Jason Henderson

1
The Impact of Ethanol Plants on Cropland Values
in the Great Plains

• Jason Henderson
• Branch Executive
• Federal Reserve Bank of Kansas City Omaha
  Branch.
• Brent Gloy
• Associate Professor
• Applied Economics and Management
• Cornell University
• Presented to
• NC-1014 Agricultural and Rural Finance Markets in
  Transition
• October 4, 2007

2
Ethanol and Land Values

• Fundamental Questions
• What is the relationship between ethanol plant
  locations and farmland values?
• Is the run-up in farmland values rational?

3
Land Values Surge in the Great Plains
Non-irrigated Cropland Value Gains (Kansas City
Federal Reserve District)
Percent change from year ago
Source Federal Reserve Bank of Kansas City
4
Land value gains varied widely.
Non-irrigated Cropland Value Gains
Percent change from year ago
Nebraska
Oklahoma
Source Federal Reserve Bank of Kansas City
5
Ethanol Plants and Ag Bankers
Operating Ethanol Plants as of April 2007
Respondents to FRBKC Agricultural Credit Survey
6
Why Should Land Values be Higher Around Ethanol
Plants?

• In traditional capitalization model, land values
  rise with net farm revenues.
• Spatial variation would arise with variation in
  basis.
• Basis impacts related to transportation costs
• Gallagher, Wisner, and Brubacker (2005) Price
  Relationships in Processors' Input Market Areas
  Testing Theories for Corn Prices Near Ethanol
  Plants Canadian Journal of Agricultural
  Economics. v53 (n2-3)117-39.
• Average impact on corn prices 0.125 per bushel
• Ranged from 0.046 to 0.193 per bushel
• McNew and Griffith (2005) Measuring the Impact
  of Ethanol Plants on Local Grain Prices Review
  of Agricultural Economics. v27 (n2)164-80.

7
Empirical Model

• Hedonic land value model LVf(Ag, Urban,
  Amenity)
• Non-irrigated Cropland Land Values
• Agricultural Bankers in Kansas City Federal
  Reserve District
• 219 respondents reported in 2006Q3, 2006Q4,
  2007Q1, and 2007Q2
• Agricultural Factors (county level)
• Crop revenues per acre
• Livestock revenues per acre
• Government payment per acre
• Urbanization factors (county level)
• Population density
• Population growth
• Metro dummy
• Adjacent county dummy
• Amenity factors
• Water and topography index

8
Ethanol Variables

• EDIST distance between the bank location and the
  nearest operating ethanol plant.
• Average 66 miles, Range 0 to 280 miles
• EMILES50 number of operating ethanol plants
  located within 50 miles of the bank location
• Average 1 plant, Range 0 to 7 plants
• Why 50 Miles? 2006Q1 to 2007Q1 11
• lt 25 miles 12.7
• 25-50 miles 12.6
• 50-75 miles 7.8
• 75 miles 6.7

9
Empirical Results Nonirrigated Cropland Values
10
Distance to an Ethanol Plant
11
Empirical Results

• Marginal impacts increase over time.
• 2006Q3 1.43 per acre per mile
• 2007Q2 2.14 per acre per mile
• Marginal impact appears to be strong for
  irrigated land.
• Nonirrigated 2007Q2 2.14 per acre per mile
• Irrigated 2007Q2 2.62 per acre per mile
• Competition among ethanol plants boosts impacts.
• EDIST 2.14 per acre per mile
• EMILES50 157 per acre for every plant
  within 50 miles
• Average distance was 29 miles
• 5.23 per acre per mile for every plant

12
Are the farmland value gains rational?

• Gallagher, Wisner and Brubaker (2005)
• Cost of Transportation 0.002316 per bushel per
  mile
• Distance to an Ethanol Plant (EDIST)
• Marginal impact 2.14 per acre per mile
• Average non-irrigated yield 90 bushels
• Capitalization rate 4
• Implied impact 0.000951 per bushel per mile

13
Are the farmland value gains rational?

• Gallagher, Wisner and Brubaker (2005)
• Cost of Transportation 0.002316 per bushel per
  mile
• McNew and Griffith (2005)
• Average impact on corn prices 0.125 per bushel
• Ranged from 0.046 to 0.193 per bushel
• Ethanol Plants within 50 miles (EMILES50)
• Marginal impact 157 per acre for every plant
• Yield 90 bushels per acre
• Capitalization rate 4
• Estimated impact 0.07 per bushel
• Average distance 29 miles
• Implied impact 0.0024 per bushel per mile

14
Conclusions

• Farmland values are higher around ethanol plants.
• High values appear to be consistent with
  estimated changes in corn basis.
• Future research
• Actual sales transactions would enhance insight.
• Extension into other regions of the country.
• Are land value deviations due to transportation
  costs or increased local demand?
• Are these impacts permanent or transitory?