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7/12/2020 Economics in Practice

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Ethanol and Land Prices

The U.S. government provides large subsidies for ethanol, a fuel produced from corn. Proponents of the ethanol subsidies suggest that it is one piece of a policy that can help the United States reduce its dependence on foreign oil. In part, as a result of these subsidies, the midwestern United States has seen a large increase in corn production relative to other grains. The following article traces another of the general equilibrium consequences of the ethanol subsidies: an increase in the price of agricultural land.

Nebraska ethanol boom causing land prices to soar

TheIndependent.com

Ethanol is not only pumping up the price of corn in Nebraska, but also farm real estate market values and cash rent rates values have seen a 14-percent increase, according to the preliminary results of the University of Nebraska-Lincoln's annual Farm Real Estate Market Development Survey.

According to the survey, Nebraska farmland's average value for the year ending Feb. 1 was $1,155 per acre, compared to $1,013 per acre at this time last year, said Bruce Johnson, the UNL agricultural economist who conducts this annual survey. He said preliminary findings show this was the largest all-land value increase in the past 19 years. It is also the fourth straight year of what Johnson called "solid advances" in land values. He said the state's current all-land average value is more than 50 percent higher than the 2003 level.

Higher prices for corn because of ethanol demand are driving the sharp rise in land prices. By early 2008, Nebraska should have about 25 ethanol plants online, producing 1.2 billion gallons of ethanol and using more than 425 million bushels of corn.

"The demand from rapidly growing ethanol production has triggered the commodity market advances, and, in turn, worked into the agricultural land market dynamic, particularly in the major corn-producing areas of the state," Johnson said.

Source: Robert Pore, [email protected].

As we see in the article, a number of markets are affected by the ethanol subsidies. The increase in the demand for ethanol drives up the demand for corn, which in turn increases the demand for land. Since the supply of land is finite, the price of land used to produce corn rises. But what about the rest of the agricultural economy? Increasing land prices increases the cost of other grains, such as wheat. As you learned in Chapter 2, land is a key factor of production. The increase in wheat costs shifts the supply curve to the left, as in the figure below. Wheat prices thus also rise.