Ethanol Impacts: Higher Land Prices, Ranchers Squeezed, Water Tight

USA Today offers more perspective on the full impact of ethanol on the farm economy. Sue Kirchoff ["Land Prices Leave Farmers in a Lurch," USA Today, 2007.07.18] cites USDA figures showing a doubling of ag land values since 1996, with a 40% increase just from 2004 to 2006. Kirchoff reminds us of the 1980s farm crisis, when "After jumping in response to a strong export market and high commodity prices, rural land values fell more than 25% from 1982 through 1987." Interest rates are lower now, so farmers may be better positioned to withstand a downturn, but with ethanol, farmers are hitching their wagons to the volatile world of energy prices. That volatility, in addition to increased production costs, introduces more uncertainty into an already risky business.

Rising land prices mean higher taxes for our South Dakota farmers, which is especially problematic since, as any farmer can tell you, property tax constantly goes up even though farm income may swing wildly from year to year with the vagaries of the market and the weather. Rising land prices also mean higher rents. "That's significant," writes Kirchoff, "because the USDA says upwards of 40% of agricultural land is owned by absentee landlords, and many farmers and ranchers lease the land they rely on." Rising land prices also represent one more rising barrier to established farmers expanding or new farmers getting into the business.

The big capital drawn by ethanol optimism puts pressure on ranchers and smaller operations. More land converted from pasture to corn means less land ranchers can lease for grazing; more corn converted to fuel means less corn for feed. In both cases, less supply means higher prices:

"Last winter some of these cash rents almost doubled, and people were willing to pay it," says Tom Hansen, a rancher and Nebraska state senator, who operates from a red cedar ranch house near North Platte.

Nebraska ranchers and farmers are working together to address the issues, and possibly realize some potential of feeding corn ethanol by-products, such as distillate grains. Still, Hansen worries that what he calls "just blatant optimism" is contorting price fundamentals. [Kirchoff]

In a companion article ["Water Constraints Rain on Ethanol Zeal," USA Today, 2007.07.18], Kirchoff notes that expansion of ethanol production could butt up against water restrictions, an issue folks in the burgeoning Sioux Falls-Harrisburg-Tea megalopolis should be able to grasp immediately. Remember, corn takes water to grow, and ethanol plants need about three gallons of water to make every gallon of ethanol. There's a lot of water in the Ogallala aquifer, but just like oil, it's not unlimited. Ethanol plants "are becoming more efficient at recycling water," Kirchoff writes. "Industry officials say water needs can be met," but even they acknowledge it will take "careful planning."

Again, as we look to ethanol to bring rural areas the riches (if not the luck) of King Farouk, we need to remember that there ain't no such thing as a free lunch. Higher corn prices look good now to farmers and land speculators alike, but we also need to keep an eye on long-term sustainability, not just short-term profits.