Regional Grain Market Competition Price Spreads & Transportation Daniel OBrien Extension Agricultural Economist K-State Research and Extension

Grain Handling, Transportation and Competitive Grain Markets Grain Price Competition in Local Markets Northwest KS Cash Grain Price Spreads Grain Hauling-Transportation Costs Semi-tractor & trailer example Profitability of Hauling Grain Wheat to South Central KS; Corn to Southwest

Economic Principles of Grain Price Competition within Local-Regional 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 Flour Mills or Export Feedgrains destined for SW Kansas livestock feeders, Ethanol-Processing Plants, or Export

U.S. Grain Demand - Directions USDA Ag Market Service, January 31, 2008 Exports Livestock Feeding Bioenergy

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 goods 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-Region Grain Price Spreads 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

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

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

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

Defining Market Boundaries Boundaries: Where the Net Grain Prices Received (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 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

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

Grain Price Spreads across Competitive Grain Markets in Northwest Kansas

Wheat Cash Markets

HRW Wheat Origins & Destinations

Colby, Kansas Cash Wheat Prices Cornerstone Ag, Colby, Kansas March 6, 2007 – Feb. 5, 2008 Source: DTN Bid Analyzer KCBT Wheat Futures Local Wheat Spot Market Feb. 5 th Basis: $0.60 under

Wheat Price Spreads Origin: Colby, Kansas, February 5, 2008 Location$Price /bu.Vs Colby Colby NW $ Goodland NW $9.88($0.02) Sharon Springs NW $10.05+$0.15 Concordia NC $10.09+$0.19 Salina (1) C $10.50+$0.60 Salina (2) C $10.17+$0.27 Hutchinson SC $10.20+$0.30

Feedgrain Cash Markets: Corn & Grain Sorghum

Feedgrain Origins & Destinations

Colby, Kansas Corn Cash Prices Frontier Ag Inc., Colby, Kansas March 6, 2007 – Feb. 5, 2008 Source: DTN Bid Analyzer CBOT Corn Futures Local Corn Spot Market Feb. 5 th Basis: $0.28 under

Corn Price Spreads Origin: Colby, Kansas, February 5, 2008 Location$Price /bu.Vs Colby Colby NW $ Goodland NW $4.76($0.05) Sharon Springs NW $4.89+$0.08 Scott City SW $4.88+$0.07 Garden City SW $5.01+$0.20 Protection SW $5.00+$0.19 Sublette SW $5.05+$0.24

Colby, KS Grain Sorghum Cash Prices Frontier Ag Inc., Colby, Kansas March 6, 2007 – Feb. 5, 2008 Source: DTN Bid Analyzer Local Grain Sorghum Spot Market Feb. 5 th Basis: $0.54 under

Grain Sorghum Price Spreads Origin: Colby, Kansas, February 5, 2008 Location$Price /bu.Vs Colby Colby NW $ Goodland NW $4.51($0.04) Norton NW $4.56+$0.01 Scott City SW $4.55even Garden City SW $4.60+$0.05 Protection SW $4.70+$0.15 Salina C $4.92+$0.37

Soybean Cash Markets

Colby, Kansas Cash Soybean Prices Cornerstone Ag, Colby, Kansas March 6, 2007 – Feb. 5, 2008 Source: DTN Bid Analyzer CBOT Soybean Futures Local Soybean Spot Market Feb. 5 th Basis: $1.50 under

Soybean Price Spreads Origin: Colby, Kansas, February 5, 2008 Location$Price /bu.Vs Colby Colby NW $ Goodland NW $11.68($0.05) Sharon Springs NW $11.58($0.15) Concordia NC $11.97+$0.24 Salina (1) C $12.47+$0.74 Salina (2) C $12.28+$0.55 Hutchinson SC $12.38+$0.65

The Economic Cost of Transporting Grain Off-Farm by Semi-Tractor/Trailer

2007 Iowa Farm Custom Rate Survey Custom Grain Trucking/Hauling Costs (March 2007) AverageLowHigh 5 miles (1-way)$0.08 /bu $0.05 /bu $0.12 /bu 25 miles (1-way)$0.13 /bu $0.08 /bu $0.20 /bu 100 miles (1-way)$0.25 /bu $0.16 /bu $0.40 /bu

Custom Grain Hauling Costs Iowa Custom Rate Survey – March 2007

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

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

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

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

Kansas Wheat Origins & Destinations Exports Mills- Exports Mills- Exports

Wheat Destination: South Central KS 1-Way Trips (No Backhauls Included) Operating Costs: $1.252 /mile or $0.047 /bu. Total Cost: $2.472 /mile or $0.093 /bu. Colby – Salina: 64 miles (1-way) Operating Cost = $80 / Total Cost = $158 per load Scott City – Hutchinson: 127 miles (1-way) Operating Cost = $159 / Total Cost = $314 per load Chanute – Wichita: 106 miles (1-way) Operating Cost = $133 / Total Cost = $262 per load

Wheat Destination: South Central KS 2-Way Trips (Empty Backhauls Included) Operating Costs: $1.252 /mile or $0.047 /bu. Total Cost: $2.472 /mile or $0.093 /bu. Colby – Salina: 128 miles (2-way) Operating Cost = $160 / Total Cost = $316 per load Scott City – Hutchinson: 254 miles (2-way) Operating Cost = $318 / Total Cost = $628 per load Chanute – Wichita: 212 miles (2-way) Operating Cost = $266 / Total Cost = $524 per load

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

Corn Destination: Southwest Kansas 1-Way Trips (No Backhauls Included) Operating Costs: $1.252 /mile or $0.047 /bu. Total Cost: $2.472 /mile or $0.093 /bu. Colby – Garden City: 106 miles (1-way) Operating Cost = $133 / Total Cost = $262 per load Hutchinson – Dodge City: 121 miles (1-way) Operating Cost = $151 / Total Cost = $299 per load Concordia – Cimarron: 228 miles (1-way) Operating Cost = $285 / Total Cost = $564 per load

Corn Destination: Southwest Kansas 2-Way Trips (Empty Backhauls Included) Operating Costs: $1.252 /mile or $0.047 /bu. Total Cost: $2.472 /mile or $0.093 /bu. Colby – Garden City: 212 miles (2-way) Operating Cost = $266 / Total Cost = $524 per load Hutchinson – Dodge City: 242 miles (2-way) Operating Cost = $302 / Total Cost = $598 per load Concordia – Cimarron: 456 miles (2-way) Operating Cost = $570 / Total Cost = $1,128 per load

Profitability of Hauling Grain from Origination in Colby, KS to other Grain Market Destinations

Wheat $ Differences Less Transportation Colby to Sharon Springs; No In-Out Cost (2/5/08) Location$/bu.Vs Colby Colby NW $ Sharon Springs NW (69 mi. 1-way) VC: [69 x $1.252 /mi] ÷ 850 bu = $0.10 /bu TC: [69 x $2.470 /mi] ÷ 850 bu = $0.20 /bu $10.05 Dif: +$0.15 Net: +$0.05 Net: ($0.05) Sharon Springs NW (138 mi. 2-way) VC: [138 x $1.252 /mi] ÷ 850 bu = $0.20 /bu TC: [138 x $2.470 /mi] ÷ 850 bu = $0.40 /bu $10.05Dif: +$0.15 Net: ($0.15) Net: ($0.25)

Wheat $ Differences Less Transportation Colby to Salina & Hutchinson; No In-Out Cost (2/5/08) Location$/bu.Vs Colby Colby NW $ Salina C (200 miles, 1-way) VC: [200 x $1.252 /mi] ÷ 850 bu = $0.29 /bu TC: [200 x $2.470 /mi] ÷ 850 bu = $0.58 /bu $10.50 Dif: +$0.60 Net: +$0.31 Net: +$0.02 Hutchinson C (233 miles, 1-way) VC: [233 x $1.252 /mi] ÷ 850 bu = $0.34 /bu TC: [233 x $2.470 /mi] ÷ 850 bu = $0.68 /bu $10.20Dif: +$0.30 Net: ($0.04) Net: ($0.38)

Corn $ Differences Less Transportation Colby to Sharon Springs; No In-Out $; 2/5/08 Location$/bu.Vs Colby Colby NW $ Sublette SW (141 mi. 1-way) VC: [141 x $1.252 /mi] ÷ 950 bu = $0.19 /bu TC: [141 x $2.470 /mi] ÷ 950 bu = $0.37 /bu $5.05 Dif: +$0.24 Net: +$0.05 Net: ($0.13) Sublette SW (282 mi. 2-way) VC: [282 x $1.252 /mi] ÷ 950 bu = $0.38 /bu TC: [282 x $2.470 /mi] ÷ 950 bu = $0.74 /bu $5.05Dif: +$0.24 Net: ($0.14) Net: ($0.50)

Milo $ Differences Less Transportation Colby to Salina; No In-Out $; 2/5/08 Location$/bu.Vs Colby Colby NW $ Salina C (200 mi. 1-way) VC: [200 x $1.252 /mi] ÷ 950 bu = $0.26 /bu TC: [200 x $2.470 /mi] ÷ 950 bu = $0.52 /bu $4.92 Dif: +$0.33 Net: +$0.07 Net: ($0.19) Salina C (400 mi. 2-way) VC: [400 x $1.252 /mi] ÷ 950 bu = $0.52 /bu TC: [400 x $2.470 /mi] ÷ 950 bu = $1.04 /bu $4.92Dif: +$0.33 Net: ($0.19) Net: ($0.71)

Soybean $ Differences Less Hauling Cost Colby to Oakley & Salina; No In-Out $; 2/5/08 Location$/bu.Vs Colby Colby NW $ Salina (1) C (400 mi. 2-way) VC: [400 x $1.252 /mi] ÷ 950 bu = $0.52 /bu TC: [400 x $2.470 /mi] ÷ 950 bu = $1.04 /bu $12.47 Dif: +$0.74 Net: +$0.22 Net: ($0.30) Hutchinson SC (466 mi. 2-way) VC: [466 x $1.252 /mi] ÷ 950 bu = $0.61 /bu TC: [466 x $2.470 /mi] ÷ 950 bu = $1.21 /bu $12.38Dif: +$0.65 Net: +$0.04 Net: ($0.56)

Grain Handling, Transportation and Competitive Grain Markets Grain Price Competition in Local Markets Northwest KS Cash Grain Price Spreads Grain Hauling-Transportation Costs Semi-tractor & trailer example Profitability of Hauling Grain Wheat to South Central KS; Corn to Southwest

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