Spatial Grain Market Economics:
Handling & Transportation
Daniel 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 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 surplusproducing area equals….
 Deficit market $Price less transfer cost to that
market
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

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
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.
600
100
500
200
400
300
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.
600
100
500
200
400
Boundary
Shift
267 300
333 300
400
200
Distance from Market
$2
500
600
100  Mkt. B mi.
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 Costs
Dhuyvetter, Harner, Tajchman, & Kastens - 2007
$Cost / Bushel
$4.00
$3.41
$3.16
$3.00
$2.62
$2.12
$2.00
$1.00
$0.00
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)
$0.35
$Cost /Bu. /Year
$0.30
$0.30
$0.28
$0.23
$0.25
$0.19
$0.20
$0.15
$0.10
$0.05
$0.00
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
Bin Storage Capacity (Bu.)
$0.23
Total Variable Costs
220K
Shrinkage
(1%+0.1%/mo)
Interest (6.56%)
$0.25
163K
Repairs (1.5%)
$0.27
95K
Insecticide
$0.28
Aeration
50K
$0.00
Drying
$0.10
$0.20
$0.30
$Cost /Bu. /Year
$0.40
Conveyance
Fixed + Variable Grain Storage Costs
Scenario: Storing Wheat 6 months, $3.41/bu Harvest Price
$0.75
$Cost /Bu. /Year
$0.59
$0.55
$0.48
$0.50
$0.42
$0.28
$0.27
$0.25
$0.00
50,000 Bu
$0.25
95,000 Bu
$0.23
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
Storage Cost / Bu.
$0.60
$0.50
On-Farm TC
$0.40
$0.30
Commercial vs. On-Farm VC
Breakeven @ 5 1/3 months
Commercial Cost
$0.20
On-Farm VC
$0.10
$0.00
1
2
3
4
5
6
7
8
9
10
11
12
Months After Harvest
Commercial Cost
On-Farm Variable Cost
On-Farm Total Cost
Commercial vs On-Farm Storage #2
Commercial Cost: 3.13¢/bu/mo.; $5.91/bu Wheat @ Harvest
Storage Cost / Bu.
$0.60
On-Farm TC
$0.50
$0.40
$0.30
Commercial Cost
Commercial vs. On-Farm VC
Breakeven @ 7 months
$0.20
On-Farm VC
$0.10
$0.00
1
2
3
4
5
6
7
8
9
10
11
12
Months After Harvest
Commercial Cost
On-Farm Variable Cost
On-Farm Total Cost
The Economic Cost of
Transporting Grain via
Semi-Tractor/Trailer
Grain Transportation Cost Example
Semi-Truck Expense & Use Estimates

Purchase Price (Used)





$12,500 ($10K - $15K)
$2,000
Tire Expense (10 tires)

$400/tire, 200K miles/tire

7,500 miles
200,000 bushels
Fuel

Repairs/Year


10 years
Annual Use

Salvage Value


$25,000 ($20K - $30K)
Useful Life



$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)


Useful Life



$14,000 ($13K - $15K)
Repairs/Year

$500 ($400-$500)
Tire Expense (8 tires)

Software Analysis
Tool

10 years
Salvage Value


$25,000 ($20K - $30K)

$262/tire, 100K miles/tire

Grain Truck
Transportation Cost
Calculator
Iowa State University
Extension (Edwards)
Example: Semi-Truck/Trailer Costs
Total
Trailer
Tractor
$18,537
$2,083
$4,500
$307
$2,500
$3,100
$6,047
$0
$0
$157
$500
$250
Labor
Fuel & Lubrication
$3,881
Tires
Repairs
$2,974
$14,656
$2,083
$4,500
Taxes, Insurance,
License
Depreciation &
Interest
$150
$2,000
$2,850
$3,073
$0
All Expenses
$6,000
$12,000
Annual Cost
$18,000
$24,000
Grain Trucking Example: $Cost/bu.
Semi-Tractor/Trailer (7,500 miles/yr)
$0.15
$0.124/bu
Cost: $/Bu
$0.12
$2.472 /Mile
All 3 Scenarios
Fuel &
Lubrication
Tires
$0.093/bu
$0.09
Labor
$0.074/bu
Repairs
$0.06
Taxes, Insurance,
License
Depreciation &
Interest
$0.03
$0.00
150K Bu
200K Bu
250K Bu
Bushels Hauled / Year
Grain Trucking Example: $Cost/bu.
Semi-Tractor/Trailer (200,000 bushels/yr)
Cost: $/Bu
$0.16
Labor
$0.086/bu
$2.86/mile
$0.093/bu
$2.47/mile
$0.100/bu
$2.21/mile
$0.08
Fuel &
Lubrication
Tires
Repairs
Taxes, Insurance,
License
Depreciation &
Interest
$0.00
6000 miles
7500 miles
9000 miles
Miles Hauled / Year
Corn Destination: Southwest Kansas
Origins: ColbyNW, HutchinsonSC & ConcordiaNC

Operating Costs:
Total Cost:

Colby – Garden City: 106 miles



Operating Cost = $133 / Total Cost = $262
Hutchinson – Dodge City: 121 miles


$1.25/mile or $0.047/bu.
$2.47/mile or $0.093/bu.
Operating Cost = $151 / Total Cost = $299
Concordia – Cimarron: 228 miles

Operating Cost = $285 / Total Cost = $564
Wheat Destination: South Central KS
Origins: ColbyNW, Garden CitySW & ChanuteSE

Operating Costs:
Total Cost:

Colby – Salina: 200 miles



Operating Cost = $250 / Total Cost = $494
Garden City – Hutchinson: 173 miles


$1.25/mile or $0.047/bu.
$2.47/mile or $0.093/bu.
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
MillsExports
MillsExports
Exports
Kansas Wheat Price Differentials
Origin: 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 Transportation
Origin: Colby (NW KS); No In-Out $; 9/25/07
Location
ColbyNW
HutchinsonSC (233 miles)
$/bu.
$7.98
$8.43
VC: [233 x $1.252/mi] ÷ 1000 bu = $0.29/bu
SalinaSC (200 miles)
+$0.16/bu
$8.38
VC: [200 x $1.252/mi] ÷ 1000 bu = $0.25/bu
Superior, NE (SC NE) (189 miles)
VC: [189 x $1.252/mi] ÷ 1000 bu = $0.24/bu
Vs Colby
--+$0.45
+$0.40
+$0.15/bu
$8.13
+$0.15
($0.09)/bu
Feedgrain Origins & Destinations
Kansas Feedgrain Origins-Destinations
Livestock &
Bioenergy
Livestock &
Bioenergy
Livestock &
Bioenergy
Livestock &
Bioenergy
Livestock
Exports
Kansas Corn Price Differentials
Destination: 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 Transportation
Destination: Sublette (SW KS); No In-Out $; 9/25/07
Location
SubletteSW
Dodge CitySC (52 miles)
$/bu. Vs Sublette
$3.74
--$3.66
($0.08)
VC: [52 x $1.252/mi] ÷ 1000 bu = $0.07/bu
ColbyNW (141 miles)
+$0.01/bu
$3.38
VC: [141 x $1.252/mi] ÷ 1000 bu = $0.18/bu
Superior, NE (SC NE) (276 miles)
VC: [276 x $1.252/mi] ÷ 1000 bu = $0.35/bu
($0.36)
+$0.18/bu
$3.37
($0.37)
+$0.02/bu
Kansas Milo Price Differentials
Destination: 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 Transportation
Destination: Sublette (SW KS); No In-Out $; 9/25/07
Location
SubletteSW
Dodge CitySC (52 miles)
$/bu. Vs Sublette
$3.43
--$3.33
($0.10)
VC: [52 x $1.252/mi] ÷ 1000 bu = $0.07/bu
SalinaCentral (215 miles)
($0.17)/bu
$3.86
VC: [215 x $1.252/mi] ÷ 1000 bu = $0.27/bu
Superior, NE (SC NE) (276 miles)
VC: [276 x $1.252/mi] ÷ 1000 bu = $0.35/bu
+$0.43
+$0.16/bu
$3.69
+$0.26
($0.09)/bu
Kansas Soybean Price Differentials
Origin: 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 Transportation
Origin: Concordia (NC KS); No In-Out $; 9/25
Location
ConcordiaNC
SalinaCentral (52 miles)
$/bu. Vs Sublette
$8.61
--$8.93
+$0.40
VC: [52 x $1.252/mi] ÷ 1000 bu = $0.07/bu
HutchinsonSC (115 miles)
+$0.33/bu
$9.13
VC: [115 x $1.252/mi] ÷ 1000 bu = $0.14/bu
WichitaSC (140 miles)
VC: [140 x $1.252/mi] ÷ 1000 bu = $0.18/bu
+$0.60
+$0.46/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