Ethanol Expansion Changed Rural Land Markets

By Scout Nelson

A new study from South Dakota State University shows that the ethanol boom of the early 2000s greatly increased farmland values across the Midwest. Researchers found that changes in energy policies and rising ethanol demand boosted corn prices and increased farmland values by as much as 44% in major ethanol-producing states.

The study was led by Hoanh Le, assistant professor at South Dakota State University’s Ness School of Management and Economics. Researchers examined how renewable fuel policies, rising crude oil prices, and the phase out of MTBE fuel additives increased demand for ethanol production in the United States. The findings were published in the journal Applied Economic Perspectives and Policy.

"The ethanol boom substantially increased farmland values in the Midwest, with effects intensifying as renewable fuel requirements expanded and crop markets adjusted," Le said. "From a policy perspective, these results highlight that biofuel mandates influenced not only commodity markets but also the rural land market, with farmland values serving as a key channel through which energy policy reshaped the agricultural economy."

Congress passed the Energy Policy Act in 2005, creating the Renewable Fuel Standard program. The policy required renewable fuels such as ethanol to be blended into transportation fuels each year. Corn demand increased rapidly because ethanol is produced from corn starch. Researchers estimate the Renewable Fuel Standard helped raise corn prices by about 30% between 2006 and 2014.

As corn demand grew, farmland values also increased. The study found that farmland values in highly productive counties rose by more than $1,100 per acre after 2005. In some counties with strong soil productivity, land values more than doubled. Researchers explained that higher corn prices improved farm income while increasing demand for productive farmland over time.

The study also found that lower-income counties experienced faster farmland value increases than higher-income counties. Researchers believe the ethanol boom changed patterns of rural wealth and may have affected land access for beginning farmers.

"Our results highlight how large-scale energy policies can reshape agricultural land markets in ways that extend well beyond their original objectives," Le said.