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Spatial Grain Market Economics: Handling & Transportation Daniel OBrien Extension Agricultural Economist K-State Research and Extension.

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Presentation on theme: "Spatial Grain Market Economics: Handling & Transportation Daniel OBrien Extension Agricultural Economist K-State Research and Extension."— Presentation transcript:

1 Spatial Grain Market Economics: Handling & 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 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

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 1)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

9 Grain Market Structure Example Area X Market A / Area Y Market B Market A $3.00 Market B $3.30 Surplus Production 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 Surplus Production Area Y $3.10

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 Market AMarket B Grain Market Boundary Example $2 $4 $6 $2 $4 $6 Mkt. A mi Mkt. B mi Distance from Market Market Boundary 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 A Net Price Line Market B Net Price Line

12 Market AMarket B Shifting Market Boundary Market B: $6.00/bu, $0.004/mi/bu Transfer $ $2 $4 $6 $2 $4 $6 Mkt. A mi Mkt. B mi Distance from Market New Market 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 ) = Boundary Shift

13 The Economic Costs of Grain 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 Costs Dhuyvetter, Harner, Tajchman, & Kastens

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 Harvest Commercial vs. On-Farm VC 5 1/3 months On-Farm TC On-Farm VC Commercial Cost

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

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

22 Grain Transportation Cost Example Semi-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

23 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)

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 Kansas Origins: Colby NW, Hutchinson SC & Concordia NC 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 KS Origins: Colby NW, Garden City SW & Chanute SE 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 from Origins to Destinations for Kansas 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

34 Kansas Wheat Price Differentials Origin: Northwest Kansas, September 25, 2007 Location$Price /bu.Vs Colby Colby NW $ Garden City SW $7.98Same Hutchinson SC $8.43+$0.45 Salina SC $8.38+$0.40 Superior, NE (SC) $8.13+$0.15 Cheyenne Wells, CO (EC) $7.98Same Keyes OK (Panhandle) $7.97($0.01)

35 Wheat $ Differences Less Transportation Origin: Colby (NW KS); No In-Out $; 9/25/07 Location$/bu.Vs Colby Colby NW $ Hutchinson SC (233 miles) VC: [233 x $1.252/mi] ÷ 1000 bu = $0.29/bu $8.43+$0.45 +$0.16/bu Salina SC (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

36 Feedgrain Origins & Destinations

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

38 Kansas Corn Price Differentials Destination: Sublette (SW KS), September 25, 2007 Location$Price /bu.Vs Sublette Sublette SW $ 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) $3.74Same

39 Corn $ Differences Less Transportation Destination: Sublette (SW KS); No In-Out $; 9/25/07 Location$/bu.Vs Sublette Sublette SW $ Dodge City SC (52 miles) VC: [52 x $1.252/mi] ÷ 1000 bu = $0.07/bu $3.66($0.08) +$0.01/bu Colby NW (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

40 Kansas Milo Price Differentials Destination: Sublette (SW KS), September 25, 2007 Location$Price /bu.Vs Sublette Sublette SW $ 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

41 Milo $ Differences Less Transportation Destination: Sublette (SW KS); No In-Out $; 9/25/07 Location$/bu.Vs Sublette Sublette SW $ Dodge City SC (52 miles) VC: [52 x $1.252/mi] ÷ 1000 bu = $0.07/bu $3.33($0.10) ($0.17)/bu Salina Central (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

42 Kansas Soybean Price Differentials Origin: Concordia (NC KS), September 25, 2007 Location$Price /bu.Vs Colby Concordia NC $ Glen Elder NC $8.61Same 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

43 Soybean$ Difference Less Transportation Origin: Concordia (NC KS); No In-Out $; 9/25 Location$/bu.Vs Sublette Concordia NC $ Salina Central (52 miles) VC: [52 x $1.252/mi] ÷ 1000 bu = $0.07/bu $8.93+$0.40 +$0.33/bu Hutchinson SC (115 miles) VC: [115 x $1.252/mi] ÷ 1000 bu = $0.14/bu $9.13+$0.60 +$0.46/bu Wichita SC (140 miles) VC: [140 x $1.252/mi] ÷ 1000 bu = $0.18/bu $9.17+$0.64 +$0.46/bu

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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