Essays on land cash rents, biofuels, and their interactions

Xiaodong Du

ISU General Staff Papers from Iowa State University, Department of Economics

Abstract: Farmland cash rental markets is one general theme of this dissertation, with the first two essays addressing specific topics related to cash rental rates. A better understanding of the determinants of local cash rental rates and their adjustments to changing economic conditions is important because an increasing and significant portion of farmland is being farmed by tenant operators. Another common thread connecting all the three essays is that they attempt to analyze the impact of biofuels on cash rents, corn/soybean acreage allocation, and gasoline prices. The first essay seeks to establish the determinants of cropland cash rental rates in Iowa using a unique panel data set. It provides evidence on how responsive rental rates are to national commodity prices, in the short-run and in the long-run. These contributions allow us to comment on how closely the Ricardian Rent Theory approximates real-world rent determination. We find that it is an incomplete explanation, even in the long-run. The second essay is concerned with embedded real option components in cash rental rates. Traditional rent valuation methods are biased downward because they excludes the renter's flexibility to use more up-to-date price information when making crop and input intensity choices. We develop an asset pricing model and employ the Monte Carlo simulation to better understand this planting real option. The third essay explores the negative impact of ethanol production on wholesale gasoline prices. The impact varies considerably across regions and comes at the expense of refiners' profits. Based on a transparent analytical model, the study concludes that a net welfare loss arises from ethanol support policies.

Date: 2008-01-01
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