An article appeared Wednesday on Page A.1 of the New York Times titled, "Ethanol is Feeding Hot Market for Farmland." It caught my eye because living in the middle of Coal Country (and originally hailing from the Corn Belt), ethanol (and corn farmers in the midwest generally) gets blamed for economic ills of all types here. The Coal industry dislikes them for subsidies that keep the price of coal down and crowd them out of the alternative energy market, farmers simultaneously blame them for corn prices that are too high (when they purchase feed) and too low (when they wish to sell their own corn), and consumers are absolutely convinced that the corn farmers are conspiring to elevate the price of a steak.
Anyway, the article pertains to land prices. The fundamental that drives the price of land is its derived demand. In other words, given a fixed acreage of land in the world, to what alternative uses can I allocate this land, and what are the incomes or benefits that a prospective owner can derive from those uses? Real estate's demand can also be driven up by speculative demand. Corn is but one use for the land, but the impact of various government subsidies can have a profound impact on land use in the long run, even when the policies are carefully designed. Most agricultural subsidies are designed to be "decoupled" in a way that the amount of the subsidy is not directly tied to the quantity of output. These payments are meant to resemble what economists call "lump-sum" payments, which do not necessarily impact resource allocation in the short run. However, these subsidies have effects on wealth in the long-run, and therefore may lead to the entry of new producers to the market, thus slightly impacting allocation of land resources. But judging from previous studies, in terms of this impact on land's derived demand, this impact is not likely to cause the price of an acre to double or triple, as the Times suggests.
A study by Chavas and Holt (1990, American Journal of Agricultural Economics) showed the wealth elasticity of these subsidies to be in the range of 0.08% for corn and 0.27% for soybeans between 1954 and 1985, which translatesd to to an cumulative impact on acreage decisions to the tune of 180,000 to 570,000 acres nationally. Some of this acreage impact could arise in the form of new land being mobilized in the production of corn and soybeans or from the reallocation of existing cropland from uses for things like barley or flaxseed in favor of subsidized crops. But, even if the impact on acreage decisions has doubled since 1985, this impact is still a mere drop in the bucket compared to the 300 million acres that were planted for harvest, and over 900 million acres of total farmland according to the most recent Agriculture Census by the US Department of Agriculture.
The Times article cites astronomical land price incresases (around 14% in the last year, and up to 50 or 60 percent in the last 3-5 years in some places) and implies that most of this can be blamed on ethanol policies. It discounts the reality that real estate market has gone generally nuts over the last several years and a bubble similar to the one in residential and commercial real estate may easily be spilling over into the market for farmland. Remember that the price of land is related to the value or benefit received from the next-best of all of the alternative uses for land, but also to speculation. Residential and commercial development pushes up the price of land near the cities and towns where the rest of us live, and farmers will have to find ways to drive up their per-acre yields, increase the price of their output, or compete with other bidders to acquire new land profitably. This competitive bidding from alternative users of land currently used for farms will also inflate the price, and much of it probably reflects a change the speculative demand for land more than the true derived demand or the fundamentals. In other words, as stupid as the government is, sometimes marktets are equally so. Don't get me wrong-- ethanol subsidies are bad, and their impact on markets is injurious in a lot of ways, but let's not lose our heads with how much power the government really has in influencing behavior.