The effect of barge and ocean freight price volatility in international grain markets

This paper looks at the potential role of time‐varying volatility of Mississippi river barge and ocean freight prices on commodity prices in Illinois, at the US Gulf and in Rotterdam using a Vector Error Correction GARCH‐in‐Mean model. The model is used to infer the extent to which transportation price risk affects price dynamics in international grain markets. Results from a simulation exercise indicate that both barge and ocean price volatility influence grain prices, but barge price volatility tends to have a greater impact on grain prices and marketing margins than that arising from ocean price volatility. Consistent with most studies that evaluate the role of risk in marketing channels, results here suggest that a reduction in barge rate risk would reduce marketing margins between Illinois and the US Gulf, and between the US Gulf and Rotterdam. The existence of an ocean freight futures contract coupled with the lack of a futures contract for barge rates may be partially responsible for the finding that barge rates have a significant influence on grain prices and contribute most to wide marketing margins found throughout the international grain‐marketing system.