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9.1 Agricultural commodity prices Statistical data show that prices for agricultural commodities first continued to fall since 1991 to 2005 and then rose significantly because of the soaring word-wide demand for agricultural commodities. According to the expert surveys, the actual increases in commodity prices primarily led to an additional increase in the rental prices. In the long term historical view however, trends in land rents diverge from commodity prices. This fact is mostly due to big number of the existing long term contracts which do not reflect recent price development.
The effect of agricultural commodity prices on land prices was assessed as positive but very weak.
9.2 Agricultural productivity The interviewed experts also stated that changes in agricultural productivity have a stronger impact on sales market prices than on rental market prices. Compared to the impact of commodity prices, growth in agricultural productivity was estimated as having much stronger impact on land prices.
9.3 Decoupled direct payments As a new support mechanism decoupled payment are intended to break the links between the amounts paid to farmers, their level of production, and market prices. In 2007, €5,687,259 thousand were transferred as decoupled direct payments to eligible producers. The average value of distributed entitlements (ca. 17 million) accounted for €335 per entitlement or €303 per hectare of eligible land. The average price of transferred entitlements was €425. Only 22 % all 1,006,000 transferred entitlements were traded within market transactions. The total amount of direct payments received by farmers in the period of 1999-2006 is displayed in the Figure 11.
Figure 11: Direct payments to farmers (1999-2006) Direct payments in Mio Euros (1999-2006) Mio € 6,000 5,000 4,000 3,000 2,000
Source: BMLEV, 2008.
This change towards a market orientation gave rise to land value expressed primarily in increasing rentals. Nearly 1/3 of the interviewed experts supported this conclusion. However, the effect of decoupled payments on rental prices for grassland and arable land is not the same.
Statistical data show a significant increase of the average rental price per hectare for grassland by €4 from 2005 to 2007, while they remained stable at a level of €121/ha from 2001 to 2005.
This increase is due to fact that there were no direct payments for grassland before 2005. The average rental price for arable land increased by €6/ha in the period of 2005-2007, which is Lioudmila Möller et al.
less than the average two-years growth values for the period of 2003-2005. A further reason for the recent upward trend of rental prices that resulted from expert surveys is that the rents are more determined by the market factors than by regulatory measures.
According to the expert surveys, land sales prices are not affected by decoupling. One explanation might be that for land purchase decisions long-term developments (such as hedging against economic risks or speculative aspects) are more important than the value of direct payments.
In addition, it is also expected that the rising need for building land will entail the shortage of agricultural land and therewith an additional rise in demand for eligible land. Given this projected surplus of entitlement, farmers with more payment entitlements than eligible land, will be willing to pay higher rents or sales prices in order to activate their entitlements21. This precondition for activation of entitlements is expected to keep the land prices at a high level.
9.4 Coupled and other payments Germany decided to decouple all direct payments completely except the one for tobacco and hop22. Being so, there are almost no coupled payments which can influence land values. Less favored area payments, environmental payments have no impact on land values as experts stated.
9.5 Farm size As Figure 8 shows, the nationwide trend in decrease of the number of farms is accompanied by the increase of the average farm size. The influence of the farm size on sales prices and rents differs across the regions. In Bavaria and Saxony land sales prices are not correlated with the farm size. In Weser Ems the farm size development entails a weak increase of land sales prices. However, this statement only applies to grassland, while the in livestock intensive farming no correlation between land price development and farm size could be observed.
In regard to rental market, a weak increase in rents in conjunction with the farm size was stated in all case study regions. This positive correlation applies to arable land, grassland, and livestock holding.
9.6 Bio-energy The impact of the advanced bio-energy production on land sales prices and rents was assessed as strong in West Germany but as very small in East Germany. This disparity is mostly due to the different average farm size in the West and East regions. Biogas producers in East Germany assured the needed amount of substrate by renting or buying large size land and/or by closing supply contracts with farmers. In contrast, West German bio-energy producers are forced to rent or buy additional land, which makes them influential actors on the land market.
The interim conclusion that can be drawn from these facts is that the changes in any influencing factors are anticipated in a long-term adaption. However, there are many other factors and regional characteristics which currently have an impact on land value and therefore deserve closer attention.
9.7 Other factors 9.7.1 Soil quality Soil quality, as measured by soil type, has a direct influence on the productivity of farmland, and consequently, is an important determinant of farmland prices. Since the soil conditions required for production of food crops may be different from those required for other species, they are imbedded in farmer’s decision on what, and to which extent, should be produced on the land.
In turn, soil productivity is affected by farming intensity. Due to historical land use and the At present, entitlements allotted to farmers tend to exceed the number of eligible hectares. In East Germany, their current surplus is estimated to amount to approx. 1-2%.
25% of the hops payments and 60% of the tobacco payments are still coupled (BMLEV, 2006a).
Impact of the introduction of decoupled payments on functioning of the German land market 37 geographical situation agricultural farms are not always situated in areas where benefits in terms of yield would be high. Despite major changes in land use, the strong linkage between land use and soil type seems to continue.
9.7.2 Competition for areas There are many non-agricultural aspects of land market that can have a negative or positive impact on this linkage. For instance, the demand for building land is not as contingent upon soil quality as demand for agricultural land (re-designated areas) is, but it leads to land shortage and therewith influences the value of agricultural land. In the last 10 years, average price for square meter of building land almost doubled (from €65 to €120), while the amount of building land sold in this time dropped by 47.5 %23. This explains the differences in land value in the regions with the different degree of urbanization but nearly the same soil quality24. Another example for the impact derived from non-agricultural sector is the growing competition for agricultural land between food and energy crops producers. While in 2004, energy crops covered 890,000 ha of agricultural land, two years later that number amounted to 1.5 million hectares (+ 40 %). However, this still makes up about only 9 % of the utilized agricultural areas.
9.7.3 Labor force structure Another significant factor that impacts reservation prices of land buyers/tenants and therewith land value, is the different prevalent employment structure in West and East Germany. This leads to different levels of rental and sales prices in West and East Germany. The average rental price for West Germany is €227/ha and the average sales price around €16,000/ha.
Whereas in East Germany farmers pay in average €119 to rent one hectare land and around €4,000 to buy one hectare. In East Germany, vast majority of farms are corporate large-size farms with hired labor forces. For those farms, labor costs of employees are expenses which reduce farm’s liquidity. For small individual (family) farms, which are the prevalent farming form in West Germany, entrepreneurial profit and salaries of family members are not expenses but imputed costs. This implies that labor costs do not reduce liquidity of small family farms as it is the case for corporative farms. Consequently, farmers in West Germany have a higher reservation price for land than farmers in East Germany.
10 DISTRIBUTION OF DIRECT PAYMENTSIn 2005 every German farmer was allowed to apply for premium entitlements according to the amount of his eligible area. The value of each entitlement mainly depends on the direct payments a farm received during a fixed reference period or a certain point in time as described above. Thus, the total amount of entitlements allocated to farmers in 2005 amounts to 16.959 million.
In 2008 permanent cultures and wine are to receive new entitlements, which will amount to approximately 150,000 new entitlements.
The average nominal value of all in entitlements is €332 in 2007. The standard deviation of the average nominal value between farms ranges from €75 in Sachsen-Anhalt to €180 in Rhineland Palatine. Large differences could be especially observed in regions with pastoral animals due to the impact of the farm specific top-up.
The present average nominal value of entitlements per municipality is €316 countrywide. In 85 % of the municipalities, the average nominal value ranges between €200 and €400. The highest difference between municipalities within one region was observed in Baden Württemberg (BW) and Rhineland-Palatinate (RLP), which showed a standard deviation of €58 and €59, respectively. The narrowest differences were observed in Saarland (SL), Brandenburg and IFS, 2007.
In 2007, average prices for building land amounted to €249/m² in Bavaria, €175/m² in Baden-Württemberg, and €47/m² in Saxony.
Lioudmila Möller et al.
Berlin (BB & BL) with €31 standard deviation. Especially in regions with intensive livestock production, the average value of entitlements could vary significantly between farms. The chosen decoupling scheme in Germany actually leads to a heterogeneous distribution of entitlements.
In the East Germany, the deviation is smaller than in the West Germany. In Saxony-Anhalt only respectively 10 % of the entitlements belong to farms with an average entitlement below €280 or higher than €390. In North Rhine-Westphalia (NRW) this is true for values below €220 or higher than €510.
Figure 12: Average value of entitlement per municipality Source: RÖDER and KILIAN, 2008a.
Impact of the introduction of decoupled payments on functioning of the German land market 39 In addition to these initially distributed premium entitlements, further entitlements are distributed
from the German National Reserve, which is supplied by four sources:
• The general 1 % reduction of the national ceiling;
• The voluntary return of unused SFP;
• The mandatory return of SFP which were not used in three consecutive years;
• The mandatory return of SFP whose respective face value is derived more than 20 % from the national reserve and which were not used in five consecutive years by the initial holder or his successor.
Farmers who fulfilled one of the following criteria could apply for SFP from the national reserve25 (BMELV, 2004):
• Transfer of a rented farm or rented part of a farm that was rented before 17.05.2005;
• Investments which were made before 15.05.2004;
• Purchase or rent of a farm or part of a farm before 15.05.2004;
• Change of production in the course of abandoning dairy farming before 15.05.2004;
• Special situations in the context of leasing a milk quota.
Funds from the national reserve were only granted if the additional payment exceeded either 5 % of the payment the farmer receives or €500, or if the additional payment exceeded €5,000.
The determination whether an SFP is upgraded or not is based on a formally elaborated procedure (e.g. BayStMLF, 2005).