A spatial analysis of Illinois agricultural cash rents

Following the commodity price shocks in 2007, anecdotal evidence shows that tenant farmers experienced large increases in cropland rental rates and input prices. However, it is unclear how residual profits (crop revenue less non-land costs) resulting from the price increases within this sector (if any) have been allocated among tenant farmers, landowners and input suppliers. This work provides statistical evidence regarding how increases in corn prices and the associated increases in profitability ultimately flow through to the rental market, and which participants benefit the most. The purpose of this paper is to help fill the gap in the existing academic literature with respect to how the recent price shocks affected the agricultural rental market. Using unique farm-level, longitudinal data from the Illinois Farm Bureau Farm Management (FBFM) office, a hedonic model of the determinants of Illinois??? cash rents per acre is constructed and the marginal contributions of parcel characteristics to the market price are derived. A novel spatial econometric panel estimation method is employed to model the spatial error structure and ensure consistent estimators of the model parameters. Lastly, the marginal benefits appropriated by each commodity production participant are estimated and the validity of Ricardian Rent Theory (RRT) is tested. The primary findings indicate that marginal output price increases have a significant effect on cash rents with strong spatial correlations detected in the data. The estimated effect of increasing prices on cropland rents is substantially larger at the farm level, in comparison to a county aggregated model using similar data. County level results find that marginal increases in the harvest futures price increases rents by around $24.00. Under the farm level analysis, this measure rises to over $41.00, perhaps implying that the aggregation process has a significant loss of information. Second, as would be predicted by land rent theories, we find substantiating evidence that both inter-county and intra-county soil productivity variations have considerable impacts on cash rent levels, in that rents are positively associated with higher soil quality. Third, we find that there is a risk premium embedded in the cash rental rate, in that parcels with a higher perceived yield risk result in a negative impact on the cash rent. This is expected given the likely risk aversion of tenant operators. Parcels within relatively rural areas as well as those operated by farmers with large scale operations also exhibit tendencies for higher rent levels, although this impact is rather minimal. Lastly, we find limited support for RRT with a majority of increased revenues due to output price increases accruing to the farmer. Tenant farmers capture 89% of the marginal increases in commodity prices while the landowner and input suppliers absorb only 3.3% and 7.7%, respectively. The relatively large amount that is captured by the tenant farmer may be a form of ???compensation??? for bearing price risk. This would imply that tenant farmers cash renting cropland receive both a premium for yield risk as well as price risk