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On the regional level a big heterogeneity can still be found. In Figure 7 the rental prices for arable and grassland on the level of federal states is displayed. The states with the highest rental prices are North Rhine-Westphalia (NRW), Lower Saxony (NS) and Schleswig-Holstein (SH), whereas the lowest prices can be found in Brandenburg (BB), Saarland (SL) and Saxony (SN).
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Source: SITUTATIONSBERICHT, 2008.
8.4 Specifics of the East German land market 8.4.1 New legal and economic conditions Despite 17 years of common national agricultural policy the share of rented areas in East Germany is still significantly high. In 2007, it averaged 82 %, which is 20 % more than in West Germany. Given this background, a brief review of the transformation of the East German agriculture is needed to explain this bias toward land rent.
Development and adjustment measures initiated in the course of the German reunification triggered a fast development of rental market in East Germany. The most important reasons for these high dynamics were the favorable institutional conditions and substantial financial support12. As to mitigate the economic adaptation pressure on the farmers, who now had to produce under the same legal and economic conditions, financial adjustment measures such as e.g. additional income subsidies and investment promotion were introduced. Besides, special laws that concerned privatization and reorganization of state owned areas were adopted: the Agricultural Adjustment Law (Landwirtschaftsanpassungsgesetz) and the State Agency Act (Treuhandgesetz). This special legal frame has had a decisive impact on the development of the East German rental market. About 80 % of the utilized agricultural land (which was not state-owned) was retransferred debt-free to the formal private owners. Areas of the former agricultural producers’ co-operatives that were distributed to their former members were highly indebted however, and the legal successor had to take over old credit debts amounting on average to 1200 DM per hectare13. Although the old debts were mostly released or their redemption was financed through additional capital services, capital scarcity remained the central problem of the East German farming14. Thus, leasing of agricultural areas was the only affordable way to carry out an agricultural activity. Since the distribution Cp. DOLL, H., KLARE, K. (2000), p. 190.
Cp. FOSTNER, B., ISERMEYER, F. (1998), pp. 161-190.
Cp. DOLL, H., KLARE, K. (2000), p. 192.
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of areas was regulated by state agencies and not by market forces, there was no noticeable demand-stimulated increase of rental prices. In face of enormous financial support in the past (e.g. direct farm subsidies of 5.2 billion DM or 1000 DM per hectare only in 1990-199115) and the current high dynamic of the East agriculture, its expected adjustment has not occurred.
8.4.2 The role of large-scale farms Over the time period 1990-2007, the number of farms in Germany has dropped from over 630,000 to 360,000. At the same time, the number of people employed in the agriculture has halved from 1,138,000 to 560,000. This downward tendency was accompanied by the rise in the average farm size of 28.6 ha in 1990 to 46.1 ha in 2007. In 2007, the farm size averaged 1.2 ha more than in the previous year. Historical trend also approves a positive relationship between average farm size and the level of economic development, measured by GDP per capita. In the last 5 years, the number of farms decreased by 14 %, the average farm size grew by 14 %, while GDP per capita rose by 13.5 %.
Figure 8: Trends in average farm size and number of farms in Germany and in its East regions
Source: STATISTISCHES BUNDESAMT, 2007.
The growth in farm size varies significantly across the regions. By the end of 2007, the average farm size was 39.2 hectares in West Germany and 188 hectares in East Germany. In the East German regions, where large-scale cooperative farms used to be the predominant farming type, the path of land market development still reflects the social, political, and structural conditions set in the former GDR. Despite many changes and adjustments taken through the common national agricultural policy, large-scale farming still continues to be a prevalent form not only of corporate but also of family-run farms. Farms in East Germany have been managing the largest areas not only nationwide but even within the EU 25. In 2007, the average farm size in East Germany amounted to 188 ha (in Mecklenburg-Western Pomerania it was 250 ha), while nationwide farm size averaged 46 ha.
For the most part, large-scale farming can be explained as a "heritage" of the corporate state farms and ownership structures. In 1989 82.2 % (or 5,075,000 ha) of utilized agricultural areas were managed by state-run agricultural co-operatives (so-called LPG)16. The average farm size of a total of 3,844 LPG existing at that time farms amounted to 1,390 hectares17.
But structures and scales inherited from the large state farms are certainly not the only reason for large-scale farming.
The most decisive factor was the land price. In 1991, sales and rental prices were up to 80 % and 70 % below the respective West German average figure. Being attracted by the relatively Cp. DOLL, H., KLARE, K. (2000), p. 191.
Cp. German Government Report on German Reunification Bericht der Bundesregierung zur Deutschen Einheit, Drucksache 12/6854, p. 139, 511.
Impact of the introduction of decoupled payments on functioning of the German land market 33 low rents and sales prices of agricultural land, many farmers from the Netherlands and West Germany adopted already existing consolidated enterprises in the East Germany in the last 15 years, particularly in Mecklenburg-Western Pomerania, Saxony-Anhalt, and Brandenburg18. The additional supply of agricultural areas caused by the high fluctuation of rural population kept down land prices, which in turn advanced the establishment of new large-scale farms. This continued to keep land prices at a low level. Since the areas were less fragmented19 than in the West regions, the number of landlords per rented areas was low. This fact was favorable to large-scale farming as well. An inverse impact of farm size (which also implies a degree of land fragmentation) on land value was approved neither by statistics nor by qualitative data.
These facts, supported by recent statistics, suggest that large-scale farms will continue to dominate agricultural landscapes in the East Germany, at least in the middle run.
8.4.3 BVVG as determinants of land value in the East Germany An important specific of the land market in the East Germany is the state trust holding BVVG (Bodenverwertungs- und -verwaltungs GmbH) as an additional actor. BVVG is an exclusive state run trust initiated in 1992, after the German Reunification, to manage and privatize
1.4 million hectares of the former nationally-owned agricultural land areas in East Germany.
By the end of 2007, nearly the half of those land areas has been privatized through reassignment or sales to private persons or corporate bodies. With the current volume of 909,000 hectares of agricultural land, the BVVG is still the biggest land owner in the New Laender. Land areas rented by 2008 represented 524,100 ha; 415,100 ha (or 79 %) of them were rented within long-term agreements. Average rents for existing contracts accounted 127 €/ha. Rents for newly rented 33,320 hectares rose by 33 % (from 124 to €186/ha) against 2006. As an intermediate step toward the final privatization the long-term rental contracts between BVVG and tenants act stabilizing on land market in East Germany.
Figure 9: Areas let for rent within the long and short term contracts by the end of 2007 ha 180,000 160,000 140,000 120,000 160,700 100,000 142,100 80,000 21,500 19,300 60,000 85,700 14,200 47,400 26,600 40,000 3,500 3,100
Source: BVVG, 2008.
By the end of 2007, 61 % of the privatized land was sold at reduced price (65 % of the current market value) as a result of the Compensation and Indemnity Act (EALG)20, which has kept land prices in the East German regions at the relatively low level. At the same time the BVVG intensified the use of invitation bids as its key instrument, which caused an average rise in market prices by 22 % (ranging from 42 % in Saxony-Anhalt to 4 % in Thuringia) in 2006-2007. Since expiring rental contracts can not be renewed, it creates an additional compulsion to buy as much land as possible to be able to continue farming activities.
Cp. the magazine Sonderheft der Zeitschrift Neue Landwirtschaft: Bodenmarkt (2), 2006/2007, p.6.
That is especially distinct in Mecklenburg-Western Pomerania due to low population density.
German: Entschädigungs- und Ausgleichsleistungsgesetz.
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100,000 80,000 112,400 60,000 85,000 75,500 60,300 40,000 57,100 26,700 37,500 14,700
Source: BVVG, 2008.
Taking into account long-term rental contracts, the BVVG currently has about 600,000 ha of agricultural land in its possession. It is estimated that 42 % (250.000 ha) of this land will be needed for sales at reduced prices according to the Compensation and Indemnity Act. The respective buyer’s options are bound to long-term rental contracts, and therefore will end with the expiry date of those contracts, which is between 2010 and 2014. Remaining land areas (approx. 350,000 ha) will be sold at market value, but not exceeding 25,000 ha annually. That means that the privatization of land managed the BVVG, and therewith its direct influence on land market, will last until 2020.
9 DRIVERS OF LAND VALUESLand value is generally determined by political, economical, historical, structural, and natural conditions. From the economic point of view, the value of land is determined by the demand/ supply ratio. In addition, it is highly dependent on the land profitability in a given area. The profitability in turn depends largely on the soil quality. As to demonstrate the complexity of land value drivers and the interdependencies among them, a few important factors are mentioned
• Agricultural policies: (Areas payments, price support, production limits (quotas), coupled entitlements, input payments);
• Tax policies (income tax, property tax, inheritance tax, capital gains);
• Regulatory measures: (Purchase and sales of agricultural land; cross compliance, price regulation).
As the main interest of this study is to provide an empirical analysis of land market against the background of the recent agricultural policy, this section focuses on the drivers of land value that were expected to influence land prices and rents in the last five years.
Expert interviews conducted in the case study regions showed that many factors, which are theoretically assumed to be decisive for land sales prices and rents, have no or no significant impact on land value. According to the interviews, infrastructural expansion (e.g. due to building of highways, airports etc.) entailed only a weak increase in sales prices and rents. The impact of the current tax policy, interest rate and inflation were assessed as unchanged high in the last 17 years. This implies that the SPS implementation did not intensify their impact on land value. Urban pressure caused by population growth – thought evidently associated with progressive land shortage – had no impact at all. The same conclusion was reached in regard to the impact of market regulation, rural development policies, informal institutions, coupled and other subsidies. All respondents stated explicitly that the change in the impact of the above-mentioned land value drivers in the last 5 years is not discernible at the moment.
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