No TRain, No Grain: thoughts on Wheat, Trains and Oil production

Rail service is often the most cost-effective available alternative for shipping agricultural commodities in the Upper Midwest Region of the United States. The recent energy boom has created new competition for the use of shipping services. As oil has taken up freight space on railways, it has become more costly for farmers in states like Minnesota, Montana, North Dakota and South 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 rail cars for storing surplus inventories of crude oil.

Rail companies have been accused of prioritizing oil shipments over grain; however, rail companies assert that the delays are due much higher rail demand and rail congestion in general. In defense of rail companies, economic theory does suggest that the increase in demand for rail services by the oil sector is likely to increase transportation costs for all competing consumers, including wheat farmers. High crude oil prices encourage oil production therefore affecting the demand for shipping services—including railvcars.

According to this logic, wheat farmers struggling to reach markets due to increased transportation costs should celebrate the recent dramatic drop in oil prices. However, the decline in oil prices may not have alleviated the pressure that wheat farmers face from the oil industry when competing for access rail services. In fact, it is precisely the decline in oil prices what could complicate things even further for wheat farmers. I claim that U.S. oil storage nearing capacity seems to be an additional source of concern for wheat farmers, and I want to test whether there is evidence to support this reasoning.

The recent plunge in oil prices has brought many changes to the industry in general and oil producers are increasingly choosing not to sell their product at current prices. Instead, they seem to be turning to innovative ways to store their surplus crude and sell it through the futures market for delivery at a later date and for a higher price. According to the EIA, U.S. crude inventories rose above 500 million barrels in late January, 2016 for the first time since 1930. The low oil prices have created a new demand for what the industry calls “rolling storage”: the practice of storing of surplus inventories in rail cars.

I love these stories, they are visual, they give the maths a face and a name; they are exciting and make my research fun. The kind of stories we study in environmental and agricultural economics are evidently about real people and about real places. One day I’d like to be a story-teller, a real story-teller: that is a teller of real stories; that’ why I decided to investigate the transportation link between wheat and energy markets. Do railroad companies have favorites? Are oil producers using rail cars to store oil? How much cost do farmers have to put up with? Is it worth it to construct a new oil pipeline and alleviate farmers’ losses?

Using oil nearby prices as a proxy, I studied three particular effects of increased competition for rail services. First, I examined the impact of track congestion on wheat prices before and after the shale-oil boom. I also investigated how the expansion of the energy sector may have had different effects on prices received by wheat producers in North Dakota and Texas. Finally, I studied whether the construction of new regional liquid pipeline networks was linked to regional wheat prices.

What I found was, in general, consistent with economic theory and anecdotal observations about disproportionate impacts of the energy sector’s expansion between US regions. Specifically, I find that there is a negative relation between oil prices and wheat prices–supporting the hypothesis that higher demand for rail cars by the energy industry is affecting wheat farmers negatively. Also, I find that the impact of oil nearby futures prices on the basis is about 5 times larger for farmers in North Dakota than for farmers in Texas. However, the results about the impact of production, inventories and year-specific idiosyncrasies also suggest that the effect of train delays on grain prices in the Upper Midwest is not driven entirely by the increased competition for rail services from the energy sector. Other factors, such as unusually large crops and extreme winter conditions, appear to be important determinants of the apparently disproportionately weak wheat basis in the Midwest.

Although the relation explored in this paper does not allow me to calculate a back-of-the-envelope estimation of lost revenue from train delays and backlogs, I can do something similar by calculating lost revenue from increases in oil prices (or even from increases in both oil and ethanol prices). My calculations suggest that wheat farmers in North Dakota lost close to USD$ 60.6 million in revenues from wheat sales at local markets, annually because of the expansion in the energy sector.

Pipelines for Grains?

My data was not strong enough to yield any conclusions regarding the question of pipeline interaction with oil prices. Also, I was not able to find any evidence of the rail car storage hypothesis. Yet, keep in mind this is a very recent phenomenon and the effect may not show up in the data for some time.

Either way, it is still important to keep the farmers’ losses in mind together with other negative spillovers from increased truck congestion and train accidents when deciding over projects such as the proposed Keystone XL Pipeline had more economic benefits than originally proposed.

The results presented here are relevant for agricultural, energy, and transportation policy. In particular they can be used (or not) to inform parties interested in improving existing support programs to wheat producers, in furthering regulations over the U.S. railway oligopoly to target certain level of provision of rail services, and in advocating for the development of alternative methods for transporting oil. To learn more about this study, check the papers tab in my website (or click here).

To end this post, I want to repeat that I love agricultural and environmental economics. Mostly because there is always a story to tell: there is a victim, a villain, a hero, an intricate plot, a difficult choice; there are winners and losers, and maybe there is also a solution.




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