Land degradation under tenant farming

06 November 2009 MTT Agrifood Research Finland

Finnish farmers fail to take care of land improvements on their leased fields to the same degree as with the fields they own, asserts research scientist Sami Myyrä from MTT Agrifood Research Finland in his thesis. He notes that the readiness of tenant farmers to maintain the condition of the fields is diminished by substantial land tenure insecurity.

– It is insecurity of land tenure that really bites. At worst, the neglect of basic field improvements may lead to a low-productivity trap in which no one, whether tenant farmer or landowner, has the financial incentive to restore fields, says Myyrä.

In Finland the area under active cultivation totals more than two million hectares, of which around one third is leased. The leasing of fields accelerated rapidly in the 1990s, particularly with Finland’s membership of the EU.

The field lease culture here is in its infancy and lease contracts are typically short, in the five-year range on average.

Phosphorusand pH tell a tale of neglect

In his research Myyrä compares fields farmed by the owners themselves and leased fields for easily soluble phosphorus concentration and pH value, which reveals liming. Here he observed a clear difference in standards in favour of fields farmed by owners. Furthermore, the pH value of leased fields is statistically significantly lower.

Statistical data for the research was obtained from MTT’s profitability bookkeeping records, the Soil Analysis Service and the TIKE plot register. Population of the survey material was gleaned from the farm register of the Finnish Tax Administration.

The Finnish land market doesn't work

Myyrä also used dynamic programming to examine farmers’ decisions regarding land improvements on leased fields. Factors taken into account by the modelling included production input and product prices, the length of the lease period and the likelihood of the lease being renewed.

The result indicated that likelihood of lease renewal was the key factor in farmers’ decision-making with regard to liming and fertilisation.

– The Finnish land market simply doesn’t work. On a complete land market, landowners would have made land improvements regardless of whether or not they worked the fields themselves, Myyrä concludes.

Return on scale is absent

Finnish grain growing productivity has been rising only slowly, at an annual rate of 0.6-1.7 per cent over the long term. According to Myyrä this is in part due to the growth in field leasing.

Contrary to what has been assumed up to now, increase in farm size does not appear to have automatically increased productivity.

– The development in productivity that has been observed has derived almost exclusively from technological advances. Economies of scale relating to the extent of production have had only a minor impact, says Myyrä.

Reduction in capital gains tax an incentive

For some reason Finnish landowners are extremely reluctant to sell their fields. The research investigated three methods of increasing the sale of fields: real estate tax on field, temporary relief on tax on capital gains made on land sales, and the imposition on landowners of an obligation for basic field improvement.

Myyrä finds that adoption of real estate tax on fields is politically unrealistic, and that further investigation is needed into any obligation concerning basic improvement.

– Temporary relief on capital gains tax is the best way to encourage those land owners who have even an inkling of an intent to sell, he says.

Temporary relief on capital gains tax on land sale will indeed be adopted in Finland in the near future, as soon as the EU grants approval.

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