Model assumptions and drivers of land use change
The following assumptions are made about the decision environment of farm-agents. First, it is assumed that individual farmers aim to maximise net family income given their family’s land, wealth and labour endowments. The area of agricultural land in the region is limited and the opportunities for employment in other sectors determine the opportunity cost of on-farm labour. The family’s wealth endowment determines their cost of capital. The landscape is represented by a set of agricultural land blocks of varying size and distance from farmsteads in the region. Labour and capital are substitutes in the model whereas field-size and capital are complements. These relationships imply that families (and regions) with a low opportunity cost of labour will utilize relatively more labour in the farm enterprise and that cost savings can be achieved by farm and field expansion. Finally, farmers influence the landscape through their land use decisions (i.e. which blocks to farm, and how) that, in turn, are influenced by the nature and level of agricultural support. Given the existence of a competitive land market (as assumed in the model), rented land will over time gravitate to the most efficient or profitable producers (i.e. those that can extract the highest rent/profit from each plot).
The shadow price of land (i.e. implicit land rent) is a crucial policy variable, because the higher the potential land rent, the less sensitive land use will be to changes in market and policy conditions (identical reasoning applies to quota-constrained outputs such as milk). Factors that reduce implicit land rents over time will therefore influence structural change and hence need to be distinguished from the impacts of decoupling support. For example, rising off-farm wage rates as a result of growth in other sectors is a particularly critical factor, as this implies that the returns from farming need to increase over time if farmers are to maintain income parity and remain in the sector. Further, off-farm employment opportunities vary considerably between regions and have the potential to buffer the impacts of decoupled support where the opportunity cost of labour is low; this is important to be aware of when considering the regional comparisons in the empirical results. Finally, the joint distribution of block size and distance of blocks from farmsteads are important physical constraints on farm expansion (since transport is costly).