Announcing the Second Release of Agriland Price Index (ISALPI) | (2022-Q3)

IIM Ahmedabad-SFarmsIndia Agri Land Price Index (ISALPI) is a “constant-quality” agricultural land price index for India. It is supported by the Misra Centre for Financial Markets and Economy () at . , a Hyderabad-based “peer-to-peer marketplace for agricultural lands” provides data for index development.

The second release of ISALPI is now published. The district ranks are updated. The whitepaper related to the index can be accessed here: https://prashantre.files.wordpress.com/2022/11/white-paper-isalpi-20220830-v3.pdf

Some Salient Observations (as of July 2022):

• The CAGR (2019 Jan – 2022 Jul) is 11%
• 2-Year CAGR (2022 Jul-) is 9%
• 3-Year CAGR (2019 Jul-) is 3%
• The average Y-o-Y Price appreciation is 8%
• Prices seem to be higher during the second half of a year
• Prices peaked during Feb 2021. During the second wave of Covid, prices plummeted to a trough in Jul-Aug' 2021. The fall amounted to nearly 24% within 6 months.
• After a drastic fall, the prices peaked again in Feb 2022, almost matching the earlier peak (Feb 2021). However, prices fell 20% by May 2022, and had been showing signs of a modest recovery until July 2022.
• The latest tranche of data included over 7,000 observations spread across over 450 districts in 26 states/Union Territories. Compared to the first tranche, where the data was limited to fewer states, this time there was a sizeable representation from Madhya Pradesh, Gujarat, Rajasthan, Haryana, Kerala, Punjab, West Bengal, and Chhattisgarh.
• Our are limited to 130 districts from where a critical mass of data was available per district for a meaningful statistical analysis. An interactive map of the district ranks can be accessed here: https://arcg.is/45qri
• Overheated districts are spread across the national boundaries

• Although the national representation of the index has improved since our first release, we still have a long way to go. Our expectation is that future tranches of data will be more representative of the national realities. In early releases, the index may not be the most optimal national-level indicator of Agri Land prices. In the second release, the top seven states states (Telangana, Andhra Pradesh, Maharashtra, Tamil Nadu, Karnataka, Uttar Pradesh, Madhya Pradesh) represented over 85% of the listings. The next six states (Gujarat, Rajasthan, Haryana, Kerala, Punjab, West Bengal) represented additional 10% of the data. With superior data coverage, more geographic granularity is desirable.

Applications of ISALPI

The index should be of interest to existing owners, prospective buyers, financiers, , local governments, environmentalists, and agri-entrepreneurs. Existing landowners may use the index to assess how the valuation of their holdings have evolved over time. Sellers and buyers could use this information to assess the historical risk and return and predict these metrics for the future to prudently decide on their buying/selling decision. ISALPI may be useful in reducing litigation cost in some situations, e.g. when agri-land is acquired for public use (e.g., highway) or private interests (e.g., a manufacturing facility) by informing the price movements over time.

Uncertainty in movements increases the cost of financing or insuring the underlying assets. The transparency offered by the land price index may not only reduce the landowners’ underwriting costs, the financial market products (insurance, mortgage, etc.) the availability and cost of financial products will also improve.

Researchers could use this information to study how economic events and factors are associated with price movements in a specific asset class. Benchmarking land price movements in rural or semi-urban areas to a standard land price index will signal the potential conversion of agricultural land into real estate. Policymakers may use it to modulate their policies.

FAQs about the ISALPI

What is ISALPI?

ISALPI stands for IIMA-SFarmsIndia Agri Land Price Index. It is a monthly, “Constant-Quality” price index of Agri Price in .

Who develops and maintains ISALPI?

ISALPI is developed by IIM Ahmedabad (IIMA), the premier management school of India in collaboration with SFarmsIndia, a Hyderabad-based Agri Land Market place. On 25th November 2021, Dr. Errol D’Souza, Director IIMA, and Mr. Kamesh Mupparaju, CEO SFarmsIndia signed an MoU to jointly maintain and update the index. The programming algorithm for the index development was ideated and first executed in 2022 by Prof. Prashant Das.

How to Use the ISALP Index?

ISALPI provides a big picture idea of how the Agri Land prices are evolving in India. The price index levels in January 2019 are standardized at 100. Suppose the index moves up to 125 in January 2020. This implies that on average, Agri land has appreciated by 25% between these twelve months.

Can ISALPI be used as a discount rate for Agri Land Valuation?

provides a big picture idea of how the Agri Land prices are evolving in India and focuses solely on capital appreciation. The discount rate estimate must also include the projected income yield from the crops (or farmland rental). Usually, this yield is small and varies in the range of 1-2.5 percent per year.

What is the Methodology behind ISALPI?

ISALPI is based on the hedonic pricing method that involves developing a regression model from the past listings data. The regression output leads to a unique index value for each period. These early-stage index values are spikier than expected. We expect that the quality of the index will improve with the arrival of new data over time.

What is the big deal (about the ISALPI method)?

Developing a price index for liquid asset classes (such as stocks) follows a relatively simple method (e.g. weighted average), as the asset-quality remains broadly constant over time. Thus, changes in price over time may be directly attributed to the change in the supply-demand factors for assets of constant quality.

On the other hand, developing price index for heterogeneous asset classes (e.g. land) is a challenge: When we observe a price differential across two time periods, it may be a result of two factors: (1) the quality of the assets transacted during the two time periods are different; and (2) the supply-demand factors may have changed. An index should focus on the latter, so that the price trend could be applied to any specific asset with a specific (“constant”) set of quality-attributes.

Simpler models that summarize the land price per acre (e.g., average price, median price) are more prone to sampling biases. E.g. some time periods may be dominated by land parcels with a specific set of attributes while others by a different set of attributes. Thus, the difference in the average across these time periods may be due to the difference in the sampled attributes rather due to the difference in supply and demand factors for the core asset (i.e., Agri Land) common across these parcels. Hedonic pricing models used in ISALPI control for (filter out) the difference in quality-attributes across the land parcels sold in different time periods, and teases out the trend attributed to supply-demand factors.

How often is the ISALP Index updated?

As of 2022, the two parties (IIMA and SFarmsIndia) have agreed to publish monthly price indices updated once a year. Thus, ISALPI, as originally planned, is recorded on a monthly frequency, but updated annually. The first release came out in June 2022. The second release was developed in August 2022.

What is the geographic coverage of the ISALP Index?

Originally, ISALPI was based on land listing data from six states: Andhra Pradesh, Karnataka, Maharashtra, Tamil Nadu, Telangana, and Uttar Pradesh. The data from these six states were aggregated into a national index. In the second release, 26 states (and union territories) were included in the index creation of which 18 had critical mass for ranking them.

What are the appropriate uses of the index?

The index could be used as a broad tracker of Agri Land prices in India over time. It is useful as an input for estimating the discount rate for valuation. The index could be juxtaposed with other price indices to study the relative movement in land prices with respect to other asset classes. Stakeholders could develop their expectations of how the Agri land prices have evolved over time.?

What are the limitations of ISALPI?

The hedonic pricing method is based on some assumptions that may not always be highly reflective of reality. For example, a basic assumption is that the pricing function for different attributes of the land parcels stays the same over time. Over long enough time horizons, this assumption may be violated. A major limitation with the hedonic pricing models is that with the arrival of new data, the past index values may have to be retrospectively updated. Often, the relative (percent) difference between the index value across consecutive time periods does not change materially.

In early releases, the index may not be the most optimal national-level indicator of Agri Land prices. In the second release, the top seven states states (Telangana, Andhra Pradesh, Maharashtra, Tamil Nadu, Karnataka, Uttar Pradesh, Madhya Pradesh) represented over 85% of the listings. The next six states (Gujarat, Rajasthan, Haryana, Kerala, Punjab, West Bengal) represented additional 10% of the data. With superior data coverage, more geographic granularity is desirable.

Another limitation of the index is that it is based on listing data rather than transactions data. However, the quality of the reported transactions data has been questioned for its accuracy in India. Besides, the ISALPI hedonic model exhibits a high degree of fit (65-67%) that renders it fit for being used in the index creation.

Where should the index not be used?

The index provides a reliable, yet broad-based measure of how land prices have evolved in the past. Individual land parcels may be subject to their own specificities such that their price movement may deviate from what the index suggests.