Economics In Practice

7122020 Economics In Practice

Ethanaol and Land Prices The U.S. government provides large subsidies for ethanol, a fuel produced from corn. Proponents of the ethanol subsidies suggest that it is one piece of a policy that can help the United States reduce its dependence on foreign oil. In part, as a result of these subsidies, the midwestern United States has seen a large increase in corn production relative to other grains. The following article traces another of the general equilibrium consequences of the ethanol subsidies: an increase in the price of agricultural land: Nebraska ethanol boom causing land prices to soar TheIndependent.com Ethanol is not only pumping up the price of corn in Nebraska, but also farm real estate market values and cash rent rates. Values have seen a 14-percent increase, according to the preliminary results of the University of Nebraska-Lincoln's annual Farm Real Estate Market Development Survey.

According to the survey, Nebraska farmland's average value for the year ending February 1 was $1,155 per acre, compared to $1,013 per acre at this time last year, said Bruce Johnson, the UNL agricultural economist who conducts this annual survey. He said preliminary findings show this was the largest all-land value increase in the past 19 years. It is also the fourth straight year of what Johnson called "solid advances" in land values. He said the state's current all-land average value is more than 50 percent higher than the 2003 level.

Higher prices for corn because of ethanol demand are driving the sharp rise in land prices. By early 2008, Nebraska should have about 25 ethanol plants online, producing 1.2 billion gallons of ethanol and using more than 425 million bushels of corn. "The demand from rapidly growing ethanol production has triggered the commodity market advances, and, in turn, worked into the agricultural land market dynamic, particularly in major corn-producing areas of the state," Johnson said.

Paper For Above instruction

The ethanol boom stimulated by government subsidies has significantly impacted land prices and the broader agricultural economy in Nebraska. This phenomenon exemplifies the principles of supply and demand within a general equilibrium framework, illustrating how government policy can influence multiple interconnected markets.

At the core of this transformation is the increased demand for ethanol, which motivates farmers to grow more corn. As demand for corn rises due to policies aimed at reducing dependence on foreign oil, the increase in corn cultivation intensifies the demand for land suitable for corn farming. Land, being a finite resource, becomes more valuable as its demand increases, leading to higher land prices. The Nebraska case demonstrates a clear linkage: subsidies → increased ethanol demand → higher corn demand → increased land prices.

This escalating land demand exerts upward pressure on land prices, which, in turn, affects costs across the agricultural sector, including other grains like wheat. Since land is a key factor of production, higher land prices increase the costs of producing wheat and other crops that share similar land requirements. The increase in wheat costs shifts the supply curve for wheat to the left, indicating a decrease in supply at each price point. Consequently, higher costs cause the price of wheat to rise, further exemplifying how increased land prices in one segment of agriculture spill over into others, affecting the entire agricultural economy.

The dynamics here are consistent with economic theory. The increase in demand for a particular commodity (corn for ethanol) raises the demand for land, leading to higher land prices. These price increases then translate into higher production costs for related crops, prompting adjustments in supply and prices across sectors. This interconnectedness exemplifies the principles of general equilibrium theory, where a change in one market propagates through related markets, impacting prices and quantities in multiple sectors.

Furthermore, this scenario highlights the role of government intervention in external markets and the unintended market consequences. Subsidies used to promote ethanol production have unintended effects on land prices and the cost structure of agriculture, illustrating that policies can generate ripple effects across various markets. Policymakers should consider these secondary effects when designing subsidies or other interventions, as they can significantly alter market outcomes beyond the initial target sector.

In conclusion, the Nebraska ethanol boom driven by government subsidies exemplifies key economic principles related to supply, demand, and equilibrium. Increased demand for ethanol elevates demand for corn, which, combined with finite land resources, results in rising land prices. These higher costs subsequently impact other crops like wheat, causing supply shifts and price increases. Such interconnected market effects underscore the complexity and dynamic nature of agricultural economics, illustrating the importance of comprehensive policy analysis to anticipate broad economic consequences.

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