Spatial Grain Market Economics: Handling & Transportation

1
Spatial Grain Market EconomicsHandling
Transportation

• Daniel OBrien
• Extension Agricultural Economist
• K-State Research and Extension

2
Grain Handling, Transportation and Spatial Grain
Markets

• Principles of Spatial Grain Price Relationships
• Costs of Grain Storage Handling
• Grain Hauling-Transportation Costs
• Semi-tractor trailer example
• Spatial Grain Market Examples
• Corn to Southwest Kansas Destinations
• Wheat to South Central Kansas Destinations

3
Economic Principles of Grain Price Relationships
in Spatially-Related Grain Markets
4
Principles of Spatial Grain Price Differences
Between Markets

• Spatial grain price relationships are determined
  by transfer costs among regions in competitive
  grain markets
• Transfer Costs Arbitrage Costs
• Arbitrage (Dictionary) Buying grain in one
  market and selling them at a profit in another
  market.
• Arbitrage in Grain Markets (for Farmers)
  Transferring selling grain to the most
  profitable buyer/location relative to other
  selling opportunities

5
Transfer Costs Arbitrage Costs

• Transportation expense
• Loading / Unloading (in-out) charges
• Risks from moving grain over distance owning
  grain over time
• Risk of negative buy-sell price margin changes
• Other transfer costs
• Entrepreneurial expertise time
• Contracting, insurance, fees
• Testing, grading, phyto-sanitary test risks

6
Inter-Regional Price DifferencesCompetitive
Arbitrage Across Space

• Price differences between any 2 regions that do
  trade with each other will just equal transfer
  costs
• Price differences between regions cannot exceed
  transfer costs
• Price differences between any 2 regions that do
  not trade with each other will be less than or
  equal to transfer costs

7
Grain Market Price Structure

• Structure of grain prices is a function of
• Pattern of trade (producers from which areas ship
  to what other areas)
• Transfer costs between regions that engage in
  trade
• Example of Grain Market Structure
• Two (2) Markets A, B
• Two (2) Production Areas X, Y
• Transfer Costs

8
Market Structure Principles

• The lowest-cost source determines the prevailing
  Price in each deficit market
• Producers sell in markets providing the highest
  net return
• Prevailing Price in each surplus-producing area
  equals.
• Deficit market Price less transfer cost to that
  market

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Grain Market Structure ExampleArea X ? Market A
/ Area Y ? Market B
Surplus Production Area Y 3.10
Market A 3.00
Transfer Cost 0.30/bu
Market to Market Transfer Cost 0.50/bu
Transfer 0.20/bu
Transfer 0.10/bu
Surplus Production Area X 2.90
Market B 3.30
Transfer Cost 0.40/bu
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Defining Market Boundaries

• Boundaries Points where Net Price (net of
  transfer costs) from shipping to different
  markets are equal
• Producers are indifferent between markets
• Assume.
• Opportunity to ship grain to alternative markets
• No physical barriers (rivers, mountains, state
  lines, etc.)
• Transfer costs decline continuously with distance

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Grain Market Boundary Example
Market A
Market B
Market A Net Price 4.00/bu 6 /bu (400 mi x
0.005/mi/bu)
Market B Net Price 4.00/bu 5 /bu (200 mi x
0.005/mi/bu)

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6
Market A Net Price Line
4
4
Market Boundary
Market B Net Price Line
2
2
400
Mkt. A mi.?
100
200
300
500
600
200
? Mkt. B mi.
100
300
400
500
600
Distance from Market
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Shifting Market Boundary Market B 6.00/bu,
0.004/mi/bu Transfer
Market A
Market B
Market A Net Price 4.67/bu 6 /bu (267 mi x
0.005/mi/bu)
Market B Net Price 4.67/bu 6 /bu (333 mi x
0.004/mi/bu)

6
6
4
4
2
New Market Boundary
2
Boundary Shift
267
Mkt. A mi.?
100
200
300
400
500
600
333
? Mkt. B mi.
100
200
300
400
500
600
Distance from Market
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The Economic Costs of Grain Storage and Handling
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On-Farm vs Commercial Storage

• If have EXISTING On-Farm Storage
• ? Consider Variable Costs Only in grain storage
  decisions
• If building NEW On-Farm Storage
• ? ALL costs are Variable Fixed costs are
  considered Variable before grain storage
  facilities are built / sunk thereafter
• Commercial Storage ? Variable Cost
• ? Elevator storage costs, handling requirements
  to be considered

15
Initial Grain Bin Investment CostsDhuyvetter,
Harner, Tajchman, Kastens - 2007
16
Annual Fixed Costs for Grain Bins Dhuyvetter,
et. al. (2007)
17
Variable Costs of Grain Storage Scenario
Storing Wheat 6 months, 3.41/bu Harvest Price
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Fixed Variable Grain Storage Costs Scenario
Storing Wheat 6 months, 3.41/bu Harvest Price
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Commercial vs On-Farm Storage 1 Commercial
Cost 3.13/bu/mo. 3.41/bu Corn _at_ Harvest
On-Farm TC
Commercial vs. On-Farm VC Breakeven _at_ 5 1/3 months
Commercial Cost
On-Farm VC
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Commercial vs On-Farm Storage 2 Commercial
Cost 3.13/bu/mo. 5.91/bu Wheat _at_ Harvest
On-Farm TC
Commercial Cost
Commercial vs. On-Farm VC Breakeven _at_ 7 months
On-Farm VC
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The Economic Cost of Transporting Grain via
Semi-Tractor/Trailer
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Grain Transportation Cost ExampleSemi-Truck
Expense Use Estimates

• Purchase Price (Used)
• 25,000 (20K - 30K)
• Useful Life
• 10 years
• Salvage Value
• 12,500 (10K - 15K)
• Repairs/Year
• 2,000
• Tire Expense (10 tires)
• 400/tire, 200K miles/tire

• Annual Use
• 7,500 miles
• 200,000 bushels
• Fuel
• 3.00/gallon, 5.5 mpg
• 45 mph average hauling speed
• Other
• License-insurance 2,850
• Labor 10/hr, 9 Interest

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Grain Transportation Cost (more)Semi-Trailer
Expense Estimates

• Purchase Price (Used)
• 25,000 (20K - 30K)
• Useful Life
• 10 years
• Salvage Value
• 14,000 (13K - 15K)
• Repairs/Year
• 500 (400-500)
• Tire Expense (8 tires)
• 262/tire, 100K miles/tire

• Software Analysis Tool
• Grain Truck Transportation Cost Calculator
• Iowa State University Extension (Edwards)

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Example Semi-Truck/Trailer Costs
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Grain Trucking Example Cost/bu.Semi-Tractor/Tra
iler (7,500 miles/yr)
2.472 /Mile All 3 Scenarios
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Grain Trucking Example Cost/bu.Semi-Tractor/Tra
iler (200,000 bushels/yr)
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Corn Destination Southwest KansasOrigins
ColbyNW, HutchinsonSC ConcordiaNC

• Operating Costs 1.25/mile or 0.047/bu.
• Total Cost 2.47/mile or 0.093/bu.
• Colby Garden City 106 miles
• Operating Cost 133 / Total Cost 262
• Hutchinson Dodge City 121 miles
• Operating Cost 151 / Total Cost 299
• Concordia Cimarron 228 miles
• Operating Cost 285 / Total Cost 564

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Wheat Destination South Central KSOrigins
ColbyNW, Garden CitySW ChanuteSE

• Operating Costs 1.25/mile or 0.047/bu.
• Total Cost 2.47/mile or 0.093/bu.
• Colby Salina 200 miles
• Operating Cost 250 / Total Cost 494
• Garden City Hutchinson 173 miles
• Operating Cost 217 / Total Cost 428
• Chanute Wichita 106 miles
• Operating Cost 133 / Total Cost 262

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Grain Price Differences from Origins to
Destinations for Kansas Grain Markets
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Grain Origins Destinations

• Grain Market Origins
• Locations from which grain is transported to
  other destinations
• HRW Wheat originates from Western Central KS
• Corn originates from Corn Belt, Milo from High
  Plains
• Grain Market Destinations
• Locations to which grain is transported from
  other points of origin
• Kansas HRW Wheat destined for eastern Mills or
  Export
• Feedgrains destined for SW Kansas livestock
  feeders, Midwestern Ethanol Plants or Export

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U.S. Spatial Grain Markets
USDA Ag Market Service, September 20, 2007
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HRW Wheat Origins Destinations
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Kansas Wheat Origins Destinations
Exports
Mills- Exports
Mills- Exports
Exports
34
Kansas Wheat Price DifferentialsOrigin
Northwest Kansas, September 25, 2007
35
Wheat Differences Less TransportationOrigin
Colby (NW KS) No In-Out 9/25/07
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Feedgrain Origins Destinations
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Kansas Feedgrain Origins-Destinations
Livestock Bioenergy
Livestock Bioenergy
Livestock Bioenergy
Livestock Bioenergy
Livestock
Exports
38
Kansas Corn Price DifferentialsDestination
Sublette (SW KS), September 25, 2007
39
Corn Differences Less TransportationDestination
Sublette (SW KS) No In-Out 9/25/07
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Kansas Milo Price DifferentialsDestination
Sublette (SW KS), September 25, 2007
41
Milo Differences Less TransportationDestination
Sublette (SW KS) No In-Out 9/25/07
42
Kansas Soybean Price DifferentialsOrigin
Concordia (NC KS), September 25, 2007
43
Soybean Difference Less TransportationOrigin
Concordia (NC KS) No In-Out 9/25
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Grain Handling, Transportation and Spatial Grain
Markets

• Principles of Spatial Grain Price Relationships
• Costs of Grain Storage Handling
• Grain Hauling-Transportation Costs
• Semi-tractor trailer example
• Spatial Grain Market Examples
• Corn to Southwest Kansas Destinations
• Wheat to South Central Kansas Destinations