I joined the executive committee of the Oregon Wheat Growers League in 1998–just as a five-year period of severe drought and low prices started affecting Oregon wheat farmers. We were often asked questions about the crisis. In response, I wrote an article that develops estimates of the profitability of wheat farms in my county during the nine-year period from 1993 to 2001. I used all third-party data, included farm program payments, and developed profitability estimates for both landowners and tenants.
I later used the data from the above paper to investigate what would happen if farm profitability stayed depressed. I considered two scenarios: the elimination of federal farm program payments and a drastic reduction in the average wheat price.
In both scenarios, I concluded that the long-run effect of the decline in profitability would be to reduce land values and cause leases to be renegotiated on terms more favorable to the tenants. Since a tenant can only afford to farm a property if he can convince his banker that he will be profitable, landowner must absorb a big part of any fall in long-run profitability.
Farm payments aren’t the only federal subsidies that are capitalized into asset values. The mortgage interest deduction has very similar effects. Roger Lowenstein wrote an interesting article in the New York Times Magazine in March of 2006 arguing that the principal effect of the mortgage interest deduction is to raise the value of homes.