Determinants of farmland prices and their local variation

Abstract

The setting of farmland prices in the market not only reflects existing agricultural activities but also expected potential for development. This study decomposes farmland prices into values representative of current agricultural production and the prospective development potential at the county level in South Korea. The income value of farmland is derived by analysing agricultural revenue and production cost, and the sale value of farmland is estimated by reviewing transaction prices filed with the administrative authority. The difference between income value and sale value is adopted as the development value in this study. The results of the estimation show that the proportion of development value in the price of farmland is remarkably high, with a median proportion of 0.78, indicating that the threat of converting land to non-agricultural use is non-trivial because it remains a financially attractive alternative. In addition, the magnitude of the portion of the development value in the price of farmland varies considerably across counties depending on the distance to nearby metropolitan cities. This implies that agricultural policy should be designed in a locally optimised manner to effectively restrain the conversion of farmland for urban use.