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.