In order to facilitate the analysis of the impacts of agricultural and land-use policies on farmland-use management, a generic typology of three agricultural categories is developed: the urban fringe or peri-urban zone; the agricultural core zone; and the far, or extensive, margin zone.
In the urban fringe or peri-urban zone, which is found at the edge of a city, urban activity has a strong influence on land uses and on the nature of farming, even in those countries where there are strong restrictions on converting farmland to other uses.
The agricultural core zone comprises the majority of agricultural land in most countries. In this zone, farmland has very low opportunity costs and the chance of market forces causing significant changes in land use are low. Returns from farming are high enough to keep the land in agriculture and there is little pressure for urbanisation.
In the far, or extensive, margin zone, agriculture is a marginally profitable activity and declines in the return from farming cause production to cease. If the urban fringe faces pressure to convert farmland to a higher-value use, the issue at the far margin is whether agriculture can be sustained. If this is not the case, then land will revert to a less intensively managed use, such as forests or native round cover.
Given the typology, conversion of farmland is fundamentally a problem only at the urban fringe and the far margin. By definition, in the agricultural zone, while the particular use of land in terms of the agricultural commodity produced may change or the operator of the farm may change, the land itself will remain in farming. However, while the majority of farmland may, in most countries, fall into this category, there is great interest in what happens to farmland at both the urban fringe and at the far margin. Depending on the specific country, these two zones can account for a large number of farms and a considerable share of farmland; moreover, they produce a disproportionately large share of agriculture’s environmental services.
In developing the analysis a number of assumptions are made to provide a stylised framework of farmland conversion that is generally applicable to the OECD countries. An inevitable consequence of this process is that the framework does not describe any given country with sufficient precision for it to be used directly for policy purposes. Instead, the framework describes the broad forces acting upon different types of farmland that influence the conversion process. In particular, the framework is presented as a set of three concentric rings of farmland surrounding an urban centre. Obviously, in any country there are multiple urban centres and not all of them will have a corresponding pattern of farmland. Moreover, the quality of farmland varies considerably in most countries and this, too, will alter the specific geography of farmland types. However, the point of the framework is to provide a way of identifying the specific types of farmland most at risk of conversion, and it does fulfil that function.
A second simplified assumption used to facilitate the analysis is that farmland situated at some distance from the urban fringe, in the core agricultural zone, has an arbitrarily small opportunity cost. Since all parcels of land are immobile, it is common in land value analysis to conclude that any payment to land is a pure economic rent or should serve other objectives than keeping land in farming. If there are no alternatives to the current use and if farming is a profitable activity, land will remain in that use, even at a payment that is close to zero ‒ for, by definition, it has little or no opportunity cost. This is a rough approximation of the condition facing large amounts of farmland, especially in countries with low population densities and high rates of urbanisation. In reality, there are small amounts of farmland outside the urban fringe that may be used for ex-urban residences, rural manufacturing locations, etc., but these uses are small compared to the total mass of farmland. Indeed, this assumption fundamentally underlies the common practice in agricultural policy analysis of assuming the stock of farmland is fixed (OECD, 2008b).
The analysis also largely overlooks the issue of shifts in land uses that are internal to any given farm. Because land has different qualities there will typically be price regimes that lead to some land on a farm being idled in the short to medium run. However, in the long run there is a good chance that these parcels will return to production as prices improve. The rationale for not focusing on these land-use adjustments, which can have significant consequences, is that there is no change in ownership. Just as a farmer chooses to plant some land with one crop and another parcel with another crop and use a third as pasture, so too is the decision to withhold land from production part of the internal farm management process. For the purposes of this study, farmland conversion will involve land leaving the sector and becoming unavailable for short-term re-use.
A significant part of the analysis concentrates on the role of environmental services from agriculture. For the purpose of simplicity, the analysis treats these non-commodities as local public goods. This means that their value is largely determined by the direct experience of those living in close proximity to the point of production.
The analysis is static, in so far as only the effects of the agricultural policy measure considered are taken into account, while other factors that could influence conversion of farmland are assumed to be constant. In addition, it is assumed that producers are risk-averse.
Finally, the last major assumption is that the farm household assesses the available returns from both farm and non-farm allocations of labour and capital. If agriculture pays a lower return than from off-farm work, then individual household members will shift more resources to off-farm activity, where it is available. Certainly, in some countries the returns to full-time farming are sufficiently high to prevent this becoming a common phenomenon. However, if returns from farming are low, some other mechanism is needed to allow farming to persist in urban fringe areas, where farmers face a combination of: small farm size − leading to low levels of farm income, high production costs leading to low unit returns, and competition for land for other uses − leading to pressure for conversion.