The impact of financial constraints on the local price of farm land

Fiske, John
Journal Title
Journal ISSN
Volume Title
Source URI
Research Projects
Organizational Units
Organizational Unit
Journal Issue

Most farm land acquisitions involve a significant commitment of money capital. The proportion of owned versus borrowed wealth used to meet the purchase commitment is reflected in the down-payment ratio. The larger the down-payment ratio, the greater the proportion of owned wealth employed in the acquisition of the land. The availability of wealth from either or both sources may impose a constraint on land acquisition and may influence the market price of land;A model of firm behavior under a money capital constraint has been developed in order to examine this influence. This model shows the firm's demand for fixed inputs (i.e. farm land) to be a function of the price of the firm's output, the prices of all inputs, and the availability of money capital constraint is binding, an easing of the constraint, ceteris paribus, can change the level of input use at which equality between marginal value product and marginal factor cost is achieved. Assuming the level of factor use to be fixed, this change may be translated into a change in factor price (i.e. land price);A single equation econometric model was specified in order to test three hypotheses derived from the theoretical model. First, given a fixed equity level, the required down-payment percentage, as a reflection of the constraint on money capital, should be negatively related to the price of farm land. Second, existing buyer wealth, also deemed a measure of money capital availability, should be positively related to land price. Third, an interaction between existing wealth and required down-payment percentage exists whereby land buyers with different levels of wealth react differently, in terms of the price they bid, to changes in the required down-payment percentage. The direction of this interaction, ambiguous in the sense that it depends on factors which might vary over a given sample of land buyers, was deemed to be negative in light of the characteristics of the present sample;The results of the estimation, using data on farm sales in Iowa over the years 1975 through 1979, failed to reject the first two hypotheses. The hypothesized interaction between wealth and down-payment percentage, although of the predicted sign, was acceptable only at lower levels of confidence.