Academic journal article Agricultural and Resource Economics Review

Impact of Ethanol Plants on Local Land Use Change

Academic journal article Agricultural and Resource Economics Review

Impact of Ethanol Plants on Local Land Use Change

Article excerpt

We investigate effects of corn-based ethanol plants on local land uses using countylevel panel data for Iowa for 1997 through 2009 and an Arellano-Bond differencegeneralized method-of-moments estimator. Our results show that ethanol plants have statistically significant effects on the proportion of acres planted to corn in the plants' host counties. Furthermore, ceteris paribus, the land-use-change effect of locally owned plants (owned by local farmers or cooperatives) is about twice as large as the effect of plants with nonlocal owners. Environmental implications of the land-use change effect also are explored.

Key Words: Arellano-Bond difference generalized method of moments estimator, ethanol plants, Iowa, land use change, water quality

(ProQuest: ... denotes formulae omitted.)

The first decade of the twenty-first century witnessed a worldwide surge in ethanol fuel production. World ethanol production increased from 4.5 billion gallons in 2000 to 21.9 billion gallons in 2010 (Brown 2011). The United States, due to its abundance of corn, is the leading producer and possesses about one-half of the world's ethanol production capacity. As of January 2012, there were 209 ethanol plants online in the United States (Renewable Fuels Association (RFA) 2012) and the average production capacity of the plants was 71 million gallons per plant per year. Assuming that a bushel of corn produces 2.8 gallons of ethanol, a typical ethanol plant would annually consume 25.4 million bushels of corn.1 If one further assumes that the yield for corn is 170 bushels per acre, then a typical ethanol plant would require a feedstock supplied by about 149,412 acres of crop land annually. The question naturally arises, then, whether development of ethanol plants has a direct effect on local land use and, if so, the extent of that effect. Intuitively, ceteris paribus, farm land located near an ethanol plant is more likely than distant fields to be devoted to corn because it is closest to the terminal market (the ethanol plant). We test this hypothesis and estimate the magnitude of any effects observed.

The answers to these questions have important environmental implications since changes in land use induce changes in greenhouse gas (GHG) emissions and in agricultural chemical applications, which would likely cause new environmental problems (Li and Feng 2008, Donner and Kucharik 2008). By precisely specifying whether such land use changes occur in response to establishment of ethanol plants and the extent to which they occur, one can then precisely measure the environmental consequences (e.g., GHG emissions and changes in agricultural chemical applications) of expansion of the ethanol industry. These consequences are of interest to policymakers because if areas surrounding ethanol plants experience a greater magnitude of change in land use, then policies will be needed to improve agricultural management of such areas to mitigate the environmental effects of these land use changes.

There still is no consensus regarding the effect of ethanol plants on local grain prices and land values. McNew and Griffith (2005) showed that ethanol plants increased local grain prices, but studies conducted by O'Brien (2009) and Katchova (2009) did not support that conclusion. Gallagher, Wisner, and Brubacker (2005) showed that grain prices increased in the vicinity of conventional nonlocal-owner plants while locally owned ethanol plants (owned by local corn producers and farmer cooperatives) did not have a statistically significant effect on local grain prices. Lewis (2010) showed that ethanol plants in Michigan and Kansas increased local grain prices while ethanol plants in Iowa and Indiana did not. Regarding the effect of ethanol plants on the value of crop land, Henderson and Gloy (2009), using survey data from agricultural bankers in the Kansas City Federal Reserve District, found that proximity to ethanol plants increased the value of crop land. …

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