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Spatial Grain Market Economics: Handling & Transportation Daniel O’Brien Extension Agricultural Economist K-State Research Spatial Grain Market Economics: Handling & Transportation Daniel O’Brien Extension Agricultural Economist K-State Research and Extension

Grain Handling, Transportation and Spatial Grain Markets n Principles of Spatial Grain Price Relationships Grain Handling, Transportation and Spatial Grain Markets n Principles of Spatial Grain Price Relationships n Costs of Grain Storage & Handling n Grain Hauling-Transportation Costs q n Semi-tractor & trailer example Spatial Grain Market Examples q q Corn to Southwest Kansas Destinations Wheat to South Central Kansas Destinations

Economic Principles of Grain Price Relationships in Spatially-Related Grain Markets Economic Principles of Grain Price Relationships in Spatially-Related Grain Markets

Principles of Spatial Grain Price Differences Between Markets n Spatial grain price relationships are Principles of Spatial Grain Price Differences Between Markets n Spatial grain price relationships are determined by transfer costs among regions in competitive grain markets n Transfer Costs = Arbitrage Costs q q 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 n Transportation expense n Loading / Unloading (in-out) charges Transfer Costs = Arbitrage Costs n Transportation expense n Loading / Unloading (in-out) charges n Risks from moving grain over distance & owning grain over time q n Risk of negative buy-sell price margin changes Other transfer costs: q q q 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 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 n Structure of grain prices is a function of: q Grain Market Price Structure n Structure of grain prices is a function of: q q n 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 q q q Two (2) Markets – A, B Two (2) Production Areas – X, Y Transfer Costs

Market Structure Principles 1) The lowest-cost source determines the prevailing $Price in each deficit Market Structure Principles 1) The lowest-cost source determines the prevailing $Price in each deficit market Ø Producers sell in markets providing the highest net return 2) Prevailing $Price in each surplusproducing area equals…. Ø Deficit market $Price less transfer cost to that market

Grain Market Structure Example Area X Market A / Area Y Market B Transfer Grain Market Structure Example Area X Market A / Area Y Market B Transfer Cost: $0. 30/bu Market A $3. 00 Surplus Production Area Y $3. 10 Market to Market Transfer Cost: $0. 50/bu Transfer $: $0. 10/bu Surplus Production Area X $2. 90 Transfer Cost: $0. 40/bu Transfer $: $0. 20/bu Market B $3. 30

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

Grain Market Boundary Example Market A Market B Market A Net Price = $4. 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 $2 Mkt. A mi. 100 600 500 200 400 300 Market Boundary 400 200 Distance from Market $2 500 600 100 Mkt. B mi.

Shifting Market Boundary Market B: $6. 00/bu, $0. 004/mi/bu Transfer $ Market A Market 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 New Market Boundary $2 Mkt. A mi. 100 600 500 200 400 Boundary Shift 267 300 333 300 400 200 Distance from Market $2 500 600 100 Mkt. B mi.

The Economic Costs of Grain Storage and Handling The Economic Costs of Grain Storage and Handling

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

Initial Grain Bin Investment Costs Dhuyvetter, Harner, Tajchman, & Kastens - 2007 Initial Grain Bin Investment Costs Dhuyvetter, Harner, Tajchman, & Kastens - 2007

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

Variable Costs of Grain Storage Scenario: Storing Wheat 6 months, $3. 41/bu Harvest Price Variable Costs of Grain Storage Scenario: Storing Wheat 6 months, $3. 41/bu Harvest Price

Fixed + Variable Grain Storage Costs Scenario: Storing Wheat 6 months, $3. 41/bu Harvest Fixed + Variable Grain Storage Costs Scenario: Storing Wheat 6 months, $3. 41/bu Harvest Price

Commercial vs On-Farm Storage #1 Commercial Cost: 3. 13¢/bu/mo. ; $3. 41/bu Corn @ 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

Commercial vs On-Farm Storage #2 Commercial Cost: 3. 13¢/bu/mo. ; $5. 91/bu Wheat @ Commercial vs On-Farm Storage #2 Commercial Cost: 3. 13¢/bu/mo. ; $5. 91/bu Wheat @ Harvest On-Farm TC Commercial vs. On-Farm VC Breakeven @ 7 months Commercial Cost On-Farm VC

The Economic Cost of Transporting Grain via Semi-Tractor/Trailer The Economic Cost of Transporting Grain via Semi-Tractor/Trailer

Grain Transportation Cost Example Semi-Truck Expense & Use Estimates n Purchase Price (Used) q Grain Transportation Cost Example Semi-Truck Expense & Use Estimates n Purchase Price (Used) q n $2, 000 Tire Expense (10 tires) q $400/tire, 200 K miles/tire q n 7, 500 miles 200, 000 bushels Fuel q $12, 500 ($10 K - $15 K) Repairs/Year q n 10 years Annual Use q Salvage Value q n $25, 000 ($20 K - $30 K) Useful Life q n n $3. 00/gallon, 5. 5 mpg 45 mph average hauling speed Other q License-insurance: $2, 850 q Labor $10/hr, 9% Interest

Grain Transportation Cost (more) Semi-Trailer Expense Estimates n Purchase Price (Used) q n Useful Grain Transportation Cost (more) Semi-Trailer Expense Estimates n Purchase Price (Used) q n Useful Life q n n $14, 000 ($13 K - $15 K) Repairs/Year q $500 ($400 -$500) Tire Expense (8 tires) q Software Analysis Tool q 10 years Salvage Value q n $25, 000 ($20 K - $30 K) n $262/tire, 100 K miles/tire q Grain Truck Transportation Cost Calculator Iowa State University Extension (Edwards)

Example: Semi-Truck/Trailer Costs Example: Semi-Truck/Trailer Costs

Grain Trucking Example: $Cost/bu. Semi-Tractor/Trailer (7, 500 miles/yr) $2. 472 /Mile All 3 Scenarios Grain Trucking Example: $Cost/bu. Semi-Tractor/Trailer (7, 500 miles/yr) $2. 472 /Mile All 3 Scenarios

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

Corn Destination: Southwest Kansas Origins: Colby. NW, Hutchinson. SC & Concordia. NC n Operating Corn Destination: Southwest Kansas Origins: Colby. NW, Hutchinson. SC & Concordia. NC n Operating Costs: Total Cost: n Colby – Garden City: 106 miles n q n Operating Cost = $133 / Total Cost = $262 Hutchinson – Dodge City: 121 miles q n $1. 25/mile or $0. 047/bu. $2. 47/mile or $0. 093/bu. Operating Cost = $151 / Total Cost = $299 Concordia – Cimarron: 228 miles q Operating Cost = $285 / Total Cost = $564

Wheat Destination: South Central KS Origins: Colby. NW, Garden City. SW & Chanute. SE Wheat Destination: South Central KS Origins: Colby. NW, Garden City. SW & Chanute. SE n Operating Costs: Total Cost: n Colby – Salina: 200 miles n q n Operating Cost = $250 / Total Cost = $494 Garden City – Hutchinson: 173 miles q n $1. 25/mile or $0. 047/bu. $2. 47/mile or $0. 093/bu. Operating Cost = $217 / Total Cost = $428 Chanute – Wichita: 106 miles q Operating Cost = $133 / Total Cost = $262

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

Grain Origins & Destinations n Grain Market Origins q Locations from which grain is Grain Origins & Destinations n Grain Market Origins q Locations from which grain is transported to other destinations n n n HRW Wheat originates from Western & Central KS Corn originates from Corn Belt, Milo from High Plains Grain Market Destinations q Locations to which grain is transported from other points of origin n n 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 U. S. Spatial Grain Markets USDA Ag Market Service, September 20, 2007

HRW Wheat Origins & Destinations HRW Wheat Origins & Destinations

Kansas Wheat Origins & Destinations Exports Mills. Exports Kansas Wheat Origins & Destinations Exports Mills. Exports

Kansas Wheat Price Differentials Origin: Northwest Kansas, September 25, 2007 Location $Price /bu. Vs Kansas Wheat Price Differentials Origin: Northwest Kansas, September 25, 2007 Location $Price /bu. Vs Colby. NW $7. 98 --- Garden City. SW $7. 98 Same Hutchinson. SC $8. 43 +$0. 45 Salina. SC $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 Transportation Origin: Colby (NW KS); No In-Out $; 9/25/07 Location Wheat $ Differences Less Transportation Origin: Colby (NW KS); No In-Out $; 9/25/07 Location Colby. NW Hutchinson. SC (233 miles) $/bu. $7. 98 $8. 43 VC: [233 x $1. 252/mi] ÷ 1000 bu = $0. 29/bu Salina. SC (200 miles) +$0. 16/bu $8. 38 VC: [200 x $1. 252/mi] ÷ 1000 bu = $0. 25/bu Superior, NE (SC NE) (189 miles) VC: [189 x $1. 252/mi] ÷ 1000 bu = $0. 24/bu Vs Colby --+$0. 45 +$0. 40 +$0. 15/bu $8. 13 +$0. 15 ($0. 09)/bu

Feedgrain Origins & Destinations Feedgrain Origins & Destinations

Kansas Feedgrain Origins-Destinations Livestock & Bioenergy Livestock Exports Kansas Feedgrain Origins-Destinations Livestock & Bioenergy Livestock Exports

Kansas Corn Price Differentials Destination: Sublette (SW KS), September 25, 2007 Location $Price /bu. Kansas Corn Price Differentials Destination: Sublette (SW KS), September 25, 2007 Location $Price /bu. Vs Sublette. SW $3. 74 --- Dodge City. SW $3. 66 ($0. 08) Colby. NW $3. 38 ($0. 36) Salina. Central $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 Transportation Destination: Sublette (SW KS); No In-Out $; 9/25/07 Location Corn $ Differences Less Transportation Destination: Sublette (SW KS); No In-Out $; 9/25/07 Location Sublette. SW Dodge City. SC (52 miles) $/bu. Vs Sublette $3. 74 --$3. 66 ($0. 08) VC: [52 x $1. 252/mi] ÷ 1000 bu = $0. 07/bu Colby. NW (141 miles) +$0. 01/bu $3. 38 VC: [141 x $1. 252/mi] ÷ 1000 bu = $0. 18/bu Superior, NE (SC NE) (276 miles) VC: [276 x $1. 252/mi] ÷ 1000 bu = $0. 35/bu ($0. 36) +$0. 18/bu $3. 37 ($0. 37) +$0. 02/bu

Kansas Milo Price Differentials Destination: Sublette (SW KS), September 25, 2007 Location $Price /bu. Kansas Milo Price Differentials Destination: Sublette (SW KS), September 25, 2007 Location $Price /bu. Vs Sublette. SW $3. 43 --- Dodge City. SW $3. 33 ($0. 10) Colby. NW $3. 32 ($0. 11) Salina. SC $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 Transportation Destination: Sublette (SW KS); No In-Out $; 9/25/07 Location Milo $ Differences Less Transportation Destination: Sublette (SW KS); No In-Out $; 9/25/07 Location Sublette. SW Dodge City. SC (52 miles) $/bu. Vs Sublette $3. 43 --$3. 33 ($0. 10) VC: [52 x $1. 252/mi] ÷ 1000 bu = $0. 07/bu Salina. Central (215 miles) ($0. 17)/bu $3. 86 VC: [215 x $1. 252/mi] ÷ 1000 bu = $0. 27/bu Superior, NE (SC NE) (276 miles) VC: [276 x $1. 252/mi] ÷ 1000 bu = $0. 35/bu +$0. 43 +$0. 16/bu $3. 69 +$0. 26 ($0. 09)/bu

Kansas Soybean Price Differentials Origin: Concordia (NC KS), September 25, 2007 Location $Price /bu. Kansas Soybean Price Differentials Origin: Concordia (NC KS), September 25, 2007 Location $Price /bu. Vs Colby Concordia. NC $8. 61 --- Glen Elder. NC $8. 61 Same Superior, NE (SC NE) $8. 53 ($0. 08) Stockton. NC $8. 59 ($0. 02) Salina. Central $8. 93 +$0. 40 Hutchinson. SC $9. 13 +$0. 60 Wichita. SC $9. 17 +$0. 64

Soybean$ Difference Less Transportation Origin: Concordia (NC KS); No In-Out $; 9/25 Location Concordia. Soybean$ Difference Less Transportation Origin: Concordia (NC KS); No In-Out $; 9/25 Location Concordia. NC Salina. Central (52 miles) $/bu. Vs Sublette $8. 61 --$8. 93 +$0. 40 VC: [52 x $1. 252/mi] ÷ 1000 bu = $0. 07/bu Hutchinson. SC (115 miles) +$0. 33/bu $9. 13 VC: [115 x $1. 252/mi] ÷ 1000 bu = $0. 14/bu Wichita. SC (140 miles) VC: [140 x $1. 252/mi] ÷ 1000 bu = $0. 18/bu +$0. 60 +$0. 46/bu $9. 17 +$0. 64 +$0. 46/bu

Grain Handling, Transportation and Spatial Grain Markets n Principles of Spatial Grain Price Relationships Grain Handling, Transportation and Spatial Grain Markets n Principles of Spatial Grain Price Relationships n Costs of Grain Storage & Handling n Grain Hauling-Transportation Costs q n Semi-tractor & trailer example Spatial Grain Market Examples q q Corn to Southwest Kansas Destinations Wheat to South Central Kansas Destinations