Academic journal article Journal of Agricultural and Applied Economics

Effects of Ownership Restrictions on Farmland Values in Saskatchewan

Academic journal article Journal of Agricultural and Applied Economics

Effects of Ownership Restrictions on Farmland Values in Saskatchewan

Article excerpt

Restrictions on the ownership of farmland by nonresidents of Saskatchewan were imposed by the Farmland Security Act (FSA) in 1974. The FSA has been blamed by some observers for depressed provincial land values. An adaptive expectations present value model is developed to estimate the effects of the FSA, with the province of Alberta included as a control. Results of seemingly unrelated regressions and generalized autoregressive conditional heteroscedasticity estimates find no statistically significant effect of the FSA on the value of land in Saskatchewan. This may indicate that the effect of the regulatory change is too small to be measured accurately.

Key Words: adaptive expectations, Farmland Security Act, generalized autoregressive conditional heteroscedasticity, present value, seemingly unrelated regressions

JEL Classifications: C51, G21, Q18

Limits to the ownership of domestic resources by nonresidents are common. One example of such limits is those on foreign ownership of farmland. Lapping and Lecko note three main reasons for such ownership restrictions. First, foreign investors may have tax advantages that allow them to outbid local farmers for land. Second, nonresident owners may be more concerned with immediate profitability than good land stewardship. Third, absentee ownership may provide an unstable situation for a leasing farmer and could preclude farm expansion or rationalization of existing production units. The Farmland Security Act (FSA) was enacted in Saskatchewan in 1974 in an effort to limit foreign ownership of that province's agricultural land. The FSA severely restricts the amount of land that can be owned by nonresidents of Saskatchewan, with Canadian nonresidents limited to 320 acres and foreign nonresidents confined to half that amount. As such, the law has been cited as a possible cause of depressed provincial farmland values (Regina Leader-Post). It is argued that if the number of prospective bidders on a parcel of farmland is lowered, the resulting price received by the vendor will also be lowered, resulting in a decrease in the wealth of farmers.

The objective of the research reported in this paper is to determine the effect of the FSA on Saskatchewan land values. Two methods are used to carry out this objective. First, if the FSA had an effect on Saskatchewan land prices, this should be reflected in a significant dummy variable representing the regulatory change. An econometric model that resembles previous models but incorporates the FSA as a permanent fundamental component of the land price time series is constructed to test this hypothesis. A present value (PV) framework,1 which calculates land values as the discounted sum of all future payments to the land, is introduced as the null hypothesis. The alternative is an imperfect land market in which the number of bidders affects the final price paid for land. Second, the ratio of the value of land in Saskatchewan to that in the neighboring province of Alberta is compared before and after the Act was implemented. If the FSA had the hypothesized negative effect, then the ratio of the value of Saskatchewan farmland to that of Alberta should have decreased after implementation, ceteris paribus.

Though several valuation studies have been carried out for Canadian farmland (Baker, Ketchabaw, and Turvey; Clark, Klein, and Thompson; Veeman, Dong, and Veeman; Weisensel, Schoney, and Van Kooten), no previous study has attempted to model the effects of land ownership restrictions. If the number of potential nonresident land bidders is a significant proportion of the number of overall potential bidders, then the bid price for land should be lowered as a result of the ownership restriction. Conversely, if the number of potential nonresident land buyers is sufficiently low, no effect upon land values should be observed.

The contribution of the paper is twofold. The immediate contribution is to the current policy debate over the need to remove the FSA to protect farm wealth from further decline. …

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