'Vegetable Spirits' and Energy Policy

Abstract

This study investigates the extent to which the 2005 Energy Policy Act with its embedded Renewable Fuel Standard (RFS) program contributed to the rise in farmland values since 2004. We rely on the salience of a new ethanol plant in a farmers’ local neighborhood to identify the capitalization effect of the RFS mandate on these spatially advantaged farms. We identify the mean effect of the RFS on farmland values as the difference in the land-value capitalization of new ethanol plants before and after the RFS program. We use a propensity score matching estimator to control for the non-random selection of ethanol production facilities. To remove the impact of other possible unobserved shocks at the farm or market level resulting from shifts in commodity prices, we employ a difference-in-difference matching approach. The empirical strategy exploits a temporal and spatially detailed dataset that combines farmland parcel value estimates from the USDA’s June Agriculture Survey (JAS) for the years 2001-2007, location and construction timing of all U.S. ethanol plants, measures of urban influence, and detailed soil productivity data. We find that the construction of new ethanol facilities had no effect on nearby farmland values prior to the RFS legislation but had statistically significant effects on nearby farmland values after the RFS law passed. We estimate that the net capitalization effect of the RFS program on nearby farmland ranged from 15% to 28% in 2006. Our findings suggest that the RFS created expectations of higher returns to agriculture in excess of the returns derived from higher commodity prices. The findings are also in line with previous empirical evidence on the capitalization of agricultural policies into farmland values.