Dynamic Changes in Rail Shipping Mechanisms for Grain

Grain shipping involves many sources of risk and uncertainty. In response to these dynamic challenges faced by shippers, railroad carriers offer various types of forward contracting and allocation instruments. An important feature of the U.S. grain marketing system is that there are now a number of pricing and allocation mechanisms used by most rail carriers. These have evolved since the late 1980’s and have had important changes in their features over time. The operations and impact of these mechanisms are not well understood, yet are frequently the subject of public criticism and studies and at the same time are revered by (some) market participants. These mechanisms serve several important functions that are critical to the grain marketing system. These include allocating capacity across shippers, allocating shipments temporally and seasonally, as well as geographically, and determine the price or value of the service. The purpose of this study is to provide a comprehensive review, description, and analysis of these mechanisms. The specific objectives are to (1) document the evolution and operations of these mechanisms over time and across carriers; and (2) determine and describe the impacts of these practices on basis, both spatially and temporally, and on trading firms and other market participants. Multiple empirical models were developed and used to analyze two important aspects of this problem. One aspect is the role and relationship of the shipping costs on basis values. These results show that basis is more complicated than previously modeled. Export basis are mostly impacted by export competition and imports. In addition, the export basis is simultaneously dependent on the origin basis. Last, there is an important relation among rail velocity, and the secondary car market, which is simultaneously determined with the export basis. Other models examine the impact of these mechanisms on shipper conduct, specifically, how risks and rail mechanisms impact shipper strategies. The last section provides a discussion of summary and conclusions, and of future issues.