The Expanding Ethanol Market and Farmland Values: Identifying the Changing Influence of Proximity to Agricultural Market Channels

Abstract: Farmland values in the Corn Belt states have been on the rise throughout the 2000s, which is in part fueled by the expansion of the biofuels market. Using parcel-level data on agricultural land sales from 2001 to 2010 for a 50-county region of western Ohio and a quasi-experimental design, this paper tests for structural change in the relative effects of proximity to agricultural market channels before and after the onstruction of seven ethanol plants in or near western Ohio in late 2006 and early 2007. I address the endogeneity problem associated with proximity to the nearest ethanol plants using propensity score matching and instruments relying on the spatial competition among ethanol plants and other agricultural markets. Instrumental variables regression on the matched sample demonstrates the positive effects of proximity to newly constructed ethanol plants. In contrast, the effect of proximity to agricultural terminals is significantly less after 2007 due to competition from newly constructed ethanol plants.