A new study provides compelling evidence that farmers, more than any other segment of agriculture, are responsible for paying the transportation costs from the farm to the dinner plate, and those costs have a big impact on your bottom line.  

The study, performed by O’Neil Commodity Consulting on behalf of the Soy Transportation Coalition, examined 36 soybean loading facilities across seven states (Illinois, Indiana, Iowa, Nebraska, North Dakota, Ohio, and South Dakota) and analyzed the relationship among origin basis, destination basis, and transportation costs. The results reveal how transportation costs are disproportionately absorbed by farmers via a declining origin basis. 

"Over the long run, it is clear that the spread between origin and destination price basis levels have widened considerably," says the report. "There can be only two plausible explanations for this.  First, that increases in transportation costs have had a negative impact on the interior basis. And second, that elevator handling margins have widened. Both should be a concern to U.S. producers.

"The primary message here is that increases in freight cost must be borne by someone and that someone is always the one of least resistance," says the report. "In that we live in a world economy, it is not often possible to pass increases in freight cost on to the international buyer without becoming uncompetitive and losing business. The path of least resistance, or necessity, therefore often leads back to the point of origin and the producer."  

The price a farmer receives for any commodity is determined by a complex assortment of issues, notes Dean Campbell, a soybean producer from Coulterville, Ill., and Chair of the Soy Transportation Coalition (below).

"As we discovered in conducting the study, it is possible to provide greater clarity to this issue and allow farmers to more accurately see how transportation has a major impact on our individual bottom line.

"Farmers should therefore be among the leading advocates for a well-maintained, reliable transportation system.” 

The report specifically identifies how, in periods of strong worldwide demand (a “demand pull” market), the end user will pay the costs – including transportation costs – for obtaining the shipment a soybeans.  However, the report notes, “after the temporary demand pull is over, the market will always adjust/correct and any increases in transportation costs will always be passed back to producers.” 

'Supply push' market Over the long term agriculture is a “supply push” market due to strong competition from other grain and oilseed producing nations – resulting in transportation costs being disproportionately passed back to producers. 

Graphs from the 36 soybean loading facilities (found at the STC website) provide examples of when the relationship between transportation and farmer income is strongest (“supply push” market) and when it is the weakest (“demand pull” market). 

For example, in the graph from Jeffersonville, Ind., the correlation between transportation costs and origin basis (farmer income) is clearly evident. As transportation costs rise, origin basis diminishes. This is

particularly the case from 2004 to 2008, a period largely categorized as a “supply push” market. 

However, the graph highlights the “demand pull” market of 2009 during which worldwide demand – particularly in China – was strong and supply was diminished due to drought conditions in South America.  During this period, the correlation between transportation costs and origin basis was nonexistent.

Transportation costs significant There are many factors which influence market values and farmer incomes.  Aside from the big picture of world supply and demand economics, transportation costs are the most significant factor.  But transportation costs involve much more than the railroad tariff or contract rate to move a commodity from one point to another. The availability of equipment, power, crews, along with prevailing transportation logistics, will greatly impact total transportation costs on a producer’s bottom line. 

Since rail equipment is not often readily available during harvest periods, secondary freight car values will have a dramatic influence on transportation costs and subsequently on interior basis levels. Railroads have also instituted a system of fuel surcharges. These surcharges are not a part of their regular tariff or contract rate structures, but have a dramatic impact on freight costs as they rise and fall with highway diesel fuel prices.

When transportation equipment or service is not available to move grain during times of high demand, interior basis levels drop and farmer incomes are negatively affected. The lack of transportation equipment and service at such times reduces the quantity of grain a farmer can sell at the highest possible price prior to the market dropping back.

To complement the study, O’Neil Commodity Consulting conducted a survey in which 11 grain traders were asked if freight rate increases are passed on to the end user or if most increases are passed on to the producer. Seven of the 11 traders responded that freight increases are passed back to the farmer. Two responded that such costs are passed on to the end user with the remaining two suggesting that the costs are split between the farmer and the end user.