Agriculture Reference
In-Depth Information
were made.
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For farmland contracts short-term leases are feasible because, in general,
“appropriable quasi-rents” (rents tied to a specific asset) are absent.
Consider the assets involved in a farmland lease. Landowners bring just one asset to the
exchange: land—an asset that typically is not specific to the exchange. Many other farmers
could profitably use the land. This would, for example, easily include farmers located within
five miles of the land, which would encompass an area over 50,000 acres (since one square
mile or “section” has 640 acres.) If average farm size were 1,000 acres, this would mean
that roughly fifty farmers could potentially use the land.
Farmers bring several assets to the exchange, most of which are not specifictothe
farmland transaction either. First, the farmer brings his human capital (farming skills), which
are specific to the local area but are not specific to the contracted plot of land. The farmer
could profitably farm other plots in the area with his present capital stock. Second, the farmer
has his own land and buildings, but these can be sold and are not specific to a particular leased
plot or leasing agreement.
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Third, the farmer has equipment such as tractors, cultivators,
and combines. Some of these implements are quite specific to a region. To take an extreme
example, a sugarcane cutter has little use in Montana where no sugarcane is grown. Like
buildings, these machines are not specific to the plot in the lease contract, in part because
most of the equipment is transportable. Farming may not be unique in this regard, but it can
hardly be characterized as a production process laced with specific assets.
In many cases irrigation assets are the only transaction-specific assets involved in a
farmland contract. Irrigation investments include pumps, underground pipes, wells, and
other equipment that are often fixed to the land as well as the farmer's skills in using a
particular irrigation system on a specific plot of land. These investments are generally owned
by the landowner. Because farmers run the system, pay for daily maintenance, and often
share major repair costs, the possibility of contract holdup exists.
A more plausible potential holdup problem can occur with orchards.
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Fruit trees are
almost always owned by the landowner, while grain crops are not. However, as with
irrigation, the farmer invests in specific capital in maintaining the trees. Although knowledge
regarding pruning and general maintenance is transferable, the farmer's investment in
maintaining the trees can be specific because individual orchards often have unique features.
This is exacerbated by the fact that current maintenance has implications for future crops.
This is less of a problem for annual small grains like wheat.
An extreme example of a holdup problem exists where a land contract is shorter than a
given crop cycle, and requires renewal midway through a growing season. If a landowner
were to renegotiate a lease just before harvest, the farmer would be in jeopardy. To our
knowledge, however, land contracts always cover a crop cycle and so this issue is resolved
easily. The bottom line is that many farmland contracts are not plagued by potential holdup
problems that arise when an exchange is characterized by large specific assets.
