Geography 340

Economic Geography - Lab 2: Von Thunen's Model

Location Rent and Crop Decisions

The purpose of this exercise is to introduce students to Von Thunen's land rent model and the mathematical logic behind it.

What makes farm land valuable? What crops are best grown in what location? There are of course many dozens of factors to consider when answering either of these questions, but 19th century economist-geographer Johann Von Thunen, suggested distance to market as an important factor in the value of land and in the effective choice of crop-type. Von Thunen recognized that different crops have different transportation costs and in an "all things held equal" situation, that the crops with the highest transportation cost should be planted closest to the market. Those with progressively lower transportation costs should be planted at progressively greater distances from the marketplace. The proximity to market in turn creates conditions that make this land more valuable than that further from the market.

Clearly this model and the thinking behind it has applications well beyond the world of agricultural economics.
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Von Thunen's Formula for land rent looked something like this:

Location Rent formula

Where:

LRij = Location Rent of crop i at location j
Qi= Quantity or Volume of production (e.g. bushels)
pi= price of crop i
ci= cost of crop i
fi = transport cost of crop i to market ($ per mile)
kj= distance to market from place j

Essentially this translates thus: The land rent of crop i at location j is equal to the profit per bushel of the crop minus the transport costs of the crop.

For more, see: http://moodle.csun.edu/file.php/182/Hanink_1997_Location_Rent.pdf (Moodle).

This is your task:

You work as an agricultural consultant. Your job is to help farmers decide what to plant this year. Over the last few years, the rapidly changing market conditions and rising oil costs have cost farmers tens of thousands of dollars in lost opportunites to plant other crops.

Old farmer McDonald, for whom you are consulting, lives in Kern County, just north of Bakersfield. He is affected by the following conditions:

He lives just outside Bakersfield...but doesn't know the distance to the markets. Find this out via Google Maps. The tomato market is the LA Wholesale Produce Market in Downtown Los Angeles. The grain elevator is run by Cargill in San Bernardino. Use Bakersfield as the starting point.
He has 5000 acres of cropland that he wants you to help him figure out what to do with it.
He grew tomatoes last year, but with gas costs going up, he's considering planting something else.
His cousin, O'Doul who lives in Modesto, assures him that the real money is in corn because tomatoes are too expensive to transport.
Last year when McDonalds grew tomatoes he found that with labor, fertilizers and seeds, etc. his field costs for tomatoes were $10,000 per acre.
McDonald's yields were on average 350-bushels per acre and he got $29 per bushel at market.
McDonald's cousin told him that planting and harvesting corn was much cheaper, only $500 per acre and that he was getting $4 per bushel at market.
He also noted that with proper care and good luck, you could get 150-bushels per acre.
The other key difference lies in the transportability of each crop. Fields of tomatoes create a lot of produce to transport. Each truck can haul about 3000 bushels of any crop.
Diesel costs $3.00 /gallon, but it may rise or fall by $.50/gallon by harvest season.
McDonald gets about 15 miles to the gallon with his trucks.
Other fixed transportation costs (truck payments, labor, insurance, maintenance, etc.) amount to about $2.50 per mile.

Notes:

There are 53 lbs of tomatoes, 56 pounds of corn, and 60 pounds of soybeans in a bushel.
$29 price per bushel for tomatoes; $4 for corn and $7 for soybeans
$10,000 cost per acre for tomatoes, $500 for corn and $400 soybeans

Download the formulas in Microsoft Excel if you get stuck.

Answers

You are to provide the following data to your boss by your next meeting. Don't use dollar signs or commas, just numbers or letters.

Questions and Answers Table
Question Number	Answer	Question
1	Answer 1	Given the factors facing McDonald in Bakersfield, how much Land Rent (profit) should his crop of tomatoes deliver this year? (assume 115 miles delivery distance).
2	Answer 2	If he switched to corn how much would he make if all other transportation costs remained constant? (assume 161 delivery miles)
3	Answer 3	At what distance does it become more profitable to grow corn rather than tomatoes?
4	Answer 4	How much money would his cousin make in Modesto (assume 300 miles) if he switched to Tomatoes?
5	Answer 5	Oh no! Diesel costs went up by 1.00. How much less valuable did that field of tomatoes just become?
6	Answer 6	Oh no! The price of tomatoes per bushel just plummeted by $1 after a goverment agency just mistakenly blamed tomatoes for an outbreak of salmonela poising in Moline, Illinois. How much value did McDonald's land rent drop? (assume gas went back to $3)
7	Answer 7	The newsman reports that the value of corn is going up by a dime a bushel. Should McDonald reconsider?
8	Answer 8	At what price per bushel does corn become a better option than tomatoes for McDonald?
9	Answer 9	At what price do tomatoes become an attractive option for farmers in Modesto?
10	Answer 10	After expermienting with the costs of production and the market prices Old McDonald must consider, which of the following do you think he ought to be most worried about: 1) fuel prices 2) commodity prices
11	Answer 11	A new hybrid tomato will be available next summer. It promises to raise yields by 10 bushels per acre on average and only costs an extra $500 per acre. Would you advise McDonald to opt for this new hybrid tomato? Yes or No.
12	Answer 12	Do you have a better appreciation for "dumb old farmers" now? Yes or OMG Yes.

Now...for real fun, go and calculate the value of these 5,000 acres using the Net Present Value formula for the next 10 years, assuming an 8% discount rate and report back whether or not McDonald should sell his farm for $4.5 million dollars to a (gasp) land developer. Just kidding, but that begins to approach what farmers must do each year.

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When you click the button below, you will be directed to a web page that shows your answers. The instructor will get a copy of this email as well, but you may want to keep a copy for your records. If you are curious about the correct answers, please bring your questions to class.

Geography 340

Economic Geography - Lab 2: Von Thunen's Model

Location Rent and Crop Decisions

This is your task:

Answers

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