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

Regional Grain Market

Competition

Price Spreads &

TransportationDaniel O’Brien

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

Exports

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 Principles1) 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 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: 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 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

Grain Price Spreads

across

Competitive Grain

Markets in

Northwest Kansas

WheatCash Markets

HRW Wheat Origins & Destinations

Colby, Kansas Cash Wheat Prices

Cornerstone Ag, Colby, KansasMarch 6, 2007 – Feb. 5, 2008Source: DTN Bid Analyzer

KCBT WheatFutures

Local WheatSpot Market

Feb. 5th Basis: $0.60 under

Wheat Price SpreadsOrigin: Colby, Kansas, February 5, 2008

Location $Price /bu. Vs Colby

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, KansasMarch 6, 2007 – Feb. 5, 2008Source: DTN Bid Analyzer

CBOT CornFutures

Local CornSpot Market

Feb. 5th Basis: $0.28 under

Corn Price SpreadsOrigin: Colby, Kansas, February 5, 2008

Location $Price /bu. Vs Colby

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

Frontier Ag Inc., Colby, KansasMarch 6, 2007 – Feb. 5, 2008Source: DTN Bid Analyzer

Local Grain SorghumSpot Market

Feb. 5th Basis: $0.54 under

Grain Sorghum Price SpreadsOrigin: Colby, Kansas, February 5, 2008Location $Price /bu. Vs Colby

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, KansasMarch 6, 2007 – Feb. 5, 2008Source: DTN Bid Analyzer

CBOT SoybeanFutures

Local SoybeanSpot Market

Feb. 5th Basis: $1.50 under

Soybean Price SpreadsOrigin: Colby, Kansas, February 5, 2008

Location $Price /bu. Vs Colby

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 SurveyCustom 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 CostsIowa Custom Rate Survey – March 2007

$0.00$0.10$0.20$0.30$0.40$0.50$0.60$0.70$0.80$0.90$1.00

0 20 40 60 80 100 120 140 160 180 200 220 240

Miles Grain Hauled to Market (1 way)

Hau

ling

Cos

t / b

u.

Cost of Hauling Grain 20 Miles to Market (1-way):

Average Cost: $0.117 /bu

Min-Max Range: $0.073 to $0.18 /bu

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

Kansas Wheat Origins & Destinations

Exports

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

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 TransportationColby to Sharon Springs; No In-Out Cost (2/5/08)

Location $/bu. Vs Colby

Colby NW $9.90 ---

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: +$0.15Net: +$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

$10.05 Dif: +$0.15Net: ($0.15)

Net: ($0.25)

Wheat $ Differences Less TransportationColby to Salina & Hutchinson; No In-Out Cost (2/5/08)

Location $/bu. Vs Colby

Colby NW $9.90 ---

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: +$0.60Net: +$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

$10.20 Dif: +$0.30Net: ($0.04)

Net: ($0.38)

Corn $ Differences Less TransportationColby to Sharon Springs; No In-Out $; 2/5/08

Location $/bu. Vs Colby

Colby NW $4.81 ---

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: +$0.24Net: +$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

$5.05 Dif: +$0.24Net: ($0.14)

Net: ($0.50)

Milo $ Differences Less TransportationColby to Salina; No In-Out $; 2/5/08Location $/bu. Vs Colby

Colby NW $4.55 ---

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: +$0.33Net: +$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

$4.92 Dif: +$0.33Net: ($0.19)

Net: ($0.71)

Soybean $ Differences Less Hauling CostColby to Oakley & Salina; No In-Out $; 2/5/08

Location $/bu. Vs Colby

Colby NW $11.73 ---

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: +$0.74Net: +$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

$12.38 Dif: +$0.65Net: +$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

Questions or Comments?

K-State Extension Agricultural Economics:

www.AgManager.info