Tuesday, November 15, 2011

The More Highly Valued Use

In yesterday's Wall Street Journal, I read an article entitled "Farmers Reclaim Land From Developers." Though not tagged online as an economic article all of the information provided in it allows for an economic analysis of why land has shifted back to agriculture purposes after previously being purchased for housing developments on the urban fringe.

According to the article, the value of residential land has fallen by nearly 70% since it peaked in 2006 while agricultural land has risen in value by nearly 20% in the last three years. At the same time, developers have been defaulting on loans for the land that they purchased to develop at highly inflated prices and farmers, often the same ones who sold the land in the first place, are reclaiming the land for significantly lower prices than the developers paid. Also, more people have been entering the agricultural market because of the rising prices of corn, cotton, and other agricultural products. Furthermore, fewer people who once considered relocating to picturesque exurban neighborhoods because of the low cost of fuel are now no longer interested in occupying these places because of rising gas prices and a decline in their own property value, which would cause them to sell their house, in many cases, for less than what they paid.

To start, while housing prices were rising prior to 2006 and before the housing bubble completely popped in 2008, land developers saw huge profits to be gained from purchasing land near the urban fringe to develop into residential communities. This meant that by purchasing the land from farmers, who were not making nearly the same amount of money as the developers expected to from the land, the sale of land to developers meant that that land was going to a more highly valued use. Now that demand for houses in exurban communities has all but disappeared due to their distance from the CBD, and farmland has increased in value as a result of rising crop sales prices, holding the land for its future development is not the most highly valued use. Idle land is worse, economically, than land being used for something not its most highly valued use.

As it stands, all land still being held for development but not actually developed is, in effect idle. Even if agriculture is not the most highly valued use of the land, which it seems to be, it is better for farmers to reclaim the land than allow it to remain sectioned off for development that is unlikely to occur any time in the near future, if at all. In several cases, farmers who previously sold their land to developers, like the England family that sold 430 acres of land for $8.6 million, were able to repurchase it for much less than they sold it for; in the case of the Englands, they repurchased their land for $1.75 million. For the families that this is true of, they could invest the profit in capital improvements to their equipment and in additional acreage.

Along with the new farmers entering the market because of expectation of profit, all of the old families who repurchased their land are beginning to produce more of the crops with currently increasing prices. As more suppliers enter the market, the supply curve shifts to the right, increasing the equilibrium quantity and decreasing the equilibrium price for a given product. Since the price will decrease, it is likely that at some point in the near future, some of the new entrants into the agricultural market will either leave completely or at lease leave the specific market for corn or cotton for a different, higher priced good.

One person interviewed for the article predicted that some land, south of Chicago, previously expected to be converted to a neighborhood would not end up being developed for another 15 to 20 years. At that point, it can be predicted that the profit developers would gain from the land will be greater than the profit that farmers could gain from farming the land. In that case, the land parcel would once again be going to a more highly valued use. Since this change would not occur until a point quite a ways into the future, this observation of natural market fluctuations demonstrates that sprawl is a function of supply and demand and when there is no demand for exurban developments, the outward expansion of cities stops or slows significantly. Previously people thought that there would be developments in the places that farmers are now taking over, but now that no one has a desire to purchase a dwelling there, sprawl is being curbed, not by policy, but by the market.

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