FARMLAND PRICE DISCOUNTS AND FARM CAPITAL STRUCTURE

This paper studies the Illinois farmland market during the period 1985-1999. Financial conditions, market liquidity, and industry conditions are used to explain the farmland price discounts. The study addresses the following questions: 1) whether farmland prices are independent of the farmer’s financial conditions, 2) whether prices are associated with farmland market liquidity, and 3) whether prices are independent of the industry business cycle. Hypotheses are tested using average county level financial information and average county level price of farmland transactions in Illinois throughout the period 1985-1999. In the first step of the empirical study, farmland fundamental values are estimated following the standard present value model, including risk and other farm and geographic characteristics. In the second step, price discounts associated with the estimated fundamental values from the first step are regressed against financial conditions, farmland turnover ratio, and transaction characteristics. Financial conditions are measured alternatively by the debt-to-asset ratio, and high and low-spare debt capacity dummies (defined based on liquidity and solvency measures)