Land Value and Leasing Implications of Precision Agriculture

J. Lowenberg-DeBoer, Director Site-Specific Management Center

Introduction

In the past a substantial part of the benefits of any new crop technology in agriculture was capitalized into land values. That may happen again with precision farming, but the importance of human capital in this technology may mean that a large share of the benefits will flow to people in the form of salaries and entrepreneurial profits. Precision farming may also increase the demand for rental land, driving up rents. This newsletter looks at how precision farming will affect land values and farm land rental.

The traditional analysis would assume that all net profits would be bid back into land values. For example, one of the studies of the profitability of precision farming found an $18/a benefit from the technology (See Precision Farming Profitability edited by Lowenberg-DeBoer and Erickson, 2000, for more details in chapter 1). Using the standard capitalization model, discounting land over an infinite life (Value of land = Annual income/discount rate), using a 10% discount rate and assuming that all the extra income was attributed to land, the added value due to the $18/acre benefit would be $180 per acre. Although it is unlikely that all the benefits would be capitalized into land, it is likely that profitable precision ag technology will add upward pressure to land prices.

Scarcest Resource

The typical land capitalization model assumes that the scarcest resource in the farm sector is land, and hence all income that does not go to pay specific inputs (e.g. seed, fertilizer, labor) can be attributed to land. In the precision farming case that assumption may not hold, at least not in the initial stages of technology adoption. The scarcest resource for the precision farmer may be human capital, that is the knowledge and skill required to make the system work, especially the ability to analyze data and develop strategies that increase profits. If skill is the scarcest resource, more of the precision farming resources will go to attract people with the necessary skills. This may mean higher salaries for the agronomist working for the local fertilizer dealer or higher incomes for those farmers who acquire the skills.

Farmland Rents

Precision agriculture technology will also increase the demand for rental land. Precision technology is essentially a way to automate management. It takes some of the functions that formerly occurred in the brain of the farmer and turns them over to a computer. This will allow one person to manage more land, more effectively. To acquire that land, many managers will bid more aggressively on rentals just as they did when mechanization, chemical weed control, no-till and other automation technologies were introduced..

The technology may also alter rental agreements. In recent years many farmland rentals have shifted from share agreements to cash rental, which is easier for tenants with multiple landlords to manage and requires less agricultural knowledge on the part of the landlord. Precision farming technology may slow that trend by making share rentals more profitable and easier to manage for landlords and professional land managers.

In the recent past, most of the yield increasing technology in agriculture has required higher expenditures (e.g. hybrid seed, fertilizer, pesticides). In many traditional share rental arrangements this meant that the landlord shared in these costs. Most of the expenditures for precision agriculture technology (e.g. sensors and other equipment, software, training) would be paid by the tenant in the traditional share arrangement. Many studies of variable rate inputs show that overall input use changes very little, though the distribution of those inputs in the field may be changed substantially. Thus, under many current share agreements precision farming means higher revenue for the landlord, with little additional expense.

One perennial problem in farmland rental is finding a trustworthy tenant. Sensor technologies may make it easier for a share landlord to monitor production practices and yields. For example, Aas-applied maps@ can show sloppy fertilizer or herbicide application practices. Yield maps provide a means to verify yields. Remote sensing can provide landlords with yield maps and other information completely independent of the tenant.

The tenant also can use precision farming information to his or her advantage in regociating with the landlord. Remote sensing images can give a prospective renter information on the relative productivity of a farm. It can help identify areas that regularly flood or have other production problems. In an on-going rental, yield maps can give the tenant information for renegociating terms and/or to help convince landlords to improve drainage or make other investments.

Conclusions

Some uses for precision agriculture technology have proven to be profitable and more are likely to be developed. As precision agriculture becomes common practice some of those benefits will probably be bid into higher farmland prices, but initially the scarcest resource in this system is likely to be human capital and a substantial part of the benefit will go to those who have the skills.

Precision agriculture is also likely to increase demand for rental land and make share rental relatively more profitable for the landlord. Precision technology essentially automates management and allows one person to manage more land, more effectively. Under traditional share rental agreements most of the cost of precision farming are paid by the tenant, so landlords may receive yield increases with relatively little extra expense. Sensors and satellite imagery also can make it easier to supervise share rentals.