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Spatial Grain Market Economics: Handling & Transportation

Spatial Grain Market Economics: Handling & Transportation. Daniel O’Brien Extension Agricultural Economist K-State Research and Extension. Grain Handling, Transportation and Spatial Grain Markets. Principles of Spatial Grain Price Relationships Costs of Grain Storage & Handling

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Spatial Grain Market Economics: Handling & Transportation

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  1. Spatial Grain Market Economics:Handling & Transportation Daniel O’Brien 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 ofGrain Price Relationships inSpatially-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 Differences“Competitive Arbitrage Across Space” • Price differences between any 2 regions that do trade with each other will just equaltransfer 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 thanorequal totransfer 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

  9. 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

  10. 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

  11. 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) = $6 $6 Market A Net Price Line $4 $4 Market B Net Price Line Market Boundary $2 $2 400 Mkt. A mi. 100 200 300 500 600 200 600 500 400 300 100  Mkt. B mi. Distance from Market

  12. Shifting Market BoundaryMarket 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. 100 200 300 400 500 600 333 600 500 400 300 200 100  Mkt. B mi. Distance from Market

  13. The Economic Costs ofGrain Storage and Handling

  14. 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

  18. Fixed + Variable Grain Storage Costs Scenario: Storing Wheat 6 months, $3.41/bu Harvest Price

  19. Commercial vs On-Farm Storage #1 Commercial Cost: 3.13¢/bu/mo.; $3.41/bu Corn @ Harvest On-Farm TC Commercial vs. On-Farm VC Breakeven @ 5 1/3 months Commercial Cost On-Farm VC

  20. Commercial vs On-Farm Storage #2 Commercial Cost: 3.13¢/bu/mo.; $5.91/bu Wheat @ Harvest On-Farm TC Commercial Cost Commercial vs. On-Farm VC Breakeven @ 7 months On-Farm VC

  21. The Economic Cost ofTransporting Grain viaSemi-Tractor/Trailer

  22. 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 Grain Transportation Cost ExampleSemi-Truck Expense & Use Estimates

  23. 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) Grain Transportation Cost (more)Semi-Trailer Expense Estimates

  24. Example: Semi-Truck/Trailer Costs

  25. Grain Trucking Example: $Cost/bu.Semi-Tractor/Trailer (7,500 miles/yr) $2.472 /Mile All 3 Scenarios

  26. Grain Trucking Example: $Cost/bu.Semi-Tractor/Trailer (200,000 bushels/yr)

  27. 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

  28. 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

  29. Grain Price Differences fromOrigins to Destinations forKansas Grain Markets

  30. 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

  31. U.S. Spatial Grain Markets USDA Ag Market Service, September 20, 2007

  32. HRW Wheat Origins & Destinations

  33. 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

  36. Feedgrain Origins & Destinations

  37. 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

  40. 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

  44. 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

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