Economic analysis of Dutch agricultural land use in a changing policy environment

Abstract This study empirically investigates farmers’ decision-making on agricultural land use change in the Netherlands. Five driving factors influencing decision making on both on-farm land adjustments and changes to the size of the farm are selected: increased price volatility, milk quota, land prices, direct payments and insurance possibilities. By analysing the influence of increased output price volatility and risk on land use change, it is first shown that opposite effects between complementing and substituting land uses are present, leading to competition within the dairy sector and within crop production. Second, by employing a duration model over the period before, during and towards milk quota abolition, it is empirically shown that quota hamper the pace of change in land used for milk production on dairy farms. Third, the price of agricultural land is analysed by taking into account four categories that all influence the price of land: the direct influence via the returns from land, institutional regulations, the spatial environment and local market conditions. It is shown that the financial crisis leads to a decline in the effects of local market conditions, but the announcement of milk quota abolition in 2008 has led to an increase in the effects of the spatial environment. The last two driving factors analyse policy measures using a mathematical programming model. Fourth, it is found that the 2013 Common Agricultural Policy reforms will cause farmers to shift away from crops previously eligible for payments, with the initial shift of the direct payment reform enhanced by the move towards direct payments combined with a green payment. Fifth, small changes in land allocation towards more volatile crops are observed when the possibility of whole farm and crop-specific insurance is offered. In general it is found that when production risk is decreased, this opens the possibility to increase risk in other areas, such as farm expansion. When the total amount of farmland is treated as variable, changes to land cannot be explained by changes in revenues and risk alone. Land use change is now also influenced by long-term decision making based on expectations on future costs and revenues, and other factors such as farm characteristics, institutional and transaction characteristics and the influence of location and economic conjecture.