Is there a Term Structure in Land Lease Rates? Martin Odening Silke - - PowerPoint PPT Presentation

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Is there a Term Structure in Land Lease Rates? Martin Odening Silke - - PowerPoint PPT Presentation

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Motivation Theoretical Background Empirical Analysis Conclusion Is there a Term Structure in Land Lease Rates? Martin Odening Silke H uttel Matthias Ritter Viacheslav Esaulov Humboldt-Universit at zu Berlin Energy Finance Workshop

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SLIDE 1

Motivation Theoretical Background Empirical Analysis Conclusion

Is there a Term Structure in Land Lease Rates?

Martin Odening Silke H¨ uttel Matthias Ritter Viacheslav Esaulov

Humboldt-Universit¨ at zu Berlin

Energy Finance Workshop May 9, 2014

Anhang Martin Odening Is there a Term Structure in Land Lease Rates? 1/12

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SLIDE 2

Motivation Theoretical Background Empirical Analysis Conclusion

Motivation

Land rental markets Land is an important factor for agricultural production Most farms gain access to land via rental markets Land rental prices are used to determine farmland values Unclear influence of the length of rental contract (term) Objectives Explore the role of the term Detect farmer’s implied expectation about future price development

Anhang Martin Odening Is there a Term Structure in Land Lease Rates? 2/12

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Motivation Theoretical Background Empirical Analysis Conclusion

Theoretical Background

What is a term structure? Known from interest rates Influence of length of contract Equilibrium: Value of long-term contract = value of several short-term contracts Different possible shapes Literature Gunnelin/S¨

  • derberg (2002): Term

structures in Office Rental Market Stanton/Wallace (2009): Theoretical derivation

Upward−sloping term price Downward−sloping term price Single−humped term price

Anhang Martin Odening Is there a Term Structure in Land Lease Rates? 3/12

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SLIDE 4

Motivation Theoretical Background Empirical Analysis Conclusion Data Descriptive Statistics Empirical Model Results

Data

Land rental market in Saxony-Anhalt History of expropriation, land collectivization and socialist policy Privatization of state-owned land after German reunification 1990 Bodenverwertungs- und -verwaltungs GmbH (BVVG) Average share of rental land per farm in 2010: 77 %

  • Fig. 1: The Federal state of

Saxony-Anhalt in Germany

Anhang Martin Odening Is there a Term Structure in Land Lease Rates? 4/12

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Motivation Theoretical Background Empirical Analysis Conclusion Data Descriptive Statistics Empirical Model Results

Data

Rental prices for Saxony-Anhalt from BVVG Price and plot size (arable/grass/other), soil quality, location on county-level, length of contract Contracts running between 2006 and 2010 Data selection:

contracts starting between 2002 and 2010 including arable land contracts starting in October

  • utliers removed

2,504 observations

  • Fig. 2: Average BVVG rent prices

2010 by county in Saxony-Anhalt

Anhang Martin Odening Is there a Term Structure in Land Lease Rates? 5/12

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Motivation Theoretical Background Empirical Analysis Conclusion Data Descriptive Statistics Empirical Model Results

Descriptive Statistics

Variable Mean Stand. Dev. Min. Max. Price arable land ( e per ha) 318.66 167.2 54 1075 Plot size (ha) 17.44 31.1 0.02 554 Arable land (ha) 14.14 25.7 0.001 364.65 Grassland (ha) 2.41 7.4 0 124.96 Other land (ha) 0.90 4.3 0 190.75 Share of arable land (%) 80.92 26.5 0.17 100 Soil quality (points [0,102]) 61.34 21.0 9 100 Length of contract (years) 3.43 2.1 18 Table 1: Descriptive statistics BVVG data 2002–2010 (N = 2, 504)

Anhang Martin Odening Is there a Term Structure in Land Lease Rates? 6/12

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Motivation Theoretical Background Empirical Analysis Conclusion Data Descriptive Statistics Empirical Model Results

Empirical Model

log(Rarable

i

) = a0 + a1Aarable

i

+ a2

  • Aarable

i

2

scaled + a3 log

Qarable

i

  • + a4 log

Sarable

i

  • + a5Trend(i) +

11

  • c=2

bcCountyci + a6 log ¯ Rlagged, county

i

  • +

2010

  • t=2002

ct · Yearti · Termi +

2010

  • t=2002

dt · Yearti · Term2

i + ei

Rarable

i

– Price arable land ( e/ha) Countyci – County dummies Aarable

i

– Lot size in ha Yeart – Year dummies Qarable

i

– Soil quality in points Termi – Length of the contract Sarable

i

– Share of arable land in ha i – Contract index Trend(i) – Yearly time trend ei – Error term ¯ Rlagged, county

i

– Average county price of previous year

Results Anhang Martin Odening Is there a Term Structure in Land Lease Rates? 7/12

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Motivation Theoretical Background Empirical Analysis Conclusion Data Descriptive Statistics Empirical Model Results

Regression results

Land lease rate determinant Estimated Coeff. P-value Size arable land (ha) 0.002 0.000*** Size arable land squared (scaled by county)

  • 0.011

0.001*** Share arable land (%, log) 0.050 0.000*** Soil quality (log) 0.908 0.000*** Time trend 0.085 0.000*** Lagged regional rental price (log) 0.056 0.047** Land lease rate determinant Estimated Coeff. P-value Location dummies AMK Salzwedel – – Anhalt- Bitterfeld

  • 0.007

0.822 Burgenlandkreis

  • 0.007

0.857 B¨

  • rde

0.033 0.272 Harz 0.039 0.183 Jerichower Land 0.076 0.009*** Mansfeld- S¨ udharz

  • 0.134

0.000*** Saalekreis

  • 0.156

0.000*** Salzlandkreis

  • 0.135

0.000*** Stendal 0.050 0.046** Wittenberg

  • 0.098

0.002***

Table 2: Results from the regression

Note: *** and ** denote significance at the 1 and 5 per cent levels, respectively

Anhang Martin Odening Is there a Term Structure in Land Lease Rates? 8/12

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Motivation Theoretical Background Empirical Analysis Conclusion Data Descriptive Statistics Empirical Model Results

Regression results (cont.)

Land lease rate determinant Estimated Coeff. P-value Land lease rate determinant Estimated Coeff. P-value Term Structure D2002 Term 0.062 0.009*** D2002 Term2

  • 0.002 0.164

D2003 Term 0.067 0.005*** D2003 Term2

  • 0.003 0.156

D2004 Term 0.016 0.497 D2004 Term2

  • 0.001 0.814

D2005 Term 0.025 0.319 D2005 Term2

  • 0.001 0.785

D2006 Term

  • 0.029 0.134

D2006 Term2 0.004 0.175 D2007 Term 0.071 0.000*** D2007 Term2

  • 0.003 0.481

D2008 Term 0.148 0.000*** D2008 Term2

  • 0.012 0.000***

D2009 Term 0.117 0.000*** D2009 Term2

  • 0.011 0.000***

D2010 Term 0.083 0.000*** D2010 Term2

  • 0.008 0.000***

Constant 1.017 0.000***

Table 2 (cont.): Results from the regression

Note: *** and ** denote significance at the 1 and 5 per cent levels, respectively

Anhang Martin Odening Is there a Term Structure in Land Lease Rates? 9/12

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Motivation Theoretical Background Empirical Analysis Conclusion Data Descriptive Statistics Empirical Model Results

Term structure

Year p-values Wald test Term Structure (ct = dt = 0) 2002 0.005*** upward sloping 2003 0.001*** upward sloping 2004 0.410 n.s. 2005 0.328 n.s. 2006 0.325 n.s. 2007 0.000*** upward sloping 2008 0.000*** single-humped 2009 0.000*** single-humped 2010 0.000*** single-humped Table 3: Term Structure of Land Rental Prices

Note: *** denotes significance at the 1 per cent level, n.s. = not significant

Anhang Martin Odening Is there a Term Structure in Land Lease Rates? 10/12

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Motivation Theoretical Background Empirical Analysis Conclusion Data Descriptive Statistics Empirical Model Results

Average effect of the contract length

100 200 300 400 500 600 rent based on mean values 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022 years Term Structure 2002

  • Fig. 3: Estimated significant term structures

Equation Anhang Martin Odening Is there a Term Structure in Land Lease Rates? 11/12

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Motivation Theoretical Background Empirical Analysis Conclusion Data Descriptive Statistics Empirical Model Results

Average effect of the contract length

100 200 300 400 500 600 rent based on mean values 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022 years Term Structure 2002 Term Structure 2003 Term Structure 2007

  • Fig. 3: Estimated significant term structures

Equation Anhang Martin Odening Is there a Term Structure in Land Lease Rates? 11/12

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Motivation Theoretical Background Empirical Analysis Conclusion Data Descriptive Statistics Empirical Model Results

Average effect of the contract length

100 200 300 400 500 600 rent based on mean values 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022 years Term Structure 2002 Term Structure 2003 Term Structure 2007 Term Structure 2008

  • Fig. 3: Estimated significant term structures

Equation Anhang Martin Odening Is there a Term Structure in Land Lease Rates? 11/12

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Motivation Theoretical Background Empirical Analysis Conclusion Data Descriptive Statistics Empirical Model Results

Average effect of the contract length

100 200 300 400 500 600 rent based on mean values 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022 years Term Structure 2002 Term Structure 2003 Term Structure 2007 Term Structure 2008 Term Structure 2009 Term Structure 2010

  • Fig. 3: Estimated significant term structures

Equation Anhang Martin Odening Is there a Term Structure in Land Lease Rates? 11/12

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Motivation Theoretical Background Empirical Analysis Conclusion

Conclusion

Summary Different shapes of term structure detected Upward-sloping term structure in 2002, 2003, 2007: Farmers expect growing rental prices Single-humped term structure after 2008: Market is expected to cool down Discussion Implications for agricultural policies and structural change in agriculture Term has to be considered when predicting future price development Careful with generalization because of illiquid market and local peculiarities

Anhang Martin Odening Is there a Term Structure in Land Lease Rates? 12/12

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SLIDE 16

Appendix

Appendix: Descriptive Statistics

Term (years) Year <1 1 2 3 4 5 6 7 8 9 10 ≥ 11 Total 2002 1 8 10 2 2 1 2 26 2003 2 9 24 7 5 1 1 3 52 2004 7 52 79 39 21 8 5 2 1 2 216 2005 3 75 31 17 6 2 1 135 2006 55 183 37 24 27 4 1 1 1 333 2007 3 61 86 14 24 106 1 1 1 1 298 2008 11 135 93 127 54 135 6 2 2 565 2009 77 109 87 34 101 4 49 461 2010 61 51 75 74 42 44 10 2 54 4 1 418 Total 14 392 604 425 316 488 97 29 10 109 11 9 2,504 Table A1: Distribution of the number of rental contracts over lease length and years in observation period

Anhang Martin Odening Is there a Term Structure in Land Lease Rates? 13/12