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 instruments. An important feature of the US grain marketing system is that there are now a number of pricing mechanisms used by most rail carriers. These include varying forms of forward pricing and allocation mechanisms. In the United States, these have evolved since the late 1980’s and have had a number of important changes in their features over time. The operations and impact of these mechanisms are not well understood, but yet are frequently subject of public criticism and studies, and at the same time revered by (some) market participants. These mechanisms serve a number of 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, in addition to determining price or value of the service. The purpose of this study is to provide a comprehensive review, description and analysis of these mechanisms. Specific objectives are to 1) Document the evolution and operations of these mechanisms over time and across carriers; 2) Determine and describe the impacts of these practices on basis, both spatially and temporally, and on trading firms and other market participants; and 3) Summarize and assess the operations on these mechanisms relative to alternative pricing mechanisms. Multiple empirical models were developed and used to analyze two important aspects of this problem. One 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, imports, and the seasonal characterization varies across marketing years. 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.