MPC
Research Projects (2007-08)

Identifying Number

MPC-300

Project Title

Demand Estimation for Corn Transportation: A North Dakota Case Study

University

North Dakota State University

Project Investigator

Alan Dybing

Description of Project Abstract

Most grain elevators in North Dakota face two options for grain transportation: truck and rail service. The decision of which mode to choose is dependent on a variety of factors, the most important of which is cost. However, other characteristics of the elevators and shipments play an important role in mode choice. They determine whether an elevator can take advantage of discounted rates, whether additional shipments are needed, geographic location of terminals, and the nature of services available.

According to the National Agricultural Statistics Service, corn production in North Dakota has grown by nearly 300 percent over the past 10 years. The ND NASS conducted a survey of producers in March 2007 regarding planting intentions, and the responses indicated that corn acreage may grow by 50 percent in 2007 alone. While this is prior to actual spring planting and may be overstating actual production, it is the consensus that there will be a significant increase in corn production throughout the state. Over the same time period, on-highway diesel fuel prices in the Midwest have more than doubled.

Increased fuel prices may or may not have an effect on the rates for transportation services. Whether or not or how much they may be affected depends on the relative shape of the supply and demand curves. If demand is inelastic, fuel price increases are passed on to the transportation buyers through increased prices.

Competitiveness between truck and rail for grain transportation is wholly dependent on the relationship between terminal and line-haul costs. "Trucks have a comparative advantage for short hauls because they have relatively insignificant fixed and terminal cost components compared to other modes of transportation which offset relatively higher line-haul costs over short distances." The impact of distance to the destination is an important component of mode selection.

Previous studies have focused on small grain transportation, primarily estimating the demand for wheat and barley transportation. Increased domestic demand for corn as an input to ethanol production has had an impact on North Dakota's production.

Project Objectives

The goal of this research is to: synthesize methods for estimating the elasticity of demand for the transportation of corn by truck and railroad, use those methods to estimate the elasticity of transportation demand from North Dakota to major corn markets, and describe a process that can be replicated in other regions.

Project Approach/Methods

The demand for grain transportation is treated as an input demand or derived demand. This study will utilize a derived demand model to estimate the demand for corn transportation to Minneapolis, the Pacific Northwest and the Gulf of Mexico. Each elevator is assumed to have a link-specific minimized cost function which describes the minimum cost of transporting a given quantity of output to a given destination using optimal combinations of railroad and truck services. Simultaneous estimation of a translog cost model and share equations will be performed for each destination.

The primary data source for this study is the North Dakota Public Service Commission's grain movement database. Additional data from the NDPSC will be obtained to assess the impacts of facility storage capacity, rail capacity and other service characteristics on mode usage. Rail rate data will be obtained through the Canadian Pacific and BNSF Railways. Truck rate data and additional shipment characteristic data will be obtained through a survey of North Dakota elevator managers.

Contributions/Potential Applications of Research

The study will result in compilations of truck rate data and regional corn processor movement collection. The study approach and methods will help researchers conduct similar studies in other regions of the country.

Technology Transfer Activities

Research report; journal article submission; conference presentation

Time Duration

July 1, 2007 - June 30, 2008

Yearly and Total Project Cost

$58,000

TRB Keywords

Grain elevators, grain transportation, demand estimation