Decomposition of changes in the agricultural land rent for the EU-28

Purpose The prices and rents of land depend on its marginal productivity and a number of other factors (the range of economic and policy-related factors). Significant changes in the European Union (EU) agricultural policy and changes in productivity models in recent years have influenced land market dynamics. To properly understand the dynamics in the land market and relate it to changes in agricultural production and policy, it is important to establish a multi-factor model that would allow the main factors determining changes in land rental prices in the EU to be assessed. Design/methodology/approach The article proposes an index decomposition analysis model to explain changes in land price at the country level. The logarithmic mean Divisia index is used for the decomposition of agricultural land prices into their key contributing factors. The proposed index decomposition analysis model is used with data from the Farm Accountancy Data Network. The empirical case of the EU countries over 2004–2022 is considered. The proposed approach allows one to measure the contributions of different factors towards changes in land rent based on the production theory. Findings The results indicate that growth in agricultural output per hectare appears to be the major cause behind changes in agricultural land rent. Increasing land productivity can be attributed to improved agricultural practices and the application of intermediate inputs. The price changes are also included in the analysis. During the period under review, land and rental prices and farm profitability indicators increased in most EU countries. Average growth in land rents in the EU-28 was around 2.2%, while land prices grew at 1.3%. The fastest growth in rental prices was recorded in Estonia, Lithuania, Latvia, Bulgaria and the Czech Republic (10.6–17.1%), while that for land prices was recorded in Bulgaria, Poland, the Czech Republic and Slovakia (10.4–26.2%). Land prices have also increased relative to the income generated by a land unit. This can be attributed to a €12/ha increase in the land rent price. Increasing agricultural subsidies have also played a stimulating role with respect to changes in agricultural land rent in the EU-28. However, this effect amounted to an increase in the agricultural land rent of just €7/ha. Originality/value The proposed approach allows one to isolate the effects of land rent price changes with respect to multiple factors. These factors explain land productivity, support rate and the situation in the land market. The proposed model can also be adjusted to explain dynamics in the land rent in other contexts.