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Are revenues from energy leases reinvested by U.S. farms? Evidence from TOTAL

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Abstract

Per-acre farmland prices and agricultural production costs rose significantly over the last two decades, putting increasing pressure on farm operators and agricultural landowners to generate more revenue. At the same time, millions of acres of U.S. agricultural land became attractive for energy development due to the shale gas revolution and rising demand for utility-scale solar and wind power. To its supporters, energy development on agricultural land is a win-win proposition, offering land-rich but cash-poor farm owners a new stream of income and, potentially, the means to relieve credit constraints and reinvest in their farms. Critics, however, fret that turning productive farmland over to gas wells and solar panels will contribute to long-term loss of agricultural land and raise the costs of farming in areas attractive for energy development. At the crux of this debate are two still-unanswered or partially answered empirical questions: (1) what are the characteristics of farm businesses that choose to participate in energy leases and (2) what is the impact of energy leases on the long-term viability of host farms? This study uses national survey data from the USDA's 2014 Tenure, Ownership, and Transition of Agricultural Land (TOTAL) survey to shed new light on these issues. This large, rich, cross sectional data set provides an unprecedented perspective on farm financial behavior. In addition to detailed household and farm production characteristics, TOTAL collected detailed data on energy lease participation and income. Further, TOTAL included questions on whether a farm had difficulty accessing credit and made any capital or land investments. TOTAL contains other information not typically included in ARMS that may otherwise be unobservable, such as time to intended retirement or transition and a risk preferences score. This study uses stratified propensity score matching (PSM) to assess the impact of energy leases on participating farm businesses' capital investment, net income, and credit constraints. The TOTAL data set is exceptionally well-suited to analysis using PSM, allowing us to mitigate selection bias arising from systematic differences in the observable characteristics of farms that do and do not host energy projects. We can also contrast impacts associated with leasing oil or gas rights compared with other types of on-farm leases (for example hunting and renewable energy leases). Our results suggest that energy production income is of minor importance to most of the farms that receive it. In particular, there is no evidence of an impact on credit constraints; farms with energy income were no more or less likely to report difficulty borrowing. We also found no significant effects on the amount of capital spending or overall net farm income. That said, farms with energy income were significantly more likely to report some capital investment (of any amount) and were significantly less likely to have negative net farm income.

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2018-08-30

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credit constraints; energy payments; farmland leasing; farmland preservation; land use change; rural development; Economics; Agriculture economics; Energy

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Committee Chair

Ifft, Jennifer Ellen

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Gomez, Miguel I.

Degree Discipline

Applied Economics and Management

Degree Name

M.S., Applied Economics and Management

Degree Level

Master of Science

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Government Document

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dissertation or thesis

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