Spatial Grain Market Economics: Handling & Transportation Daniel OBrien Extension Agricultural...

Spatial Grain Market

Economics:

Handling &

TransportationDaniel 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

Grain Hauling-Transportation Costs Semi-tractor & trailer example

Spatial Grain Market Examples Corn to Southwest Kansas Destinations Wheat to South Central Kansas Destinations

Economic Principles of

Grain Price

Relationships in

Spatially-Related Grain

Markets

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

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

Inter-Regional Price Differences“Competitive Arbitrage Across Space”1) 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

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

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

Market Structure Principles1) The lowest-cost source determines the

prevailing $Price in each deficit market Producers sell in markets providing the highest

net return

2) Prevailing $Price in each surplus-producing area equals….

Deficit market $Price less transfer cost to that market

Grain Market Structure ExampleArea X Market A / Area Y Market BMarket A$3.00

Market B$3.30

SurplusProduction

Area X$2.90

Transfer Cost: $0.30/bu

Transfer Cost: $0.40/bu

Transfer $:$0.10/bu

Transfer $:$0.20/bu

Market to Market Transfer Cost:

$0.50/bu

SurplusProduction

Area Y$3.10

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

Market A Market B

Grain Market Boundary Example

$2

$4

$6

$2

$4

$6

Mkt. A mi. 100 200 300 400 500 600

Mkt. B mi.100200300400500600

Distance from Market

MarketBoundary

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)=

Market ANet Price Line

Market BNet Price Line

Market A Market B

Shifting Market Boundary Market B: $6.00/bu, $0.004/mi/bu Transfer $

$2

$4

$6

$2

$4

$6

Mkt. A mi. 100 200 300 400 500 600

Mkt. B mi.100200300400500600

Distance from Market

NewMarket

Boundary

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)=

BoundaryShift

267333

The Economic Costs of

Grain Storage and

Handling

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

Initial Grain Bin Investment CostsDhuyvetter, Harner, Tajchman, & Kastens - 2007 $3.41

$3.16

$2.62$2.12

$0.00

$1.00

$2.00

$3.00

$4.00

$Cos

t /

Bus

hel

50,000 Bu 95,000 Bu 163,100 Bu 220,000 Bu

Bin Storage Capacity (Bu.)

Bin Investment Conveyance Equip. Other Invest. Total Invested

Annual Fixed Costs for Grain Bins Dhuyvetter, et. al. (2007)

$0.30 $0.28

$0.23

$0.19

$0.00

$0.05

$0.10

$0.15

$0.20

$0.25

$0.30

$0.35

$Cos

t /B

u. /

Yea

r

50,000 Bu 95,000 Bu 163,100 Bu 220,000 Bu

Bin Storage Capacity (Bu.)

Depreciation Interest (6.56%) Taxes + Ins. (0.7%) Total Fixed Costs

Variable Costs of Grain Storage Scenario: Storing Wheat 6 months, $3.41/bu Harvest Price

$0.28

$0.27

$0.25

$0.23

$0.00 $0.10 $0.20 $0.30 $0.40

50K

95K

163K

220K

Bin

Sto

rage

Cap

acity

(Bu.

)

$Cost /Bu. / Year

Total Variable Costs

Shrinkage(1%+0.1%/ mo)Interest (6.56%)

Repairs (1.5%)

Insecticide

Aeration

Drying

Conveyance

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

$0.28

$0.59

$0.27

$0.55

$0.25

$0.48

$0.23

$0.42

$0.00

$0.25

$0.50

$0.75

$Cos

t /Bu. /

Yea

r

50,000 Bu 95,000 Bu 163,100 Bu 220,000 Bu

Bin Storage Capacity (Bu.)

Total Variable Costs Total Fixed Costs Total Farm Storage Costs

Commercial vs On-Farm Storage #1 Commercial Cost: 3.13¢/bu/mo.; $3.41/bu Corn @ Harvest

$0.00

$0.10

$0.20

$0.30

$0.40

$0.50

$0.60

1 2 3 4 5 6 7 8 9 10 11 12

Months After Harvest

Stor

age

Cos

t / B

u.

Commercial Cost On-Farm Variable Cost On-Farm Total Cost

Commercial vs. On-Farm VCBreakeven @ 5 1/3 months

On-Farm TC

On-Farm VC

Commercial Cost

Commercial vs On-Farm Storage #2 Commercial Cost: 3.13¢/bu/mo.; $5.91/bu Wheat @ Harvest

$0.00

$0.10

$0.20

$0.30

$0.40

$0.50

$0.60

1 2 3 4 5 6 7 8 9 10 11 12

Months After Harvest

Stor

age

Cos

t / B

u.

Commercial Cost On-Farm Variable Cost On-Farm Total Cost

Commercial vs. On-Farm VCBreakeven @ 7 months

On-Farm TC

Commercial Cost

On-Farm VC

The Economic Cost of

Transporting Grain via

Semi-Tractor/Trailer

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

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)

Example: Semi-Truck/Trailer Costs

$3,073

$2,974

$6,047

$2,850

$250

$3,100

$2,000

$500

$2,500

$150

$157

$307

$4,500

$0

$4,500

$2,083

$0

$2,083

$14,656

$3,881

$18,537

$0 $6,000 $12,000 $18,000 $24,000

Tractor

Trailer

Total

Annual Cost

All Expenses

Labor

Fuel & Lubrication

Tires

Repairs

Taxes, Insurance,LicenseDepreciation &Interest

Grain Trucking Example: $Cost/bu.Semi-Tractor/Trailer (7,500 miles/yr)

$0.00

$0.03

$0.06

$0.09

$0.12

$0.15

150K Bu 200K Bu 250K Bu

Bushels Hauled / Year

Cos

t: $/

Bu

Labor

Fuel &LubricationTires

Repairs

Taxes, Insurance,LicenseDepreciation &Interest

$0.124/bu

$0.093/bu

$0.074/bu

$2.472 /MileAll 3 Scenarios

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

$0.00

$0.08

$0.16

6000 miles 7500 miles 9000 miles

Miles Hauled / Year

Cos

t: $/

Bu

Labor

Fuel &LubricationTires

Repairs

Taxes, Insurance,LicenseDepreciation &Interest

$0.086/bu$2.86/mile

$0.093/bu$2.47/mile

$0.100/bu$2.21/mile

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

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

Grain Price Differences

from

Origins to Destinations

for

Kansas Grain Markets

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

U.S. Spatial Grain Markets

USDA Ag Market Service, September 20, 2007

HRW Wheat Origins & Destinations

Kansas Wheat Origins & Destinations

Exports

Exports

Mills-Exports

Mills-Exports

Kansas Wheat Price DifferentialsOrigin: Northwest Kansas, September 25, 2007

Location $Price /bu. Vs Colby

ColbyNW $7.98 ---

Garden CitySW $7.98 Same

HutchinsonSC $8.43 +$0.45

SalinaSC $8.38 +$0.40

Superior, NE (SC) $8.13 +$0.15

Cheyenne Wells, CO (EC) $7.98 Same

Keyes OK (Panhandle) $7.97 ($0.01)

Wheat $ Differences Less TransportationOrigin: Colby (NW KS); No In-Out $; 9/25/07

Location $/bu. Vs Colby

ColbyNW $7.98 ---

HutchinsonSC (233 miles)VC: [233 x $1.252/mi] ÷ 1000 bu = $0.29/bu

$8.43 +$0.45+$0.16/bu

SalinaSC (200 miles)VC: [200 x $1.252/mi] ÷ 1000 bu = $0.25/bu

$8.38 +$0.40+$0.15/bu

Superior, NE (SC NE) (189 miles)VC: [189 x $1.252/mi] ÷ 1000 bu = $0.24/bu

$8.13 +$0.15($0.09)/bu

Feedgrain Origins & Destinations

Kansas Feedgrain Origins-Destinations

Exports

Livestock &Bioenergy

Livestock

Livestock &Bioenergy

Livestock &Bioenergy

Livestock &Bioenergy

Kansas Corn Price DifferentialsDestination: Sublette (SW KS), September 25, 2007

Location $Price /bu. Vs Sublette

SubletteSW $3.74 ---

Dodge CitySW $3.66 ($0.08)

ColbyNW $3.38 ($0.36)

SalinaCentral $3.62 ($0.12)

Superior, NE (SC NE) $3.37 ($0.37)

Cheyenne Wells, CO (EC) $3.39 ($0.35)

Keyes OK (Panhandle) $3.74 Same

Corn $ Differences Less TransportationDestination: Sublette (SW KS); No In-Out $; 9/25/07

Location $/bu. Vs Sublette

SubletteSW $3.74 ---

Dodge CitySC (52 miles)VC: [52 x $1.252/mi] ÷ 1000 bu = $0.07/bu

$3.66 ($0.08)+$0.01/bu

ColbyNW (141 miles)VC: [141 x $1.252/mi] ÷ 1000 bu = $0.18/bu

$3.38 ($0.36)+$0.18/bu

Superior, NE (SC NE) (276 miles) VC: [276 x $1.252/mi] ÷ 1000 bu = $0.35/bu

$3.37 ($0.37)+$0.02/bu

Kansas Milo Price DifferentialsDestination: Sublette (SW KS), September 25, 2007

Location $Price /bu. Vs Sublette

SubletteSW $3.43 ---

Dodge CitySW $3.33 ($0.10)

ColbyNW $3.32 ($0.11)

SalinaSC $3.86 +$0.43

Superior, NE (SC NE) $3.69 +$0.26

Southeast, CO (SE) $3.42 ($0.01)

Keyes OK (Panhandle) $3.47 +$0.03

Milo $ Differences Less TransportationDestination: Sublette (SW KS); No In-Out $; 9/25/07

Location $/bu. Vs Sublette

SubletteSW $3.43 ---

Dodge CitySC (52 miles)VC: [52 x $1.252/mi] ÷ 1000 bu = $0.07/bu

$3.33 ($0.10)($0.17)/bu

SalinaCentral (215 miles)VC: [215 x $1.252/mi] ÷ 1000 bu = $0.27/bu

$3.86 +$0.43+$0.16/bu

Superior, NE (SC NE) (276 miles) VC: [276 x $1.252/mi] ÷ 1000 bu = $0.35/bu

$3.69 +$0.26($0.09)/bu

Kansas Soybean Price DifferentialsOrigin: Concordia (NC KS), September 25, 2007

Location $Price /bu. Vs Colby

ConcordiaNC $8.61 ---

Glen ElderNC $8.61 Same

Superior, NE (SC NE) $8.53 ($0.08)

StocktonNC $8.59 ($0.02)

SalinaCentral $8.93 +$0.40

HutchinsonSC $9.13 +$0.60

WichitaSC $9.17 +$0.64

Soybean$ Difference Less TransportationOrigin: Concordia (NC KS); No In-Out $; 9/25

Location $/bu. Vs Sublette

ConcordiaNC $8.61 ---

SalinaCentral (52 miles)VC: [52 x $1.252/mi] ÷ 1000 bu = $0.07/bu

$8.93 +$0.40+$0.33/bu

HutchinsonSC (115 miles)VC: [115 x $1.252/mi] ÷ 1000 bu = $0.14/bu

$9.13 +$0.60+$0.46/bu

WichitaSC (140 miles) VC: [140 x $1.252/mi] ÷ 1000 bu = $0.18/bu

$9.17 +$0.64+$0.46/bu

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