<p>Suppose that, initially, crop A is the most profitable crop that can be grown on a particular farm, yielding an average annual profit of \$X, profit being measured after deduction of all costs (including a normal return to the farmer) <em>other than</em> the cost of the property (ie the land).  In a competitive property market, the capital value of the property might be expected to approximate to the discounted present value of a stream of \$X per year.</p>

<p>Now suppose that, due to climate change, the relative profitability of different crops changes, and that crop B becomes the most profitable crop, yielding an average annual profit of \$Y. This could represent either an increase or a decrease in profitability. The former is possible for a farm in a cool climate, where perhaps crop B was previously too unreliable, but with a higher average temperature becomes more profitable than crop A.  The latter is possible for a farm in the tropics, where perhaps both crops used to be reliable but now crop A suffers from heat stress.  In either case the capital value of the property might be expected to change to the discounted present value of a stream of \$Y per year.</p>

<p>So in principle your colleague's suggestion is correct.  However, there are many reasons why it might be hard to identify such an effect in practice:</p>

<ol>
<li>Some changes in crop in response to climate change might result in the new profitability being similar to the old.</li>
<li>Average annual profitability may be hard to estimate given random fluctuations in weather conditions.</li>
<li>Profitability depends on market prices for crops and for inputs such as seeds, labour, fuel and fertilisers which may change.</li>
<li>The relevant discount rate for converting annual profit to a capital sum may also vary with market conditions.</li>
</ol>

CC BY-SA 4.0
2019-11-20T21:17:36.670Z
2019-11-20T21:17:36.670Z
Adam Bailey
<p>I am interested in conducting research into how climate change impacts the social welfare of a country, particularly how it affects producers of agricultural product. My immediate thought was that as the climate changes, certain crops will fare better under these new conditions and would generate a substitution effect towards these crops. </p>

<p>e.g. As temperatures rise, soybean becomes relatively more attractive than wheat in terms of yields and farmers would, over time, switch towards growing soybean so as to maximize rents.</p>

<p>After a discussion with a colleague, they suggested looking into property values of farms as these would encompass information about farmers' choices over time. I am not sure how to understand this connection formally. How would farmers switching crops be reflected in the property value of a farm?</p>

<producer-theory><agriculture><climate-change>
Do property values capture producer choice in agriculture?
Brennan
# Do property values capture producer choice in agriculture?

(Asked by: username_0 on 2019-11-20)

I am interested in conducting research into how climate change impacts the social welfare of a country, particularly how it affects producers of agricultural product. My immediate thought was that as the climate changes, certain crops will fare better under these new conditions and would generate a substitution effect towards these crops.

e.g. As temperatures rise, soybean becomes relatively more attractive than wheat in terms of yields and farmers would, over time, switch towards growing soybean so as to maximize rents.

After a discussion with a colleague, they suggested looking into property values of farms as these would encompass information about farmers' choices over time. I am not sure how to understand this connection formally. How would farmers switching crops be reflected in the property value of a farm?

**Tags:** producer-theory, agriculture, climate-change

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## 1 answers

### Answer by username_1 on 2019-11-20. Score: 4 | Accepted answer

Suppose that, initially, crop A is the most profitable crop that can be grown on a particular farm, yielding an average annual profit of \$X, profit being measured after deduction of all costs (including a normal return to the farmer) *other than* the cost of the property (ie the land). In a competitive property market, the capital value of the property might be expected to approximate to the discounted present value of a stream of \$X per year.

Now suppose that, due to climate change, the relative profitability of different crops changes, and that crop B becomes the most profitable crop, yielding an average annual profit of \$Y. This could represent either an increase or a decrease in profitability. The former is possible for a farm in a cool climate, where perhaps crop B was previously too unreliable, but with a higher average temperature becomes more profitable than crop A. The latter is possible for a farm in the tropics, where perhaps both crops used to be reliable but now crop A suffers from heat stress. In either case the capital value of the property might be expected to change to the discounted present value of a stream of \$Y per year.

So in principle your colleague's suggestion is correct. However, there are many reasons why it might be hard to identify such an effect in practice:

1. Some changes in crop in response to climate change might result in the new profitability being similar to the old.
2. Average annual profitability may be hard to estimate given random fluctuations in weather conditions.
3. Profitability depends on market prices for crops and for inputs such as seeds, labour, fuel and fertilisers which may change.
4. The relevant discount rate for converting annual profit to a capital sum may also vary with market conditions.


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