Regional Grain Market Competition Price Spreads Transportation Daniel

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

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

Economic Principles of Grain Price Competition within Local-Regional Grain Markets

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 Flour Mills or Export Feedgrains destined for SW Kansas livestock feeders, Ethanol-Processing Plants, or Export

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

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 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 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-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 Ø Producers sell in markets providing the highest net return 2) Prevailing $Price in each surplusproduction area equals…. Ø Deficit market $Price less transfer cost to that market

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

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: Where the Net Grain Prices Received (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. 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 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.

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 Feb. 5 th Basis: $0. 60 under KCBT Wheat Futures Local Wheat Spot Market

Wheat Price Spreads Origin: Colby, Kansas, February 5, 2008 Location $Price /bu. Vs Colby NW $9. 90 --- 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 Origins & Destinations

Colby, Kansas Corn Cash Prices Frontier Ag Inc. , Colby, Kansas March 6, 2007 – Feb. 5, 2008 Source: DTN Bid Analyzer Feb. 5 th Basis: $0. 28 under CBOT Corn Futures Local Corn Spot Market

Corn Price Spreads Origin: Colby, Kansas, February 5, 2008 Location $Price /bu. Vs Colby NW $4. 81 --- 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 Feb. 5 Basis: th Frontier Ag Inc. , Colby, Kansas March 6, 2007 – Feb. 5, 2008 Source: DTN Bid Analyzer $0. 54 under Local Grain Sorghum Spot Market

Grain Sorghum Price Spreads Origin: Colby, Kansas, February 5, 2008 Location $Price /bu. Vs Colby NW $4. 55 --- Goodland NW $4. 51 ($0. 04) Norton NW $4. 56 +$0. 01 Scott City SW $4. 55 even 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 Feb. 5 th Basis: $1. 50 under CBOT Soybean Futures Local Soybean Spot Market

Soybean Price Spreads Origin: Colby, Kansas, February 5, 2008 Location $Price /bu. Vs Colby NW $11. 73 --- 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) Average Low High 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 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 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

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)

Kansas Wheat Origins & Destinations Exports Mills. Exports

Wheat Destination: South Central KS Trips n 1 -Way Operating (No Backhauls Included) Costs: $1. 252 /mile or $0. 047/bu. n Total Cost: n Colby – Salina: 64 miles (1 -way) q n or $0. 093/bu. Operating Cost = $80 / Total Cost = $158 per load Scott City – Hutchinson: 127 miles (1 -way) q n $2. 472/mile Operating Cost = $159 / Total Cost = $314 per load Chanute – Wichita: 106 miles (1 -way) q Operating Cost = $133 / Total Cost = $262 per load

Wheat Destination: South Central KS Trips n 2 -Way Operating (Empty Included) Costs: Backhauls $1. 252/mile or $0. 047/bu. n Total Cost: n Colby – Salina: 128 miles (2 -way) q n or $0. 093/bu. Operating Cost = $160 / Total Cost = $316 per load Scott City – Hutchinson: 254 miles (2 -way) q n $2. 472/mile Operating Cost = $318 / Total Cost = $628 per load Chanute – Wichita: 212 miles (2 -way) q Operating Cost = $266 / Total Cost = $524 per load

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

Corn Destination: Southwest Kansas 1 -Way Trips (No Backhauls Included) n Operating Costs: Total Cost: n Colby – Garden City: 106 miles (1 -way) n q n Operating Cost = $133 / Total Cost = $262 per load Hutchinson – Dodge City: 121 miles (1 -way) q n $1. 252/mile or $0. 047/bu. $2. 472/mile or $0. 093/bu. Operating Cost = $151 / Total Cost = $299 per load Concordia – Cimarron: 228 miles (1 -way) q Operating Cost = $285 / Total Cost = $564 per load

Corn Destination: Southwest Kansas 2 -Way Trips (Empty Backhauls Included) n Operating Costs: Total Cost: n Colby – Garden City: 212 miles (2 -way) n q n Operating Cost = $266 / Total Cost = $524 per load Hutchinson – Dodge City: 242 miles (2 -way) q n $1. 252/mile or $0. 047/bu. $2. 472/mile or $0. 093/bu. Operating Cost = $302 / Total Cost = $598 per load Concordia – Cimarron: 456 miles (2 -way) q 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 Colby NW Sharon Springs NW (69 mi. 1 -way) $/bu. $9. 90 Vs Colby --- $10. 05 Dif: +$0. 15 VC: [69 x $1. 252 /mi] ÷ 850 bu = $0. 10 /bu Net: +$0. 05 TC: [69 x $2. 470 /mi] ÷ 850 bu = $0. 20 /bu Net: ($0. 05) Sharon Springs NW (138 mi. 2 -way) $10. 05 Dif: +$0. 15 VC: [138 x $1. 252 /mi] ÷ 850 bu = $0. 20 /bu Net: ($0. 15) TC: [138 x $2. 470 /mi] ÷ 850 bu = $0. 40 /bu Net: ($0. 25)

Wheat $ Differences Less Transportation Colby to Salina & Hutchinson; No In-Out Cost (2/5/08) Location Colby NW Salina C (200 miles, 1 -way) $/bu. $9. 90 Vs Colby --- $10. 50 Dif: +$0. 60 VC: [200 x $1. 252 /mi] ÷ 850 bu = $0. 29 /bu Net: +$0. 31 TC: [200 x $2. 470 /mi] ÷ 850 bu = $0. 58 /bu Net: +$0. 02 Hutchinson C (233 miles, 1 -way) $10. 20 Dif: +$0. 30 VC: [233 x $1. 252 /mi] ÷ 850 bu = $0. 34 /bu Net: ($0. 04) TC: [233 x $2. 470 /mi] ÷ 850 bu = $0. 68 /bu Net: ($0. 38)

Corn $ Differences Less Transportation Colby to Sharon Springs; No In-Out $; 2/5/08 Location $/bu. Vs Colby NW $4. 81 --- Sublette SW (141 mi. 1 -way) $5. 05 Dif: +$0. 24 VC: [141 x $1. 252 /mi] ÷ 950 bu = $0. 19 /bu Net: +$0. 05 TC: [141 x $2. 470 /mi] ÷ 950 bu = $0. 37 /bu Net: ($0. 13) Sublette SW (282 mi. 2 -way) $5. 05 Dif: +$0. 24 VC: [282 x $1. 252 /mi] ÷ 950 bu = $0. 38 /bu Net: ($0. 14) TC: [282 x $2. 470 /mi] ÷ 950 bu = $0. 74 /bu Net: ($0. 50)

Milo $ Differences Less Transportation Colby to Salina; No In-Out $; 2/5/08 Location $/bu. Vs Colby NW $4. 55 --- Salina C (200 mi. 1 -way) $4. 92 Dif: +$0. 33 VC: [200 x $1. 252 /mi] ÷ 950 bu = $0. 26 /bu Net: +$0. 07 TC: [200 x $2. 470 /mi] ÷ 950 bu = $0. 52 /bu Net: ($0. 19) Salina C (400 mi. 2 -way) $4. 92 Dif: +$0. 33 VC: [400 x $1. 252 /mi] ÷ 950 bu = $0. 52 /bu Net: ($0. 19) TC: [400 x $2. 470 /mi] ÷ 950 bu = $1. 04 /bu Net: ($0. 71)

Soybean $ Differences Less Hauling Cost Colby to Oakley & Salina; No In-Out $; 2/5/08 Location $/bu. Vs Colby NW $11. 73 --- Salina (1) C (400 mi. 2 -way) $12. 47 Dif: +$0. 74 VC: [400 x $1. 252 /mi] ÷ 950 bu = $0. 52 /bu Net: +$0. 22 TC: [400 x $2. 470 /mi] ÷ 950 bu = $1. 04 /bu Net: ($0. 30) Hutchinson SC (466 mi. 2 -way) $12. 38 Dif: +$0. 65 VC: [466 x $1. 252 /mi] ÷ 950 bu = $0. 61 /bu Net: +$0. 04 TC: [466 x $2. 470 /mi] ÷ 950 bu = $1. 21 /bu Net: ($0. 56)

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

Questions or Comments? K-State Extension Agricultural Economics: www. Ag. Manager. info