New study answers whether energy income increases farm investment

A new study conducted in part by Kansas State University finds that farmers don’t make more investments based on energy income earned from their land.

They also don’t seem to make fewer either.

“There are certainly cases where energy income makes a difference for a particular farm, “ Jenny Iff, an agricultural policy specialist with K-State Research and Extension who co-authored the study, said. “But it’s not something you see on average.”

The study looked at data from nearly 30,000 farms across the country from the United States Department of Agriculture’s 2014 Tenure, Ownership, and Transition of Agricultural Land (TOTAL) Survey, the most recent year for which data was available.

“The fact that they don’t find a negative effect overall, I think it’s very important,” said Richard Thakor, an assistant professor of finance at the University of Minnesota, Carlson School of Management who was not involved in the study.

“This [negative effect] has been something that’s been hypothesized by a lot of commentators and also lawmakers as well that … these sorts of payments are actually a bad thing for agriculture.”

Energy Income in Kansas and investment

Renewable energy is the largest energy source for generating electricity in Kansas, with wind power accounting for most of it. Wind power accounts for 43% of Kansas’s electricity net generation, the second highest percentage in the nation.

Kansas landowners, including farmers and ranchers, have benefited from the state’s investments in clean energy, with such projects bringing in nearly $40 million in additional income for them in 2020, according to data compiled by American Clean Power.

In other states however, that isn’t the case, and oil and gas production are the main source of energy income for farmers. At the time of the study, most of the farms the researchers analyzed earned energy income from oil and gas production and not from renewable sources like wind power, meaning the conclusions won’t necessarily be true for farms earning extra income from renewable sources.

Because previous research found that energy income tends to be stable, the researchers thought that farmers might use some of this additional income to invest in their farms.

“I thought it might be an important source of income that people use. We ended up finding no relationship,” Ifft said. “We measured investments in different ways, we measured energy in different ways, we tried to be as robust, as careful as we could be. We didn’t see any consistent relationship.”

The lack of relationship may have been caused by the amount of money farmers earned from energy income. In the study, the average farmer earned $6,000 a year. For comparison, a single turbine can earn a Kansas landowner $3,000 to $7,000 annually, according to USA Today reporting.

“A larger amount of money may enable [farmers] to do larger purchases, like purchase more land,” Thakor said, “That’s just infeasible with smaller payments.”

In addition, farmers and landowners who earn energy income might need it for reasons other than investments.

“They may need the money for their household, they may need it for family living expenses. There are other uses the money can go to that might be important,” Ifft said.

The local community and availability of credit may also affect whether a farm decides to invest any income earned from energy.

“If a farm already has good access to credit, if you are a farm in that kind of situation, that extra income might not be as important as an investment in the farm,” Ifft said. “If you can’t get all the credit [you] want, the extra income is potentially quite important.”

No relationship to investment might not be the whole story

While the researchers didn’t find an effect on investment in the data, future years could tell a different story.

“It would be really interesting to see, you know, maybe there’s an effect in the next year, or in the coming years, subsequent years and you may find a different sort of effect,” Thakor said. “If we looked at the same thing during the pandemic, [it] might actually have actually a pretty big effect.”

Just because researchers didn’t find that energy income increased farm investment doesn’t mean energy income doesn’t have an effect on the local economy.

“Broadly speaking there is a lot of evidence that energy income, on average, increases jobs, increases local income,” Ifft said. “But you have to be careful about saying this is going to save agriculture or something. That is not really supported by the data.”

Editor’s note: This story has been updated to clarify that the majority of the farms included in the study generated extra income from oil or gas production and not renewable energy. The results may not necessarily be true for energy income generated from large scale renewable energy production.

This story was originally published July 20, 2021 at 4:09 AM.