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A new land rent theory for sustainable agriculture
Land Use Policy 55 (2016) 222–229
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A new land rent theory for sustainable agriculture夽 ∗ ˙ Bazyli Czyzewski , Anna Matuszczak Pozna´ n University of Economics and Business, Poland Al. Niepodległo´sci 10, 61-875 Pozna´ n, Poland
a r t i c l e
i n f o
Article history: Received 30 March 2015 Received in revised form 4 March 2016 Accepted 6 April 2016 Keywords: Land rent Capital productivity Sustainable development JEL classification: Q10 Q15 B52
a b s t r a c t The agri-food sector is a crucial element of “integrated order”, because its functioning depends on natural resources, especially on the land factor. There exists the crucial question of whether the land factor is still capable of generating economic rents which can be the determinants of comparative advantages. On the one hand, D. Ricardo’s land rents are vanishing, H. George’s rents are provoking financial crisis, and monetarists’ assumptions are proving inadequate; while on the other, the land factor is gaining new environmental applications, and there is still a hope that land rents have their origins in a real value. These premises entitle one to formulate the hypothesis that the productivity of capital in agriculture in Poland is increasing because of intrinsic values of agricultural land. That implies a need to rethink the neoclassical theories of land rent. The main objective of this article is to elaborate a framework of a new land rent theory and to test it. This is done by evaluating capital productivity in agriculture in Poland and comparing it with the land rent value derived from market prices of agricultural property. The falsification of the theory over a long period fails. Meanwhile, the auxiliary assumptions are verified, implying that the new concept of land rent may be a true one. © 2016 Elsevier Ltd. All rights reserved.
1. Introduction Analysis of the development of concepts of land rent throughout the history of economic thought shows that their assumptions are not well-adapted to the present realities of the agricultural sector. Ricardian theory assumed only the existence of differential rents and denied the existence of absolute rent: “The reason then, why raw produce rises in comparative value, is because more labor is employed in the production of the last portion obtained, and not because a rent is paid to the landlord. The value of corn is regulated by the quantity of labor bestowed on its production on that quality of land, or with that portion of capital, which pays no rent. Corn is no high because a rent is paid, but a rent is paid because corn is high; and it has been justly observed, that no reduction would take place in the price of corn, although landlords should forego the whole of their rent. Such a measure would only enable some farmers to live like gentlemen, but would not diminish the quantity
夽 The article was written by the project funded by the National Science Centre allocated on the basis of the decision: OPUS 6 UMO-2013/11/B/HS4/00572, No. 51104-84 “Political rents in the European Union’s agriculture—comparative analysis basing on the UE27”. ∗ Corresponding authors. ˙ E-mail addresses: [email protected] (B. Czyzewski), [email protected] (A. Matuszczak). http://dx.doi.org/10.1016/j.landusepol.2016.04.002 0264-8377/© 2016 Elsevier Ltd. All rights reserved.
of labor necessary to raise raw produce on the least productive land in cultivation” (Ricardo, 1821). Quoting the reasoning of K. Marx, the rent of marginal lands is not the consequence of growth in the prices of crops, but on the contrary he said, that this circumstance that the worst soil should bring the rent to let it be cultivated would be the reason of the crops’ price growth to the level when this condition can be fulfilled (Marx, 1959). In K. Marx’s opinion the absolute rent is the surplus value of a product over its production price, which appears because of the higher relation of capital to labor in agriculture (in conditions of labor exploitation). H. George defined the land factor much more broadly than D. Ricardo or K. Marx, namely as a resource which is neither capital nor labor. In this approach the land was separated from the ground, and as a result it cannot be withdrawn from production as can labor or capital (Backhaus, 1997). Nevertheless, H. George specified that rents are only the payment for using the land excluding any inputs to improve it. The land without those inputs lacks any intrinsic utility. Mainstream economists developed A. Marshall’s interpretation of land rents, focusing on market factors. According to this concept, only the supply elasticity of land determines the existence of rent (Robinson, 1948; Brooke, 2010). Generally speaking: Ricardian economics too strongly believes in the price mechanism; the absolute rent theory assumes that all values originate from labor; according to the “residual rent theory”
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of H. George land functions come down to the location factor; and the neoclassical theory shows that rent is a result of market failure. None of the aforementioned economists attributed to land any of the intrinsic utilities which obviously occur in so-called “sustainable agriculture”. The aim of this paper is to deduce and to test empirically a framework of a new concept of land rent, in harmony with the sustainable development paradigm. This would enable the formulation of important recommendations for EU agricultural policy, which is currently in a period of transition. In accordance with K. Popper’s asymmetry, an attempt will be made to falsify the assumed theory (hypothesis), because an empirical verification of a predicted observation is a deductively invalid way of proving a theory (Popper, 1959). Thus, if the falsification fails, it will mean that the theory may be true. However, non-falsification of a theory requires that auxiliary assumptions are demonstrably true (Gezelter, 2009). Therefore, the authors also focus on verifying the assumptions on which the concept is built.
2. Sustainable agriculture in the debate on the evolution of the CAP The ongoing debate on the CAP towards 2020 is closely related to the problem of vitality of rural areas, as well as to the question of public goods provision. Public goods are goods desired by society which the market is not able to provide. In the case of agriculture and rural areas, external effects occur. Some of these are positive, and can be classified as public goods because the benefits of farmers’ activities are transferred to third parties without any compensation. The concept of public goods and the role of the CAP in the delivery of public goods have been investigated thoroughly in a number of studies, including Cooper et al. (2009), ENRD ´ ´ (2010), RISE (2009), and Baum and Sleszy nski (2009). The idea of public goods is an important element of the discussion on new models for the development of European agriculture (De Janvry, 2010; ˙ ˙ Czyzewski and Czyzewski, 2013). The widest debate concerns a model of sustainable and multifunctional agriculture. Its aim is the development of agriculture so as to be economically viable, socially responsible and protective of nature (Matuszczak, 2014; Sadowski, 2009; Majewski, 2008; Zegar, 2008). It will also provide non-food goods and take care of the social, cultural and landscape aspects of the countryside, besides its production functions (Adamowicz, 2005). Agriculture and rural areas are able to provide public goods at the level expected by society, but at the price of state subsidies (Villanueva et al., 2014; Felipe-Lucia and Comín, 2014; Maciejczak, 2009). Usually, the provision of public goods requires extensive livestock farms, mixed breeding and cultivation systems, traditional methods of farming and organic farms, which use less fertilizer and pesticides. However, more productive agricultural activities may also create public goods through modern technology, which can improve soil and water management and reduce greenhouse gas emissions (Baldock et al., 2015). Such behavior must be stimulated by agricultural policy, and it is. In the Communication of the European Commission in November 2010 – “The CAP towards 2020: Meeting the food, natural resources and territorial challenges of the future” – three basic objectives of the CAP are set out: profitable food production, sustainable management of natural resources and climate action, and balanced territorial development (European Commission 2010). The European Parliament has also recognized the role of the CAP in ensuring a sufficient supply of public goods, both in the Lyon report on the future of the Common Agricultural Policy after 2013 (European Commission 2010), as well as in the Dessa report (European Parliament, 2011). It should be emphasized that the economic, social and demographic trends in rural areas differ within the EU as well as in particular
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member countries. For this reason there should be flexibility in the spending of CAP funds, and a regional approach to shaping rural development programs should be adopted (Mantino, 2011). In spite of CAP subsidies we can observe regions and rural communities which are shrinking and becoming marginalised, with a distorted age structure, few employment opportunities and disrupted social networks.
3. Sustainable agriculture and new sources of land rent The sustainable agriculture paradigm has been reflected in the so called “land-based approach” which is a background for the CAP in 2014–2020 (Overview of CAP Reform, 2013) This approach faces the new challenge: land is expected to provide more environmental amenities ensuring safety food and profitable production in the same time (Malkina-Pykh and Pykh, 2003; Gliessman and Rosemeyer 2010). The solution is to capitalize these amenities (in subsidies or food prices and in land prices). However, the amenities will occur only if capital-intensity of farming lowers. Thus, we can say that they are not capital-origin but land-origin (Altieri, 1989). We arise question whether a land has “intrinsic” utility and productivity? Since the beginning of human civilization, land has been generating certain utilities which satisfy people’s needs. They are generated without the participation of other production factors, thus constituting an undeniable gift of nature. In his encyclical Caritas in Veritate, Pope Benedict XVI defines them as “wonderful fruit, which humans may take responsible advantage of to satisfy their just – tangible and intangible – needs, respecting inner balance.” In tribal (natural) economies, when agricultural land as presently understood did not exist, forest fruit, hunted animals, and access to water or firewood were examples of such utilities. The role of land in their creation prevailed over the labor and capital input necessary to obtain them. It might be said that the majority of land utilities were generated intrinsically. When land cultivation began and animals were domesticated, the part attributable to nature slightly decreased in favour of man’s driving role. Nevertheless, plants, animals, construction materials and broadly defined living space were still obtained largely without any contributions. In the feudal system, so-called servitudes may be considered a form of legitimisation of intrinsic land utilities, treating them as rights to use natural utilities of the land owned by a lord (in the form of brushwood, fruit, clay or fish). As the money-goods economy developed, the part of the land factor created without the participation of capital or labor became transformed into what is called intrinsic productivity. This is visible in the 18th-century concept of a pure product, as presented by the physiocrats. This states that a financial surplus over capital and labor inputs may remain only in agriculture—as a consequence of nature’s driving force. The pure product in F. Quesnay’s input-output table is thus the first attempt at valuing the intrinsic productivity of land. In a peasant economy, therefore, the part of utilities attributed exclusively to forces of nature was relatively large and was reflected in a certain part of a farm’s financial productivity (as it generated part of its product without any input). Its significance started to decline in the conditions of agricultural industrialisation and activation of the right of marginal utility. In industrial agriculture, the intrinsic share of land in creating utilities decreased in favour of capital and contract work. Intrinsic financial productivity of land also decreased considerably. In time, however, the productive functions of agricultural land, subordinate to microeconomic optimisation and the requirement to satisfy existential needs, became mutually competitive. This resulted in the need to seek a new concept of economic development, providing for a sustainable agriculture paradigm.
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One of the premises for applying such a paradigm in agricultural economics is the fact that the natural environment in highly developed countries has become almost entirely anthropogenic. Under such conditions, the manner of using natural resources must also change. This is forced by the new needs and priorities described above, namely the desire to ensure the renewability of natural resources, and pro-social/pro-environmental criteria for allocating production factors. They rediscover the “utilities” of the land factor, marginalised in industrial agriculture, granting them the status of public goods for which society as a whole should pay. However, this cannot be the same intrinsic utility of agricultural land as in the 18th century, because, at least in highly developed countries, the natural environment has been radically changed by human action. A still increasing proportion of land utilities is generated intrinsically, but in conditions of greater and irreversible capital accumulation in the welfare of natural resources. It might be said, therefore, that in sustainable agriculture, many new utilities of the land factor are generated intrinsically i.e. without additional capital and labor input (but not entirely without their driving role). Since they are considered public goods, they are paid for chiefly from taxes (in the EU, under CAP), and the fee goes to land owners. In this way, the intrinsic utility of land takes the form of a financial product and may be called the “intrinsic productivity”, which is added to the ˙ financial productivity of the production structure (Czyzewski and ˙ 2014). Czyzewski, In summary, farmed land intrinsically creates a part of the utilities which are subject to market or institutional valuation, insofar as the intensity of the agricultural economy is limited to a certain level. It is, however, conditioned by a specified level of “primary” accumulation of capital, which puts the economy at a level of evolution where society reports its demand for these utilities. Mainstream economic theory says that farmland values are determined by the discounted stream of expected returns which stand for land rents. (Burt 1986; Featherstone and Baker 1987; Capozza and Helsley 1989). The opinion has become widespread in the subject literature that agricultural subsidies are capitalized in the value of agricultural land and as a result, landowners obtain higher land rents. There is also strong evidence that decoupled payments have a larger impact than coupled payments, according to the empirical results of Latruffe and Le Mouël (2009, pp. 659–691); Latruffe et al. (2008, pp. 451–460); Patton et al. (2008, pp. 397–405), and Ciaian and Kancs (2012, pp. 517–540). However, the results of Delbecq et al. (2014, pp. 587–600) show that farmland values and land rents are only partially explained by agricultural returns. Those authors identified multiple non-agricultural attributes of farmland contributing to its market value, which fall i.a. into natural amenities, and locational characteristics. Recent empirical findings suggest that farm profitability will decline in the coming years in favour of the non-agricultural return component of values (Delbecq et al., 2014). Wasson et al. (2013, pp. 466–478) also argue that parcel-level attributes that comprise recreational and visual values are essential to explain agricultural land value. Thus, the intrinsic land utility has been noticed by many authors, as well as the fact that agricultural policy contributes to the increasing value of land rent. To the best of our knowledge, despite these evidences there is hardly any author who reconsiders the neoclassical land rent theory. All the debates focus on microeconomic modelling and not on deducing theoretical framework for such reconsiderations. From this point of view we try to fill in the gap between empirical evidences and the theory of land rent.
4. A new land rent concept The modern concept of land rent should be addressed in particular to the highly developed countries, where the three following
phenomena are at issue: consumption models shift to more proecological ones, which enable the land factor to create new utilities such as the environmental values—landscape, biodiversity, leisure, cultural inheritance, a guarantee of food supply, food safety, a rural culture and tradition, and local activities (Vatn, 2010; Fałkowski, 2010; Sapa, 2009; Brouwer, 2004; Daly, 2007). The development of a market economy can see different stages of land rent valorization. At a certain stage of economic development, the market and/or appropriate institutions valorize some intrinsic land utilities, such as mentioned landscape, biodiversity, leisure facilities, a guarantee of food safety, a rural culture, etc., and give them a financial character. These utilities occur without any additional input of capital to agricultural production—furthermore, reduction of capital intensity is needed to acquire them. Therefore, two important auxiliary assumptions for the modern concept of land rent have been derived: the existence of intrinsic land utilities (which are transformed into a financial product), and the assumption of the informational efficiency of the agricultural land market which allows the valuation of those utilities in market land prices. The above assumptions entitle one to put forward the following hypothesis: the reason for the existence of land rent is intrinsic land utility which in the commodity-money economy cause the expected productivity of capital in agriculture to be higher than in the other two sectors of agribusiness (the food processing industry, and production of means of agricultural production). Therefore, the value of land rent is determined by a positive difference between the expected productivity of capital in agriculture and in other sectors of agribusiness. The agricultural land market reflects these expectations in land prices.
5. Evidence for the new land rent concept 5.1. Methodology The new land rent concept underlines the existence of three different production factors—labor, land, and capital (and not only capital and labor as in the neoclassical approach). The basis for the empirical testing of the above formulated hypothesis will be matrices for all sectors of agribusiness based on the NACE classification system. In the input–output account, operating surplus is estimated by excluding intermediate consumption, employment costs and net taxes from gross production (this procedure is also used in the “Supply and use tables” in the Eurostat database). The point is to confirm or to deny that the expected productivity of the capital factor is higher in agriculture than in the other spheres of agribusiness according to NACE (assuming that the average coefficients of productivity for each industry are equal to the expected values). As mentioned above, the analysis was conducted according to the NACE classification, as well as the Polish Classification of Activity. The data come from the Polish Central Statistical Office (GUS), the EU Statistical Office (Eurostat), and statistics published by the Organization for Economic Co-operation and Development (OECD). Subsequently, two stages of the creation of economic rent were distinguished: transformation of capital inputs into effects, and remuneration of the capital by the operating surplus. This results in a methodological distinction between outlays of production and resources. The resources determine the input of factors available for production in a given industry. Thus the capital value is defined as the value of net fixed assets plus the value of current assets (cash). At the first stage of creation of the rent value, inputs are transformed into global production. At the second stage, the surplus of gross production over the inputs pays for the capital and labor and determines the surplus rate.
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Table 1 Dynamics of capital productivity in agriculture and its other sectors of agribusiness (according to NACE) in 1995–2009 excluding subsidies from the CAP (in PLN per 1 PLN of resources)—cf. formula 1. Year
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
CRP in PLN per 1 PLN of capital resource Sphere I of agribusiness: sectors providing intermediate goods and services for agriculture (in 2008 and 2009: sphere I and III combined)
Sphere II of agribusiness: agriculture and hunting (in 2008 and 2009 including forestry)
Sphere III of agribusiness: manufacture of food, beverages and tobacco products
0.28 0.30 0.33 0.36 0.36 0.46 0.44 0.44 0.44 0.47 0.47 0.48 0.48 0.52 0.53
0.36 0.37 0.41 0.43 0.39 0.73 0.81 0.76 0.79 1.04 0.97 1.01 1.12 1.11 1.08
0.32 0.34 0.38 0.35 0.32 0.36 0.41 0.34 0.31 0.33 0.41 0.39 0.37 no data no data
Source: Own calculations based on Central Statistical Office (GUS), Eurostat, OECD (GUS, 1996–2010e; GUS, 1995–2007, 2009; GUS, 1996–2010a; GUS, 1996–2010b; GUS, 1996–2010c; GUS, 1996–2010d; GUS, 2000–2009; GUS, 2012; Eurostat, 2000–2007; OECD, 1996–2010).
In an attempt to falsify the formulated hypothesis, the productivity of capital in all of the spheres of agribusiness was compared. Thereafter, an expected value of land rent was estimated, as a positive difference of the productivity coefficient in agriculture vs. its market environment. An additional test of the auxiliary assumption (concerning the informational efficiency of land prices) will involve verification of whether the total estimated rent value is close to the value of the rents capitalized in the market prices of land in Poland. Satisfaction of this condition would not only confirm the validity of the assumptions, but it would also prove the informational effi˙ 2013). In the ciency of the agricultural land market (Czyzewski, light of the above, the coefficient of capital productivity (CRP) was defined: CRP in PLN /1 PLNof resource =
gross operational surplus + net taxes from producers net fixed assets + cash
As indicated earlier, the CRP is constructed on the basis of the relation between gross production and inputs, which determines the level of the operating surplus. Therefore, the primary source of land rent is the relation between global production and intermediate consumption. We dispute the interpretation that the source of higher capital productivity (if such occurs) in agriculture in Poland is mainly the own unpaid labor of farmers. It was found that a decrease in the labor input in agriculture does not necessarily have ˙ to indicate a fall in capital productivity (Czyzewski, 2012). Economic rents develop as a result of the market valuation of capital and its expected rates of return, and not as a result of farming families’ labor. This is paid for residually and not by the market mechanism. 5.2. Expected capital productivity The literature on the subject discusses the well-known phenomenon of the more effective transformation of inputs in gross production in agriculture compared with the other branches of ´ ´ agribusiness (Poczta and Mrówczynska-Kami nska, 2003; Grzelak, 2011). This could partly explain the higher productivity of capital in agriculture—cf. formula 1. We took as evidence the data from the years 1995–2009 in Poland. Taking into consideration that the analysis is based on average values (expected values), a constant advantage of the agricultural sector over the rest of agribusiness
is visible—cf. Table 1. This means that the hypothesis stated above cannot to any extent be falsified. The surplus productivity of capital per resource unit amounted to 0.08 PLN in 1995 and to 0.55 PLN in 2009 (compared with sphere I in Table 1). The advantage of productivity therefore increased from 28% to almost 103%, excluding the impact of subsidies. Not so much the absolute size, but the dynamic growth of the reported advantage of agriculture over other branches in terms of the profitability of productive assets, may raise doubts as to the credibility of the data. The jump in 2002 (the year of a crisis in agriculture in Poland) is particularly puzzling. The next jump in 2004 may be partly explained by pro-efficient structural changes in agriculture financed by the pre-accession funds, and by the implementation of the provisions of the 2000 Agenda in Poland. In other words, expected utilities of well-being of the natural environment were recognized. Simultaneously, direct payments were introduced, which resulted in a dynamic increase in land prices. It should be noted that capitalization of the subsidies in land prices is a phenomenon specific to the simplified system of direct payments operating in Poland (SAPS—Single Area Payment Scheme). In the SPS system (Single Payment Scheme) used in most of the old EU-15 member states, the introduction of area payments has had an insignificant influence on agricultural land prices. This results from the functioning of a parallel market of entitlements to payments (Ciaian et al., 2010).
5.3. Testing the assumption of land market efficiency The data presented above in Table 1 do not permit falsification of the key hypothesis of the new land rent concept. However, a deductively valid procedure of falsification requires testing of the auxiliary assumptions. The crucial one supposes that the market for agricultural land is efficient (in the sense of informational efficiency). This leads to the question of whether the total land rent value resulting from higher capital productivity in agriculture in Poland coincides with the total perpetual rent capitalized in market land prices in this country. A positive answer to this question would provide undoubted evidence for the theory formulated, demonstrating the plausibility of the adopted assumptions. To calculate the total value of the perpetual rent capitalized by the market mechanism, average prices of agricultural land were taken. Consequently the total surplus productivity of capital was
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Table 2 Total expected land rent and distribution of operating surplus in Polish agriculture (excluding EU subsidies). Year
10471.5 10281.4 7072.17 6397.98 8817.5 8255.96 9333.04 12726.6 17828.8 19828.8
Operating surplus in agriculture (sphere I) excluding direct payments from CAP (in current prices)
Total expected land rent derived from surplus productivity of capital in agriculture over the entire economy (in m PLN)b
Own and hired labor cost (in m PLN)c
9166.19 11816.24 10094.20 10704.25 17938.99 15281.71 16006.56 19716.79 19539.78 19458.63
22007.81 20784.76 20431.80 19354.75 21308.01 21048.29 20668.44 20925.35 22016.22 23924.37
Individual labor cost in agriculture per AWU after deducting land rent (in PLN/hour)
Parity (relative to the entire economy) labor remuneration in agriculture (in PLN/hour)d
Unpaid part of the labor resource in agriculture per AWU, assuming parity ratese
Labor remuneration in agriculture, assuming the consumption of the entire land rent (in PLN/hour)
4.16 3.88 4.25 4.01 4.40 4.33 4.25 4.29 no data no data
8.71 9.34 9.66 9.97 10.37 10.78 11.22 12.19 13.33 14.05
0.52 0.58 0.56 0.60 0.58 0.60 0.62 0.65 no data no data
5.89 6.09 6.35 6,22 8,11 7,48 7,55 8,34 no data no data
Source: Own calculations based on Central Statistical Office (GUS), Eurostat, OECD (GUS, 1996–2010e; GUS, 1995–2007, 2009; GUS, 1996–2010a; GUS, 1996–2010b; GUS, 1996–2010c; GUS, 1996–2010d; GUS, 2000–2009; GUS, 2012; Eurostat, 2000–2007; OECD, 1996–2010). a For example in 2008 the capitalized land rent equals: average price of agricultural land (AL), i.e. 15387.9 PLN per ha *long-term interest rate, i.e. 6.09% *19,025 000 ha AL in ownership in Poland. b Calculated from the difference in capital productivity in agriculture and in the whole of the national economy, in PLN per 1 PLN of capital resource, excluding CAP subsidies (area payments). This is the expected value of the land rent, assuming that the average land resource does not have to meet the Good Agricultural and Environmental Conditions (GAEC) and other related requirements of the CAP. c The item “compensation of employees” including the hired labor cost was added to the figure for own labor cost (i.e. the remainder of the surplus after subtraction of the land rent). This is a necessary technical operation enabling calculation of the cost of labor per AWU, since the data relating to employment in agriculture on an AWU basis concern the total labor resources (own and hired), while the surplus remunerates own labor only. d Parity was taken as 80% of the average hourly rate of remuneration in the national economy, since it was assumed that in agriculture the parity rates may be 20% lower owing to the fact that, according to GUS, the remuneration of the farming profession is at least that much lower (on average in the whole period) than the national average. e The numbers show by how much the labor resource in agriculture (in terms of AWU) would have to be decreased to accumulate the whole land rent and at the same time remunerate labor at the parity rate.
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2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Total expected land rent capitalized in average land pricesa
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evaluated by comparing agriculture (sphere II in Table 1) with the whole of the national economy. According to the formula for the capitalization of the perpetual rent in average market prices of agricultural land in Poland in 2009: R0 = L0 × s
(2)
R0 —annual value of land rent (perpetual rent) capitalized in land prices, L0 —market land price (actual value of perpetual rent), s—discount rate (annual rate of return of alternative assets, i.e. the long-term interest rate) the total land rent value amounts to 19.8288 bn PLN, while the land rent value derived from surplus productivity of capital in agriculture is 19.4586 bn PLN—cf. Table 2. Bearing in mind the diversity of data sources and the entirely independent calculation methodology, the convergence of these numbers (with an error of estimation of less than 1%) is particularly interesting. The fact that expected productivity of capital in agriculture coincides with the expectations reflected in market prices is not an automatic truth, since markets may be mistaken in their resource valuation. Therefore, this fact constitutes an empirical premise for the informational efficiency of the market for agricultural land, which makes it possible to treat market prices as a point of reference for estimations of the land rent value. These efficiency conditions were fulfilled in the years 2000–2002 and 2007–2009—cf. Table 2. From 2003 to 2006 the land market in Poland was subject to various perturbations coinciding with the implementation of SAPS. Those years should be regarded as a transition period in which market informational efficiency was disturbed. However, a large difference between capital productivity in agriculture and other sectors of agribusinessis unfavorable from the point of view of sustainable development. As was mentioned before, a higher share of land rent in the operating surplus means a lower share of farmers’ labor remuneration. If the farmers’ labor is unpaid, they consume the land rent, thus limiting the funds available for sustainable development of farms (e.g. for purchase of new land). Therefore, the dynamic increase in this advantage is particularly alarming, especially if it is not based on increasing net value of property, and is stimulated externally by the subsidies under agricultural policy. This problem is illustrated by the data in Table 2. The pauperization of farmers in Poland with respect to the economy as a whole is clearly visible: for example, in 2007 the rate of remuneration per labor unit (AWU) was 4.29 PLN/hour (approx 1.1 EUR), whereas according to parity it should have amounted to over 12 PLN. Admittedly, the land rent (and the prices of agricultural land resulting from it) grows dynamically, and in this way farmers compensate for the disparity in their own labor cost. If we assume that the entire land rent is consumed, the remuneration in agriculture reaches 70% of parity. However, this occurs at the expense of the sustainability of developmental processes. The key principle of sustainable development – that the surplus in agriculture should cover the parity labor cost and the rent enabling concern for land, including agricultural land purchases and changes in agrarian structures – is not fulfilled. The penultimate column of Table 2 gives the shares of farmers’ own unpaid labor, assuming that they do not consume the land rent. This is equivalent to the part of the labor which should theoretically leave agriculture in order to ensure its sustainable development and the accumulation of the land rent in rural areas. We can see that after 2004 as much as 60% of the labor force in Polish agriculture (by AWU) is redundant from this point of view. According to some economists, such a reduction in the number of people employed in agriculture on a full-time basis is unrealistic and socially undesirable in Poland. However, it remains a ˙ controversial issue (Czyzewski and Kułyk 2009). Therefore, in the future, when the levels of incomes of farms in the EU-15 and
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EU-27 countries become significantly close, a different orientation of CAP support needs to be considered. It should be oriented more towards recapitalizing agriculture instead of “subsidizing” the land rent (e.g. through the SAPS). Such an operation would decrease the surplus productivity of capital in agriculture (with reference to other sectors of agribusiness), and thus would improve the relation between the cost of own labor and the price of agricultural land. It would create better conditions for sustainable development. If, simultaneously, it were possible to create more jobs in rural areas, the effects of the above measures would be reinforced through an increase in labor productivity, and the labor cost would approach the parity rate. We would then be dealing with a process of substitution of labor by capital, which is typical of developing economies introducing structural reforms (Sordyl, 2010).
6. Conclusions To sum up we made an attempt to falsify the following hypothesis: “the reason for the existence of land rent in a sustainable agriculture is intrinsic land utility, which causes the expected productivity of capital in agriculture to be higher than in the other sectors of agribusiness”. The average coefficients of capital productivity (CRP) were estimated for fifteen-year period at the sector level in Poland. These coefficients do not falsify the proposed hypothesis to any extent. Opposite, they confirm it, hence giving premises for further research. The excess value of capital productivity in agriculture would not be so surprising if one considered that CAP subsidies contribute to the gross operational surplus. However the CRP coefficient exclude subsidies. One can argue that it is only Poland’s specific phenomenon, but capital-input productiv˙ ity has been also investigated for the EU-27 (Czyzewski and Brelik, 2014, p.197). This research was based on EUROSTAT data and input approach instead of resources approach, however the results were similar. Subsequently, we tested the auxiliary assumption that the value of land rent is determined by a positive difference between the expected productivity of capital in agriculture and in other sectors of agribusiness, whereas land market reflects these expectations in land prices. That difference and the total value of land rent capitalized in agricultural land (AL) in Poland was evaluated (based on CRP and assets values in monetary units) with regard to the equation which discounts perpetual rent (i.e. average price of agricultural land*long-term interest rate × number of hectares of AL in ownership). The both values are almost equal for the several years after the period of CAP phasing in. We do not claim that the land rent concept for sustainable agriculture is commonly valid, but we intend to initiate a discussion on the need of change in the neoclassical way of perceiving land factor. Capital productivity in agriculture is an important premise for the realization of the sustainable development guidelines. However, the assumption that “the higher the productivity, the better” is a great oversimplification of the issue. The existence of rent from the capital invested in agriculture, which is not connected with “exploitation” of the labor factor, indicates changes in consumers’ preferences towards “sustainable consumption”. Analysis of indices of capital productivity in agriculture indicates such changes with reference to food produced, although not necessarily consumed, in Poland. This agrees with the hypothesis that the expected productivity of capital in agriculture in Poland is higher than in its market environment. The surplus productivity of assets in agriculture creates the land rent value and establishes the prices of farm land. It does not, however, remunerate the land factor, since this is consumed due to the conditions of disparity in farmers’ labor remuneration. Thus, paradoxically, rigid adherence to the principles of sustainable development under such conditions, in
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the CAP perspective after 2013, is not entirely rational. From the point of view of economic and social order, it seems that the accumulation of capital in agriculture is more desirable, provided that it does not disrupt the EU-wide environmental order. The models of demand for agricultural products and services are developed globally. Therefore, there is no reason to adhere to the environmental order locally or regionally, everywhere in Poland, if we already possess some comparative advantages relating to the quality of agricultural products. It is not sufficient to pay the “backwardness rent”—it is better to capitalize it. Moreover, we need to remember that sooner or later any rent vanishes and becomes an element of costs. Therefore, its existence should be used as a means to introduce structural changes.
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A new land rent theory for sustainable agriculture夽 ∗ ˙ Bazyli Czyzewski , Anna Matuszczak Pozna´ n University of Economics and Business, Poland Al. Niepodległo´sci 10, 61-875 Pozna´ n, Poland
a r t i c l e
i n f o
Article history: Received 30 March 2015 Received in revised form 4 March 2016 Accepted 6 April 2016 Keywords: Land rent Capital productivity Sustainable development JEL classification: Q10 Q15 B52
a b s t r a c t The agri-food sector is a crucial element of “integrated order”, because its functioning depends on natural resources, especially on the land factor. There exists the crucial question of whether the land factor is still capable of generating economic rents which can be the determinants of comparative advantages. On the one hand, D. Ricardo’s land rents are vanishing, H. George’s rents are provoking financial crisis, and monetarists’ assumptions are proving inadequate; while on the other, the land factor is gaining new environmental applications, and there is still a hope that land rents have their origins in a real value. These premises entitle one to formulate the hypothesis that the productivity of capital in agriculture in Poland is increasing because of intrinsic values of agricultural land. That implies a need to rethink the neoclassical theories of land rent. The main objective of this article is to elaborate a framework of a new land rent theory and to test it. This is done by evaluating capital productivity in agriculture in Poland and comparing it with the land rent value derived from market prices of agricultural property. The falsification of the theory over a long period fails. Meanwhile, the auxiliary assumptions are verified, implying that the new concept of land rent may be a true one. © 2016 Elsevier Ltd. All rights reserved.
1. Introduction Analysis of the development of concepts of land rent throughout the history of economic thought shows that their assumptions are not well-adapted to the present realities of the agricultural sector. Ricardian theory assumed only the existence of differential rents and denied the existence of absolute rent: “The reason then, why raw produce rises in comparative value, is because more labor is employed in the production of the last portion obtained, and not because a rent is paid to the landlord. The value of corn is regulated by the quantity of labor bestowed on its production on that quality of land, or with that portion of capital, which pays no rent. Corn is no high because a rent is paid, but a rent is paid because corn is high; and it has been justly observed, that no reduction would take place in the price of corn, although landlords should forego the whole of their rent. Such a measure would only enable some farmers to live like gentlemen, but would not diminish the quantity
夽 The article was written by the project funded by the National Science Centre allocated on the basis of the decision: OPUS 6 UMO-2013/11/B/HS4/00572, No. 51104-84 “Political rents in the European Union’s agriculture—comparative analysis basing on the UE27”. ∗ Corresponding authors. ˙ E-mail addresses: [email protected] (B. Czyzewski), [email protected] (A. Matuszczak). http://dx.doi.org/10.1016/j.landusepol.2016.04.002 0264-8377/© 2016 Elsevier Ltd. All rights reserved.
of labor necessary to raise raw produce on the least productive land in cultivation” (Ricardo, 1821). Quoting the reasoning of K. Marx, the rent of marginal lands is not the consequence of growth in the prices of crops, but on the contrary he said, that this circumstance that the worst soil should bring the rent to let it be cultivated would be the reason of the crops’ price growth to the level when this condition can be fulfilled (Marx, 1959). In K. Marx’s opinion the absolute rent is the surplus value of a product over its production price, which appears because of the higher relation of capital to labor in agriculture (in conditions of labor exploitation). H. George defined the land factor much more broadly than D. Ricardo or K. Marx, namely as a resource which is neither capital nor labor. In this approach the land was separated from the ground, and as a result it cannot be withdrawn from production as can labor or capital (Backhaus, 1997). Nevertheless, H. George specified that rents are only the payment for using the land excluding any inputs to improve it. The land without those inputs lacks any intrinsic utility. Mainstream economists developed A. Marshall’s interpretation of land rents, focusing on market factors. According to this concept, only the supply elasticity of land determines the existence of rent (Robinson, 1948; Brooke, 2010). Generally speaking: Ricardian economics too strongly believes in the price mechanism; the absolute rent theory assumes that all values originate from labor; according to the “residual rent theory”
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of H. George land functions come down to the location factor; and the neoclassical theory shows that rent is a result of market failure. None of the aforementioned economists attributed to land any of the intrinsic utilities which obviously occur in so-called “sustainable agriculture”. The aim of this paper is to deduce and to test empirically a framework of a new concept of land rent, in harmony with the sustainable development paradigm. This would enable the formulation of important recommendations for EU agricultural policy, which is currently in a period of transition. In accordance with K. Popper’s asymmetry, an attempt will be made to falsify the assumed theory (hypothesis), because an empirical verification of a predicted observation is a deductively invalid way of proving a theory (Popper, 1959). Thus, if the falsification fails, it will mean that the theory may be true. However, non-falsification of a theory requires that auxiliary assumptions are demonstrably true (Gezelter, 2009). Therefore, the authors also focus on verifying the assumptions on which the concept is built.
2. Sustainable agriculture in the debate on the evolution of the CAP The ongoing debate on the CAP towards 2020 is closely related to the problem of vitality of rural areas, as well as to the question of public goods provision. Public goods are goods desired by society which the market is not able to provide. In the case of agriculture and rural areas, external effects occur. Some of these are positive, and can be classified as public goods because the benefits of farmers’ activities are transferred to third parties without any compensation. The concept of public goods and the role of the CAP in the delivery of public goods have been investigated thoroughly in a number of studies, including Cooper et al. (2009), ENRD ´ ´ (2010), RISE (2009), and Baum and Sleszy nski (2009). The idea of public goods is an important element of the discussion on new models for the development of European agriculture (De Janvry, 2010; ˙ ˙ Czyzewski and Czyzewski, 2013). The widest debate concerns a model of sustainable and multifunctional agriculture. Its aim is the development of agriculture so as to be economically viable, socially responsible and protective of nature (Matuszczak, 2014; Sadowski, 2009; Majewski, 2008; Zegar, 2008). It will also provide non-food goods and take care of the social, cultural and landscape aspects of the countryside, besides its production functions (Adamowicz, 2005). Agriculture and rural areas are able to provide public goods at the level expected by society, but at the price of state subsidies (Villanueva et al., 2014; Felipe-Lucia and Comín, 2014; Maciejczak, 2009). Usually, the provision of public goods requires extensive livestock farms, mixed breeding and cultivation systems, traditional methods of farming and organic farms, which use less fertilizer and pesticides. However, more productive agricultural activities may also create public goods through modern technology, which can improve soil and water management and reduce greenhouse gas emissions (Baldock et al., 2015). Such behavior must be stimulated by agricultural policy, and it is. In the Communication of the European Commission in November 2010 – “The CAP towards 2020: Meeting the food, natural resources and territorial challenges of the future” – three basic objectives of the CAP are set out: profitable food production, sustainable management of natural resources and climate action, and balanced territorial development (European Commission 2010). The European Parliament has also recognized the role of the CAP in ensuring a sufficient supply of public goods, both in the Lyon report on the future of the Common Agricultural Policy after 2013 (European Commission 2010), as well as in the Dessa report (European Parliament, 2011). It should be emphasized that the economic, social and demographic trends in rural areas differ within the EU as well as in particular
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member countries. For this reason there should be flexibility in the spending of CAP funds, and a regional approach to shaping rural development programs should be adopted (Mantino, 2011). In spite of CAP subsidies we can observe regions and rural communities which are shrinking and becoming marginalised, with a distorted age structure, few employment opportunities and disrupted social networks.
3. Sustainable agriculture and new sources of land rent The sustainable agriculture paradigm has been reflected in the so called “land-based approach” which is a background for the CAP in 2014–2020 (Overview of CAP Reform, 2013) This approach faces the new challenge: land is expected to provide more environmental amenities ensuring safety food and profitable production in the same time (Malkina-Pykh and Pykh, 2003; Gliessman and Rosemeyer 2010). The solution is to capitalize these amenities (in subsidies or food prices and in land prices). However, the amenities will occur only if capital-intensity of farming lowers. Thus, we can say that they are not capital-origin but land-origin (Altieri, 1989). We arise question whether a land has “intrinsic” utility and productivity? Since the beginning of human civilization, land has been generating certain utilities which satisfy people’s needs. They are generated without the participation of other production factors, thus constituting an undeniable gift of nature. In his encyclical Caritas in Veritate, Pope Benedict XVI defines them as “wonderful fruit, which humans may take responsible advantage of to satisfy their just – tangible and intangible – needs, respecting inner balance.” In tribal (natural) economies, when agricultural land as presently understood did not exist, forest fruit, hunted animals, and access to water or firewood were examples of such utilities. The role of land in their creation prevailed over the labor and capital input necessary to obtain them. It might be said that the majority of land utilities were generated intrinsically. When land cultivation began and animals were domesticated, the part attributable to nature slightly decreased in favour of man’s driving role. Nevertheless, plants, animals, construction materials and broadly defined living space were still obtained largely without any contributions. In the feudal system, so-called servitudes may be considered a form of legitimisation of intrinsic land utilities, treating them as rights to use natural utilities of the land owned by a lord (in the form of brushwood, fruit, clay or fish). As the money-goods economy developed, the part of the land factor created without the participation of capital or labor became transformed into what is called intrinsic productivity. This is visible in the 18th-century concept of a pure product, as presented by the physiocrats. This states that a financial surplus over capital and labor inputs may remain only in agriculture—as a consequence of nature’s driving force. The pure product in F. Quesnay’s input-output table is thus the first attempt at valuing the intrinsic productivity of land. In a peasant economy, therefore, the part of utilities attributed exclusively to forces of nature was relatively large and was reflected in a certain part of a farm’s financial productivity (as it generated part of its product without any input). Its significance started to decline in the conditions of agricultural industrialisation and activation of the right of marginal utility. In industrial agriculture, the intrinsic share of land in creating utilities decreased in favour of capital and contract work. Intrinsic financial productivity of land also decreased considerably. In time, however, the productive functions of agricultural land, subordinate to microeconomic optimisation and the requirement to satisfy existential needs, became mutually competitive. This resulted in the need to seek a new concept of economic development, providing for a sustainable agriculture paradigm.
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One of the premises for applying such a paradigm in agricultural economics is the fact that the natural environment in highly developed countries has become almost entirely anthropogenic. Under such conditions, the manner of using natural resources must also change. This is forced by the new needs and priorities described above, namely the desire to ensure the renewability of natural resources, and pro-social/pro-environmental criteria for allocating production factors. They rediscover the “utilities” of the land factor, marginalised in industrial agriculture, granting them the status of public goods for which society as a whole should pay. However, this cannot be the same intrinsic utility of agricultural land as in the 18th century, because, at least in highly developed countries, the natural environment has been radically changed by human action. A still increasing proportion of land utilities is generated intrinsically, but in conditions of greater and irreversible capital accumulation in the welfare of natural resources. It might be said, therefore, that in sustainable agriculture, many new utilities of the land factor are generated intrinsically i.e. without additional capital and labor input (but not entirely without their driving role). Since they are considered public goods, they are paid for chiefly from taxes (in the EU, under CAP), and the fee goes to land owners. In this way, the intrinsic utility of land takes the form of a financial product and may be called the “intrinsic productivity”, which is added to the ˙ financial productivity of the production structure (Czyzewski and ˙ 2014). Czyzewski, In summary, farmed land intrinsically creates a part of the utilities which are subject to market or institutional valuation, insofar as the intensity of the agricultural economy is limited to a certain level. It is, however, conditioned by a specified level of “primary” accumulation of capital, which puts the economy at a level of evolution where society reports its demand for these utilities. Mainstream economic theory says that farmland values are determined by the discounted stream of expected returns which stand for land rents. (Burt 1986; Featherstone and Baker 1987; Capozza and Helsley 1989). The opinion has become widespread in the subject literature that agricultural subsidies are capitalized in the value of agricultural land and as a result, landowners obtain higher land rents. There is also strong evidence that decoupled payments have a larger impact than coupled payments, according to the empirical results of Latruffe and Le Mouël (2009, pp. 659–691); Latruffe et al. (2008, pp. 451–460); Patton et al. (2008, pp. 397–405), and Ciaian and Kancs (2012, pp. 517–540). However, the results of Delbecq et al. (2014, pp. 587–600) show that farmland values and land rents are only partially explained by agricultural returns. Those authors identified multiple non-agricultural attributes of farmland contributing to its market value, which fall i.a. into natural amenities, and locational characteristics. Recent empirical findings suggest that farm profitability will decline in the coming years in favour of the non-agricultural return component of values (Delbecq et al., 2014). Wasson et al. (2013, pp. 466–478) also argue that parcel-level attributes that comprise recreational and visual values are essential to explain agricultural land value. Thus, the intrinsic land utility has been noticed by many authors, as well as the fact that agricultural policy contributes to the increasing value of land rent. To the best of our knowledge, despite these evidences there is hardly any author who reconsiders the neoclassical land rent theory. All the debates focus on microeconomic modelling and not on deducing theoretical framework for such reconsiderations. From this point of view we try to fill in the gap between empirical evidences and the theory of land rent.
4. A new land rent concept The modern concept of land rent should be addressed in particular to the highly developed countries, where the three following
phenomena are at issue: consumption models shift to more proecological ones, which enable the land factor to create new utilities such as the environmental values—landscape, biodiversity, leisure, cultural inheritance, a guarantee of food supply, food safety, a rural culture and tradition, and local activities (Vatn, 2010; Fałkowski, 2010; Sapa, 2009; Brouwer, 2004; Daly, 2007). The development of a market economy can see different stages of land rent valorization. At a certain stage of economic development, the market and/or appropriate institutions valorize some intrinsic land utilities, such as mentioned landscape, biodiversity, leisure facilities, a guarantee of food safety, a rural culture, etc., and give them a financial character. These utilities occur without any additional input of capital to agricultural production—furthermore, reduction of capital intensity is needed to acquire them. Therefore, two important auxiliary assumptions for the modern concept of land rent have been derived: the existence of intrinsic land utilities (which are transformed into a financial product), and the assumption of the informational efficiency of the agricultural land market which allows the valuation of those utilities in market land prices. The above assumptions entitle one to put forward the following hypothesis: the reason for the existence of land rent is intrinsic land utility which in the commodity-money economy cause the expected productivity of capital in agriculture to be higher than in the other two sectors of agribusiness (the food processing industry, and production of means of agricultural production). Therefore, the value of land rent is determined by a positive difference between the expected productivity of capital in agriculture and in other sectors of agribusiness. The agricultural land market reflects these expectations in land prices.
5. Evidence for the new land rent concept 5.1. Methodology The new land rent concept underlines the existence of three different production factors—labor, land, and capital (and not only capital and labor as in the neoclassical approach). The basis for the empirical testing of the above formulated hypothesis will be matrices for all sectors of agribusiness based on the NACE classification system. In the input–output account, operating surplus is estimated by excluding intermediate consumption, employment costs and net taxes from gross production (this procedure is also used in the “Supply and use tables” in the Eurostat database). The point is to confirm or to deny that the expected productivity of the capital factor is higher in agriculture than in the other spheres of agribusiness according to NACE (assuming that the average coefficients of productivity for each industry are equal to the expected values). As mentioned above, the analysis was conducted according to the NACE classification, as well as the Polish Classification of Activity. The data come from the Polish Central Statistical Office (GUS), the EU Statistical Office (Eurostat), and statistics published by the Organization for Economic Co-operation and Development (OECD). Subsequently, two stages of the creation of economic rent were distinguished: transformation of capital inputs into effects, and remuneration of the capital by the operating surplus. This results in a methodological distinction between outlays of production and resources. The resources determine the input of factors available for production in a given industry. Thus the capital value is defined as the value of net fixed assets plus the value of current assets (cash). At the first stage of creation of the rent value, inputs are transformed into global production. At the second stage, the surplus of gross production over the inputs pays for the capital and labor and determines the surplus rate.
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Table 1 Dynamics of capital productivity in agriculture and its other sectors of agribusiness (according to NACE) in 1995–2009 excluding subsidies from the CAP (in PLN per 1 PLN of resources)—cf. formula 1. Year
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
CRP in PLN per 1 PLN of capital resource Sphere I of agribusiness: sectors providing intermediate goods and services for agriculture (in 2008 and 2009: sphere I and III combined)
Sphere II of agribusiness: agriculture and hunting (in 2008 and 2009 including forestry)
Sphere III of agribusiness: manufacture of food, beverages and tobacco products
0.28 0.30 0.33 0.36 0.36 0.46 0.44 0.44 0.44 0.47 0.47 0.48 0.48 0.52 0.53
0.36 0.37 0.41 0.43 0.39 0.73 0.81 0.76 0.79 1.04 0.97 1.01 1.12 1.11 1.08
0.32 0.34 0.38 0.35 0.32 0.36 0.41 0.34 0.31 0.33 0.41 0.39 0.37 no data no data
Source: Own calculations based on Central Statistical Office (GUS), Eurostat, OECD (GUS, 1996–2010e; GUS, 1995–2007, 2009; GUS, 1996–2010a; GUS, 1996–2010b; GUS, 1996–2010c; GUS, 1996–2010d; GUS, 2000–2009; GUS, 2012; Eurostat, 2000–2007; OECD, 1996–2010).
In an attempt to falsify the formulated hypothesis, the productivity of capital in all of the spheres of agribusiness was compared. Thereafter, an expected value of land rent was estimated, as a positive difference of the productivity coefficient in agriculture vs. its market environment. An additional test of the auxiliary assumption (concerning the informational efficiency of land prices) will involve verification of whether the total estimated rent value is close to the value of the rents capitalized in the market prices of land in Poland. Satisfaction of this condition would not only confirm the validity of the assumptions, but it would also prove the informational effi˙ 2013). In the ciency of the agricultural land market (Czyzewski, light of the above, the coefficient of capital productivity (CRP) was defined: CRP in PLN /1 PLNof resource =
gross operational surplus + net taxes from producers net fixed assets + cash
As indicated earlier, the CRP is constructed on the basis of the relation between gross production and inputs, which determines the level of the operating surplus. Therefore, the primary source of land rent is the relation between global production and intermediate consumption. We dispute the interpretation that the source of higher capital productivity (if such occurs) in agriculture in Poland is mainly the own unpaid labor of farmers. It was found that a decrease in the labor input in agriculture does not necessarily have ˙ to indicate a fall in capital productivity (Czyzewski, 2012). Economic rents develop as a result of the market valuation of capital and its expected rates of return, and not as a result of farming families’ labor. This is paid for residually and not by the market mechanism. 5.2. Expected capital productivity The literature on the subject discusses the well-known phenomenon of the more effective transformation of inputs in gross production in agriculture compared with the other branches of ´ ´ agribusiness (Poczta and Mrówczynska-Kami nska, 2003; Grzelak, 2011). This could partly explain the higher productivity of capital in agriculture—cf. formula 1. We took as evidence the data from the years 1995–2009 in Poland. Taking into consideration that the analysis is based on average values (expected values), a constant advantage of the agricultural sector over the rest of agribusiness
is visible—cf. Table 1. This means that the hypothesis stated above cannot to any extent be falsified. The surplus productivity of capital per resource unit amounted to 0.08 PLN in 1995 and to 0.55 PLN in 2009 (compared with sphere I in Table 1). The advantage of productivity therefore increased from 28% to almost 103%, excluding the impact of subsidies. Not so much the absolute size, but the dynamic growth of the reported advantage of agriculture over other branches in terms of the profitability of productive assets, may raise doubts as to the credibility of the data. The jump in 2002 (the year of a crisis in agriculture in Poland) is particularly puzzling. The next jump in 2004 may be partly explained by pro-efficient structural changes in agriculture financed by the pre-accession funds, and by the implementation of the provisions of the 2000 Agenda in Poland. In other words, expected utilities of well-being of the natural environment were recognized. Simultaneously, direct payments were introduced, which resulted in a dynamic increase in land prices. It should be noted that capitalization of the subsidies in land prices is a phenomenon specific to the simplified system of direct payments operating in Poland (SAPS—Single Area Payment Scheme). In the SPS system (Single Payment Scheme) used in most of the old EU-15 member states, the introduction of area payments has had an insignificant influence on agricultural land prices. This results from the functioning of a parallel market of entitlements to payments (Ciaian et al., 2010).
5.3. Testing the assumption of land market efficiency The data presented above in Table 1 do not permit falsification of the key hypothesis of the new land rent concept. However, a deductively valid procedure of falsification requires testing of the auxiliary assumptions. The crucial one supposes that the market for agricultural land is efficient (in the sense of informational efficiency). This leads to the question of whether the total land rent value resulting from higher capital productivity in agriculture in Poland coincides with the total perpetual rent capitalized in market land prices in this country. A positive answer to this question would provide undoubted evidence for the theory formulated, demonstrating the plausibility of the adopted assumptions. To calculate the total value of the perpetual rent capitalized by the market mechanism, average prices of agricultural land were taken. Consequently the total surplus productivity of capital was
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Table 2 Total expected land rent and distribution of operating surplus in Polish agriculture (excluding EU subsidies). Year
10471.5 10281.4 7072.17 6397.98 8817.5 8255.96 9333.04 12726.6 17828.8 19828.8
Operating surplus in agriculture (sphere I) excluding direct payments from CAP (in current prices)
Total expected land rent derived from surplus productivity of capital in agriculture over the entire economy (in m PLN)b
Own and hired labor cost (in m PLN)c
9166.19 11816.24 10094.20 10704.25 17938.99 15281.71 16006.56 19716.79 19539.78 19458.63
22007.81 20784.76 20431.80 19354.75 21308.01 21048.29 20668.44 20925.35 22016.22 23924.37
Individual labor cost in agriculture per AWU after deducting land rent (in PLN/hour)
Parity (relative to the entire economy) labor remuneration in agriculture (in PLN/hour)d
Unpaid part of the labor resource in agriculture per AWU, assuming parity ratese
Labor remuneration in agriculture, assuming the consumption of the entire land rent (in PLN/hour)
4.16 3.88 4.25 4.01 4.40 4.33 4.25 4.29 no data no data
8.71 9.34 9.66 9.97 10.37 10.78 11.22 12.19 13.33 14.05
0.52 0.58 0.56 0.60 0.58 0.60 0.62 0.65 no data no data
5.89 6.09 6.35 6,22 8,11 7,48 7,55 8,34 no data no data
Source: Own calculations based on Central Statistical Office (GUS), Eurostat, OECD (GUS, 1996–2010e; GUS, 1995–2007, 2009; GUS, 1996–2010a; GUS, 1996–2010b; GUS, 1996–2010c; GUS, 1996–2010d; GUS, 2000–2009; GUS, 2012; Eurostat, 2000–2007; OECD, 1996–2010). a For example in 2008 the capitalized land rent equals: average price of agricultural land (AL), i.e. 15387.9 PLN per ha *long-term interest rate, i.e. 6.09% *19,025 000 ha AL in ownership in Poland. b Calculated from the difference in capital productivity in agriculture and in the whole of the national economy, in PLN per 1 PLN of capital resource, excluding CAP subsidies (area payments). This is the expected value of the land rent, assuming that the average land resource does not have to meet the Good Agricultural and Environmental Conditions (GAEC) and other related requirements of the CAP. c The item “compensation of employees” including the hired labor cost was added to the figure for own labor cost (i.e. the remainder of the surplus after subtraction of the land rent). This is a necessary technical operation enabling calculation of the cost of labor per AWU, since the data relating to employment in agriculture on an AWU basis concern the total labor resources (own and hired), while the surplus remunerates own labor only. d Parity was taken as 80% of the average hourly rate of remuneration in the national economy, since it was assumed that in agriculture the parity rates may be 20% lower owing to the fact that, according to GUS, the remuneration of the farming profession is at least that much lower (on average in the whole period) than the national average. e The numbers show by how much the labor resource in agriculture (in terms of AWU) would have to be decreased to accumulate the whole land rent and at the same time remunerate labor at the parity rate.
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2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Total expected land rent capitalized in average land pricesa
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evaluated by comparing agriculture (sphere II in Table 1) with the whole of the national economy. According to the formula for the capitalization of the perpetual rent in average market prices of agricultural land in Poland in 2009: R0 = L0 × s
(2)
R0 —annual value of land rent (perpetual rent) capitalized in land prices, L0 —market land price (actual value of perpetual rent), s—discount rate (annual rate of return of alternative assets, i.e. the long-term interest rate) the total land rent value amounts to 19.8288 bn PLN, while the land rent value derived from surplus productivity of capital in agriculture is 19.4586 bn PLN—cf. Table 2. Bearing in mind the diversity of data sources and the entirely independent calculation methodology, the convergence of these numbers (with an error of estimation of less than 1%) is particularly interesting. The fact that expected productivity of capital in agriculture coincides with the expectations reflected in market prices is not an automatic truth, since markets may be mistaken in their resource valuation. Therefore, this fact constitutes an empirical premise for the informational efficiency of the market for agricultural land, which makes it possible to treat market prices as a point of reference for estimations of the land rent value. These efficiency conditions were fulfilled in the years 2000–2002 and 2007–2009—cf. Table 2. From 2003 to 2006 the land market in Poland was subject to various perturbations coinciding with the implementation of SAPS. Those years should be regarded as a transition period in which market informational efficiency was disturbed. However, a large difference between capital productivity in agriculture and other sectors of agribusinessis unfavorable from the point of view of sustainable development. As was mentioned before, a higher share of land rent in the operating surplus means a lower share of farmers’ labor remuneration. If the farmers’ labor is unpaid, they consume the land rent, thus limiting the funds available for sustainable development of farms (e.g. for purchase of new land). Therefore, the dynamic increase in this advantage is particularly alarming, especially if it is not based on increasing net value of property, and is stimulated externally by the subsidies under agricultural policy. This problem is illustrated by the data in Table 2. The pauperization of farmers in Poland with respect to the economy as a whole is clearly visible: for example, in 2007 the rate of remuneration per labor unit (AWU) was 4.29 PLN/hour (approx 1.1 EUR), whereas according to parity it should have amounted to over 12 PLN. Admittedly, the land rent (and the prices of agricultural land resulting from it) grows dynamically, and in this way farmers compensate for the disparity in their own labor cost. If we assume that the entire land rent is consumed, the remuneration in agriculture reaches 70% of parity. However, this occurs at the expense of the sustainability of developmental processes. The key principle of sustainable development – that the surplus in agriculture should cover the parity labor cost and the rent enabling concern for land, including agricultural land purchases and changes in agrarian structures – is not fulfilled. The penultimate column of Table 2 gives the shares of farmers’ own unpaid labor, assuming that they do not consume the land rent. This is equivalent to the part of the labor which should theoretically leave agriculture in order to ensure its sustainable development and the accumulation of the land rent in rural areas. We can see that after 2004 as much as 60% of the labor force in Polish agriculture (by AWU) is redundant from this point of view. According to some economists, such a reduction in the number of people employed in agriculture on a full-time basis is unrealistic and socially undesirable in Poland. However, it remains a ˙ controversial issue (Czyzewski and Kułyk 2009). Therefore, in the future, when the levels of incomes of farms in the EU-15 and
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EU-27 countries become significantly close, a different orientation of CAP support needs to be considered. It should be oriented more towards recapitalizing agriculture instead of “subsidizing” the land rent (e.g. through the SAPS). Such an operation would decrease the surplus productivity of capital in agriculture (with reference to other sectors of agribusiness), and thus would improve the relation between the cost of own labor and the price of agricultural land. It would create better conditions for sustainable development. If, simultaneously, it were possible to create more jobs in rural areas, the effects of the above measures would be reinforced through an increase in labor productivity, and the labor cost would approach the parity rate. We would then be dealing with a process of substitution of labor by capital, which is typical of developing economies introducing structural reforms (Sordyl, 2010).
6. Conclusions To sum up we made an attempt to falsify the following hypothesis: “the reason for the existence of land rent in a sustainable agriculture is intrinsic land utility, which causes the expected productivity of capital in agriculture to be higher than in the other sectors of agribusiness”. The average coefficients of capital productivity (CRP) were estimated for fifteen-year period at the sector level in Poland. These coefficients do not falsify the proposed hypothesis to any extent. Opposite, they confirm it, hence giving premises for further research. The excess value of capital productivity in agriculture would not be so surprising if one considered that CAP subsidies contribute to the gross operational surplus. However the CRP coefficient exclude subsidies. One can argue that it is only Poland’s specific phenomenon, but capital-input productiv˙ ity has been also investigated for the EU-27 (Czyzewski and Brelik, 2014, p.197). This research was based on EUROSTAT data and input approach instead of resources approach, however the results were similar. Subsequently, we tested the auxiliary assumption that the value of land rent is determined by a positive difference between the expected productivity of capital in agriculture and in other sectors of agribusiness, whereas land market reflects these expectations in land prices. That difference and the total value of land rent capitalized in agricultural land (AL) in Poland was evaluated (based on CRP and assets values in monetary units) with regard to the equation which discounts perpetual rent (i.e. average price of agricultural land*long-term interest rate × number of hectares of AL in ownership). The both values are almost equal for the several years after the period of CAP phasing in. We do not claim that the land rent concept for sustainable agriculture is commonly valid, but we intend to initiate a discussion on the need of change in the neoclassical way of perceiving land factor. Capital productivity in agriculture is an important premise for the realization of the sustainable development guidelines. However, the assumption that “the higher the productivity, the better” is a great oversimplification of the issue. The existence of rent from the capital invested in agriculture, which is not connected with “exploitation” of the labor factor, indicates changes in consumers’ preferences towards “sustainable consumption”. Analysis of indices of capital productivity in agriculture indicates such changes with reference to food produced, although not necessarily consumed, in Poland. This agrees with the hypothesis that the expected productivity of capital in agriculture in Poland is higher than in its market environment. The surplus productivity of assets in agriculture creates the land rent value and establishes the prices of farm land. It does not, however, remunerate the land factor, since this is consumed due to the conditions of disparity in farmers’ labor remuneration. Thus, paradoxically, rigid adherence to the principles of sustainable development under such conditions, in
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the CAP perspective after 2013, is not entirely rational. From the point of view of economic and social order, it seems that the accumulation of capital in agriculture is more desirable, provided that it does not disrupt the EU-wide environmental order. The models of demand for agricultural products and services are developed globally. Therefore, there is no reason to adhere to the environmental order locally or regionally, everywhere in Poland, if we already possess some comparative advantages relating to the quality of agricultural products. It is not sufficient to pay the “backwardness rent”—it is better to capitalize it. Moreover, we need to remember that sooner or later any rent vanishes and becomes an element of costs. Therefore, its existence should be used as a means to introduce structural changes.
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