Market Structure and the Local Effects of Ethanol Expansion on Land Allocation: A Spatially Explicit Analysis

Abstract

We investigate how the structures of local corn procurement markets shape the effect of expansion in ethanol production on corn planting decisions in surrounding areas. We first characterize competition intensity as a function of the spatial structure of plant capacities and then econometrically estimate the response in corn acreage to competition intensity at the grid‐cell level. We use the estimated parameters to conduct factual and counterfactual experiments quantifying the effect of different sources of capacity expansion on competition intensity and, ultimately, spatial patterns of land cover. We find that an expansion of ethanol capacity of a given magnitude can have disparate effects on total land conversion to corn depending on its source, that is, whether it is due to plant entry, expansion of an incumbent plant, or the location where the expansion occurs. Expansions that increase competition intensity the most also trigger the most land conversion. This is because, as spatial competition for corn intensifies, plants are forced to procure more from the intensive margin, where additional corn can only be obtained from land conversion. We also find that competitive spillovers trigger land conversion in grid cells that are not within the procurement area of a new plant or of a plant that expands capacity. Our results underscore the importance of considering market structure when quantifying local land use changes associated with ethanol capacity expansion.