Location. Location. Location. That’s the real estate mantra when it comes to home values, but does that hold true as well for agriculture? Do land values reflect proximity to markets? Certainly the basis at the elevator reflects the distance from the processor or transportation hub. But what about the home farm? Is there a value built in when it comes to proximity to the delivery point, and how about now in particular with volatility in land markets?
The residential real estate market collapsed in 2007, and if your home is still trying to recapture its pre-2007 value, raise your hand. But the farmland market did not reflect the same economic downward pressure.
Could there have been some downward pressure that was offset by another force capable of neutralizing the negative values and actually pushing land values higher? That’s what economists from Ohio State University and the USDA’s Economics Research Service set out to do. Their research found a parallel force in 2007 in the form of ethanol, which was pushing up commodity prices at the same time residential home values were declining. There is no relationship there, but there is certainly a relationship between higher commodity prices, and farmland prices that were rising at the time of other real estate values were declining.
The researchers focused on 50 counties in Western Ohio, where the bio-fuel industry was gaining momentum with 6 new plants in operation. They also looked at more than 21 thousand farm land sale transactions from 2001 to 2010. They eliminated land sales that were less than $1,000 and more than $20,000 per acre, along with land parcels sold in 2007, which was the transition period. With the nearly 14,000 parcels left, the researchers attempted to equate them as much as possible by sale price, assessed value, total acres, soil types, urban influence, distance to highways, distance to ethanol plants, plant capacity, elevators in the region, and many other characteristics that might be an influence.
The study found that, “the agricultural land prices were not significantly higher for parcels closer to an ethanol plant than those farther away before 2007; the model even suggested proximity to ethanol plants would dampen the farmland values. However, after 2007, this proximity became a positive influence, although still insignificant. After 2007, a more evident declining pattern over distances from agricultural parcels to grain elevators emerged, mainly due to the increased demand for corn due to the unprecedented rise of the ethanol industry.
When assembling their results, the researchers found, “within a certain distance of the ethanol plant was not significant, suggesting that, after controlling for all the systematic differences of other location characteristics, there was no declining agricultural sales price gradient over the distance to nearest ethanol plant. This is likely due to the fact that the ethanol plants only started in 2008 and suggests that expectations in advance of these openings did not have a significant effect on farmland values.”
After 2007, there was a $419 per acre increase in sales prices attributed to the proximity to an ethanol refining plant. “This increase can at least be attributed to the greater demand for corns induced by the rise of ethanol industry and the constructions of new ethanol plants. Other factors that may also play a role included higher transportation costs due to rising gasoline prices and greater export demands from China.”
Beginning in 2007, residential real estate values declined, but agricultural land values continued an n increase. While land values may also been declining, the explosive growth of ethanol kept pushing values higher due to the demand for corn for refining. The close proximity has been equated to an additional $419 per acre.
Source: FarmGate blog