Indian Journal of Economics and Development

Open Access Open Access  Restricted Access Subscription Access

No Train no Grain: The Impact of Increased Demand for Rail Services by the Energy Sector on Wheat Prices


Affiliations
1 Department of Agricultural and Resource Economics, North Carolina State University, Raleigh, NC 27695, United States
 

Background/Objectives: The goal of this project is to investigate the transportation link between wheat and energy markets in the Upper Midwest Region of the United States.

Methods/Statistical analysis: Rail transportation is the most cost-effective alternative for shipping agricultural commodities in the Upper Midwest.The recent energy boom has created new competition for the use of shipping services in the region. Using oil prices as aproxy, I study the effects of increased competition for rail services on wheat prices. Prices for ethanol, coal, and natural gas are included to account for additional linkages between agricultural and energy markets.

Findings: The results from the analysis are consistent with the hypotheses that large crops, limited storage capacity and transportation disruptions (likely caused by increased competition of rail service) are determinants of the wheat basis. Furthermore, the general findingscan be used as evidence to support the theories that have received most attention from the media covering the struggle between traditional agricultural sectors and a newer and increasingly powerful energy sector in the Midwest. The relations found in this study suggest that as oil has taken up freight space on railways, it has become more costly for farmers in Upper Midwest states like North Dakota to reach grain markets, resulting in millionaire losses. Furthermore, the recent drop in oil prices may have magnified farmers' difficulties in shipping their products as some participants in the energy industry have turned to using railcars for storing surplus inventories of crude oil. Nevertheless, the use of prices as proxy variables is questionable based on validity tests and gives reason to take the accuracy of the magnitudes estimated with care.

Application/Improvements: This study is relevant for policymakers concerned with support programs to farmers, regulations over the provision of rail services, and the development of alternative methods for transporting and storing oil.


Keywords

Transportation Costs, Wheat Prices, Rail Services, Oil Boom, Pipeline.
User
Notifications

  • Prater, E.Marvin, A. Sparger, P. Bahizi, Jr. Daniel O’Neil. Rail Market Share of Grain and Oilseed Transportation. Journal of the Transportation Research Forum. 2013; 52(2), 127-150.

  • The New York Times (25 August 2014.) Grain Piles Up, Waiting for a Ride, as Trains Move North Dakota Oil.

  • http://www.nytimes.com/2014/08/26/us/grain-piles-up-waiting-for-a-ride-as-trains-move-north-dakotaoil.

  • html?_r=1. Date accessed 27/10/2015.

  • C. Nagaraj, A. T. Joshi, Suresh S. Patil. Economics of storage of paddy in rural godowns in TBP area in Karnataka. Indian Journal of Economics & Development. 2015; 3(1), 132-136.

  • J.C. Williams, B. D. Wright. Storage and Commodity Markets, Cambridge: Cambridge University Press. 1991.

  • The Wall Street Journal (28 February 2016). The New Oil-Storage Space: Railcars.

  • http://www.wsj.com/articles/the-new-oil-storage-space-railcars-1456655405. Date accessed:28/3/2016.

  • The Wall Street Journal (2 November 2014). Pain in Trains Falls Mainly on Grain.

  • http://www.wsj.com/articles/pain-in-trains-falls-mainly-on-grain-1414972402. Date accessed: 27/10/2015.

  • Usset, Edward. Minnesota Basis Analysis: Preliminary Report for the Minnesota Department of Agriculture. Center for Farm Financial Management, University of Minnesota (July), 2014.

  • Olson, Frayne. Effects of 2013/14 Rail Transportation Problems on North Dakota Farm Income: Executive Summary to Senator Heidi Heitkamp. preliminary economic analysis. 2014.

  • Norton, D. Jerry. Assessing the Impact of Railcar Availability on Grain Prices, U.S. Department of Agriculture, Agricultural Marketing Service (September). 1995.

  • Wilson, W. William, Bruce Dahl. Grain Pricing and Transportation: Dynamics and Changes in Markets. Agribusiness and Applied Economics Report No. 674, North Dakota State University (December). 2010.

  • Wilson, William and Bruce Dahl (2011), Grain Pricing and Transportation: Dynamics and Changes in Markets. Agribusiness Journal. 2011; 27(4), 420-434.

  • R.L. Gustafson. World Agricultural Supply and Demand Estimates Report (WASDE). Office of the Chief Economist.

  • http://www.usda.gov/oce/commodity/wasde/. Date accessed: 2016.

  • Wright, Brian D. (2011). "The economics of grain price volatility." Applied Economic Perspectives and Policy 33(1), 32-58.

  • Garcia, Phillip, S. Irwin, Aaron Smith. Futures Market Failure? AJAE, Jan 2015.

  • T. Serra, D. Zilberman. Biofuel-related price transmission literature : A review. Energy Economics. 2013; 37, 141–151.

  • Tokgoz, Simla. The impact of energy markets on the EU agricultural sector. Working paper 09-WP 485. 2009.

  • Tyner, W. The integration of energy and agricultural markets. Agricultural Economics. 2010; 41, 193-201.

  • Grain Transportation Report. United States Department of Agriculture, Agricultural Marketing Service.

  • https://www.ams.usda.gov/sites/default/files/media/GTR_10-31-13.pdf. Date accessed: 31./10/2013.

  • U.S. Wheat Production Practices, Costs, and Yields: Variations Across Regions. United States Department of Agriculture Economic Research Service. http://www.ers.usda.gov/publications/eib-economic-informationbulletin/eib116.aspx. Date accessed: 30/10/2013.

  • Rail Service Challenges in the Upper Midwest: Implications for Agricultural Sectors. Preliminary Analysis of the 2013-2014 Situation. United States Department of Agriculture Office of the Chief Economist and the Agricultural Marketing Service. January, 2015.

  • Transportation of US Grains: A Modal Share Analysis. United States Department of Agriculture, Agricultural Marketing Service (AMS). https://www.ams.usda.gov/services/transportation-analysis/data. Date accessed: 10/2015.

  • Quickstats. United States Department of Agriculture, National Agricultural Statistical Service (NASS). https://quickstats.nass.usda.gov/?long_desc__LIKE=wheat. Date accessed: 3/2016.

  • Pipeline Mileage and Facilities. United States Department of Transportation: PHMSA Data and Statistics. https://hip.phmsa.dot.gov/analyticsSOAP/saw.dll?Portalpages. Date accessed: 3/2016.

  • Petroleum and Other Liquids: Data. United States Energy Information Administration. http://www.eia.gov/petroleum/data.cfm. Date accessed: 3/2016. 25. The oil conundrum. The Economist. 2016; 418(8973), 17-19.


Abstract Views: 247

PDF Views: 119




  • No Train no Grain: The Impact of Increased Demand for Rail Services by the Energy Sector on Wheat Prices

Abstract Views: 247  |  PDF Views: 119

Authors

Laura Villegas
Department of Agricultural and Resource Economics, North Carolina State University, Raleigh, NC 27695, United States

Abstract


Background/Objectives: The goal of this project is to investigate the transportation link between wheat and energy markets in the Upper Midwest Region of the United States.

Methods/Statistical analysis: Rail transportation is the most cost-effective alternative for shipping agricultural commodities in the Upper Midwest.The recent energy boom has created new competition for the use of shipping services in the region. Using oil prices as aproxy, I study the effects of increased competition for rail services on wheat prices. Prices for ethanol, coal, and natural gas are included to account for additional linkages between agricultural and energy markets.

Findings: The results from the analysis are consistent with the hypotheses that large crops, limited storage capacity and transportation disruptions (likely caused by increased competition of rail service) are determinants of the wheat basis. Furthermore, the general findingscan be used as evidence to support the theories that have received most attention from the media covering the struggle between traditional agricultural sectors and a newer and increasingly powerful energy sector in the Midwest. The relations found in this study suggest that as oil has taken up freight space on railways, it has become more costly for farmers in Upper Midwest states like North Dakota to reach grain markets, resulting in millionaire losses. Furthermore, the recent drop in oil prices may have magnified farmers' difficulties in shipping their products as some participants in the energy industry have turned to using railcars for storing surplus inventories of crude oil. Nevertheless, the use of prices as proxy variables is questionable based on validity tests and gives reason to take the accuracy of the magnitudes estimated with care.

Application/Improvements: This study is relevant for policymakers concerned with support programs to farmers, regulations over the provision of rail services, and the development of alternative methods for transporting and storing oil.


Keywords


Transportation Costs, Wheat Prices, Rail Services, Oil Boom, Pipeline.

References