A common sense theory of indirect land use change

Readers of Biofuels Digest know that I have been devoting a fair amount of space over the past several months to the discussion of indirect land use change (ILUC). The publication of analysis by a team led by Tim Searchinger, among others, ignited a fearsome debate over the value of biofuels in the battle against climate change. The battle goes on in the halls of government, in academia, and elsewhere.

The theory is straightforward enough, that a rise in US corn prices causes soy farmers to plant more corn, and that the resulting soy shortage is made up by a process of land conversion in, say, Brazil, that ultimately causes rainforest destruction in the Amazon.

Whenever I run an article on ILUC, the reader stats fall through the floor. It appears to be a big yawn. However, the biodiesel industry received a real jolt when soy biodiesel producers were informed that the current draft of the EPA’s ILUC calculation would disallow the use of soy biodiesel as a qualifying fuel under the Renewable Fuel Standard. Corn ethanol has run into real problems qualifying under the California Low Carbon Fuel Standard. ILUC is not just “bad luck” to growers of first-gen feedstocks. If the price of algae, sugarcane, jatropha or camelina rose to a point where modelers could predict an impact on Amazonian rainforest, those feedstocks could find themselves sidelined too.

The state of California and the EPA have attempted to quantify the ILUC effect, with varying degrees of success depending on the person you are talking to. The word “uncertainty” comes up 60 times in the EPA’s attempt this past spring, according to the staff of Sen. Charles Grassley of Iowa.

In short, there is no disagreement that there could be an ILUC effect, as predicted by  economic modelers, but there has been a firestorm over the provenance and accuracy of the data. For example, there is not current inventory of land use in Brazil that is sufficiently robust – and data no later than 2001 has been utilized in some cases, which takes us back to a time before biofuels were on the rise.

But it occurred to me recently that we have, in historical US data, a decent record of land use conversion and crop prices. We have the data from the US General Land Office, which oversaw sales of virgin prairie and forest from the 1860s through the 1930s when it was merged into today’s Bureau of Land Management.

The General Land Office sales between 1869 and 1935 are, actually, a pretty good record of indirect land use change. For they do not track the changes that farmers made in their planting from season to season, but the change in overall US land that was put under the plough. ILUC, as a theory of carbon, holds that conversion of virgin land releases carbon that offsets any favorable emission gains. Virtually all land conversion went through the General Land Office and was recorded on their books.

So I downloaded the data on crop prices and land use change, and prepared a chart which is here published for the first time. I surely do not hold an advanced degree in this field, but I’ll be dad-blamed if I can find any correlation at all. Corn prices (in 2007 dollars) were on the decline for decades while land use conversion soared. When corn prices finally took off after the turn of the century, land conversion slowed to a crawl. The same is true of soy, although the crop price data only dates back to 1913.

National policy had a lot to do with it. Land conversion was encouraged in the 1800s in the name of “Manifest Destiny” and was discouraged in the 1900s in the name of “conservation”.

But I’ll advance a theory of my own. Let’s call it Lane’s Theory of Land Use Change. I don’t have modeling software for it and don’t plant to invent any, because I believe it is based on the kind of common sense you can obtain from your next-door neighbor. Here it is:

“Land use change does not flow from rises in crop prices, but a fall in land prices.”

My grandfather was a homesteader, as a matter of fact, proving his claim near Teapot Dome, Wyoming in 1930. I can assure you that rising crop prices had nothing to do with his conversion of 320 acres. I have 25 or so of his letters from the period. It was cheap land that was on his mind.

Common sense tells us that a farmers, ranchers and timber companies too wary of the topsy-turvy commodities market to convert virgin land to production on the basis of a surge in crop prices. The fall from $8 to $4 in the corn price in a three-month period last summer will tell you why.

When crop prices rise, farmers may well convert from one crop to another to capture a premium – but that in itself is not a land use change of virgin land. I well remember my uncle’s decision to pull out his Delicious apple trees and put in Fujis. But no farmer I have ever known has converted land unless the cost of new land is less than the cost of increasing productivity on existing land.

When there is an arbitrage between the cost of productivity increases and the cost of new land, I have no doubt that ILUC can and will occur. But that will generally be the result of falling prices.

Consider the case of Gentleman Smith and Farmer Jones. Gentleman Smith’s land is virgin land, untouched for generations while used for scenic value and pasturing a few horses, while Farmer Jones is a corn and soy farmer. One year, crop prices doubled. Farmer Jones took a look at Smith’s land, but the land price doubled, and Jones decided instead to put in new equipment on his existing land that would give him a far better result.

The next year, Smith decides to sell but meanwhile corn prices have plummeted. Smith’s land value drops with the falling profits, and Jones picks up his land at a significant discount to its long-term value. Jones knows that the corn price will pick up eventually, meanwhile he has locked in at a low price. When prices pick up, he puts in new corn on Smith’s land and, voila, we have land conversion.

Seems to me that’s how it works, and seems to me that the data that we have – as opposed to the data we don;t have or assumptions about the future – supports it.

So what’s happening down Amazon way. Seems to me that land pirates are converting land illegally, on the whole – at the ultimate falling land price of zero. I doubt they are looking at the timber or crop prices, but rather looking out for the sheriff.

What’s happening in Africa? Swathes of land available on the cheap from national governments desperate for foreign direct investment. Result? Conversion of virgin land.

So, what to make of all this. Option one, call me crazy. Option two, support high land prices and sound enforcement of laws banning illegal seizure of virgin land. High land prices make wealthier citizens out of small landholders all around the world, and give them more resources, borrowing power, and incentive to invest in land improvement.

Of course, high land values flow from long-term improvements in crop prices, and that flows from adding strategies like biofuels into the mix. Biofuels are, as far as I can tell, not a creator of indirect land use change but rather a preventer, insofar as they help support crop prices.

Does a high crop price automatically mean unaffordable food for the world’s hungry? No, and again no. High prices will encourage the investment in productivity that will restart the African Green Revolution. 30 bushels of corn per acre is an unacceptable yield in this day and age. A generation before, productivity saved Africa from the threat of starvation. The stagnation in global crop prices did much to cause the very starvation that cheap food was supposed to prevent.

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