Paper title:
Climate Change Impacts on U.S. Agriculture: Accounting for the
Option Value of Farmland in the Hedonic Approach
Author/presenter:
Ariel Ortiz-Bobea
Assistant Professor and CoBank/Farm Credit East Sesquicentennial
Faculty Fellow in Production Economics and Sustainability
In this paper I develop a hedonic framework for assessing potential climate change impacts on
U.S. agriculture that reduces vulnerability to omitted variables that are pervasive in the literature.
The approach estimates the effect of climate on farmland rental price rather than on its reported
value to avoid the influence of the option value of farmland conversion to more valuable
nonfarm use. Preliminary results suggest no damages of climate change on the sector over the
Eastern U.S., which is in contrast to large damages found in other studies (Schlenker et al. 2005;
2006).
A frequently stated shortcoming of the hedonic approach is its cross-sectional nature and the
vulnerability to omitted variable bias. Unknown time-invariant factors could be correlated with
climate and affect farmland values in unknown directions. This concern prompted Deschênes
and Greenstone (2007) to develop an alternative panel approach to estimate the effect of random
weather fluctuations on net yearly revenue. The study relies on county fixed-effects to control for
time-invariant factors that may be causing bias in the hedonic approach. Because important
production decisions remain fixed over a year, this approach provides an upper bound on
damages. The slightly positive but insignificant effect found is interpreted as a likely positive
effect of climate change on eastern U.S. agriculture. However, Fisher et al. (2012) find that data
errors and modeling assumptions bias the result toward zero and a replication with corrected data
finds significant negative results. In reply, Deschênes and Greenstone (2012) acknowledge the
data concerns but find that an alternative estimation strategy yields substantially smaller damages
than those based on the hedonic approach, which is counter-intuitive. One should expect more
optimistic results from the hedonic approach than from the “profit” panel approach because the
former accounts for greater adaptation. Visibly, a consensus has not yet been reached.
Rather than attempting to control for unknown omitted variables, I attempt to identify potentially
important omitted variables in the hedonic framework and implement a strategy to limit their
effect. I focus on the option value to convert farmland to a more profitable nonfarm land use as a
potential source of omitted variable bias. Agriculture competes for land with other sectors such
as urban or rural housing development. A landowner values farmland based on the discounted
expected stream of rents from the most valuable use of the land. Because the aforementioned
nonfarm sectors are much more valuable per unit of land than agriculture, these can highly
influence farmland valuation. Most importantly, some of these distortions may well be correlated
with climate and introduce bias in the hedonic approach.
I develop a simple approach to circumvent the distortionary effect of the option value of
farmland conversion to nonfarm use. The approach recognizes that while nonfarm pressures can
severely distort farmland values, these pressures should have no effect on the price paid by
farmers for renting farmland for production. In addition, nonfarm pressures were likely to be
limited decades ago, suggesting that using data from older Census years should help mitigate
these influences. First, I show that a measure of farmland rental price is much more likely to be a
better measure of the land's agricultural productivity than its selling price. Second, I find that the
hedonic model based on farmland rental price is more robust than the model based on farmland
price. Third, results suggest no effect of climate change on farm rental prices (or older Census
data) across the eastern U.S. in the pooled hedonic model. This strongly contrasts with large
damages found in other studies. The result is robust to the resampling of state boundaries and
similar results are found using an alternative source of cash rent data.
References
Deschênes, Olivier, and Michael Greenstone. "The economic impacts of climate change:
evidence from agricultural output and random fluctuations in weather." The American Economic
Review (2007): 354-385.
Deschênes, Olivier, and Michael Greenstone. "The economic impacts of climate change:
Evidence from agricultural output and random fluctuations in weather: Reply." The American
Economic Review 102, no. 7 (2012): 3761-3773.
Fisher, Anthony C., W. Michael Hanemann, Michael J. Roberts, and Wolfram Schlenker. "The
economic impacts of climate change: evidence from agricultural output and random fluctuations
in weather: comment." The American Economic Review 102, no. 7 (2012): 3749-3760.
Schlenker, Wolfram, W. Michael Hanemann, and Anthony C. Fisher. "Will US agriculture really
benefit from global warming? Accounting for irrigation in the hedonic approach." American
Economic Review (2005): 395-406.
Schlenker, Wolfram, W. Michael Hanemann, and Anthony C. Fisher. "The impact of global
warming on US agriculture: an econometric analysis of optimal growing conditions." Review of
Economics and Statistics 88, no. 1 (2006): 113-125.