An economic analysis of the relationships between land values, agricultural commodity prices and land reform issues in South Africa.

Abstract

This thesis is an implicit farmland value study which explores the possible effects of agricultural commodity prices, interest rate and land reform issues on farmland values. The study examines the impacts of these fundamental factors (interest rates and returns to farmland as determined by crop prices) on sugar cane farmland values, maize farmland values, on deciduous fruit (apples and pears) farmland values, and on aggregate South African farmland values. Expectations are that land reform influences the demand for farmland. Since farmland prices are demand driven, changes in the demand for farmland (as influenced by land reform issues) may result in changes in farmland prices. The study thus seeks to empirically examine, to a larger extent, the long-run influence of endogenous factors on farmland prices. Causes of cyclical behaviour in farmland prices are also examined. The study draws on cross-sectional and time series studies of previous research on farmland values. The maximum likelihood Johansen (1991) procedure of cointegration is used to estimate the relationship between fundamental factors and farmland values. The logit model is used to estimate the influence of land reform on the demand for farmland, hence farmland prices. Unit root and the Johansen cointegration test results proved that long-run relationships exist between farmland values and returns to farmland; the use of cointegration methods was thus recommended. Long-run changes in farmland prices are caused by fundamental factors. Short-run variations in farmland prices are caused by exogenous factors that affect net farm income and this lead to boom-bust cycles in farmland values.