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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