2016 Risk and Profit Conference Breakout Session Presenters

12. The Changing Competitive Structure of the Handling and Transportation Industry

Dan O’Brien Daniel O’Brien was raised on a grain and livestock farm in south central Nebraska. He received bachelors and masters degrees in Agricultural Economics from the University of Nebraska-Lincoln. After completing his Ph.D. at Iowa State, he worked as the Extension Agricultural Economist at the Northwest Research and Extension Center in Colby and was Northwest Area Extension Administrative Director starting in 2003 before returning to his Extension Agricultural Economist position in January 2007. His ongoing extension and applied research interests and efforts are in the areas of a) grain market supply- demand analysis, bioenergy impacts and risk management strategies, b) grain industry market structure, conduct and performance – focusing on grain handling and transportation issues, and c) economic analysis of irrigated and dryland cropping systems, and associated cropland leasing arrangements.

Abstract/Summary Changes in the competitive structure of the Kansas grain storage, handling, and transportation industry at the local level between the 2007-2008 and 2014-2015 are examined – along with changes in factors that are hypothesized to have influenced these adjustments in Kansas grain industry structure. The analysis focuses on changes in Kansas rail capacity access, trends in business location consolidation and ownership-type by region of the state, the locational proximity of grain storage capacity and numbers of competitors to intensity of grain production and livestock feeding, ethanol plants, and wheat mills.

A complementary focus of this paper is on how trends in Kansas production of corn, sorghum, wheat and soybeans compare to the evolution of both off- farm (commercial) and on-farm storage of these same crops over the 1969- 2015 period. Of particular interest will be how Kansas production and quarterly stocks data over time coincide with the more comprehensive Kansas grain industry data during the 2007-2008 and 2014-2015 periods. The Changing Competitive Structure of the Kansas Grain Handling & Transportation Industry

DANIEL O’BRIEN BRIAN BRIGGEMAN

The Situation – Changes in the Kansas Grain Industry  Changes have occurred in…

o Physical grain storage & handling capacity of

o Competitive organization & consolidation of Agribusinesses

o Access to railroad transportation

 Other factors…

o Periods of both short & large crops  grain storage issues

o Ethanol plants, Cattle Feeding, Dairy Industry growth Purpose & Focus of this Study

 To examine changes in the competitive structure of the Kansas grain storage, handling & transportation industry during the 2008 – 2015 period & their causes

 Analysis of trends in Kansas grain production relative to changes in on-farm & off-farm grain storage (1969-2015)

• Compared to 2008 & 2015 Kansas grain storage

Data – Grain Industry Structure

1) Grain elevator location, business type & storage capacity

2) Access to rail service (by grain elevators) & by which Railroad

3) Rail car capacity of Elevators, including Shuttle Train facilities

4) Proximity & #s of competing elevators (affiliated & non-affiliated)

5) Ethanol plant & wheat mill proximity to grain elevators

6) Intensity of grain-livestock production by county & region to each grain elevator Data Resources o Grain Elevator Characteristics

• 2007-2008 & 2014-2015 Kansas Grain & Feed Assoc. Directories o Railroad Info: BNSF, Union Pacific, & Other online sources o Public information (via the Web & personal contacts) • Directories, google satellite images, grain business websites, etc. o USDA NASS Quick Stats (National Agricultural Statistics Service) o Interviews with Managers Kansas Grain Elevators – 2015/2016

More Data – USDA Grain Production & Storage info

 On-Farm & Off-Farm Grain Storage & Production #s

• Corn, Grain Sorghum, Wheat & Soybeans

• Both Kansas & data

• Time Period: 1969-2016 Kansas Grain Elevators & Processors

 All Grain Elevators (#): 695 (2008) > 687 (2015)

 Grain Elevators by Business Type o Cooperative 484 (2008) = 484 (2015) (no change) o Independents 205 (2008) > 198 (2015) (-3.4%) o Joint Ventures 6 (2008) >5 (2015) (-17%)

 Kansas Agricultural Crop Processors o Wheat/Grain Processors 12 (2008) = 12 (2015) (no change) o Soybean Processors 2 (2008) =2 (2015) (no change) o Ethanol Plants 8 (2008) =8 (2015) (no change)

Kansas Off-Farm Grain Storage Capacity

 Total Kansas Grain Elevator Storage Capacity

o Upright Storage 774 mln bu(2008) < 809 mln bu(2015) (+4.5%)

o Flat Storage 135 mln bu(2008) < 176 mln bu(2015) (+30%)

o Total Storage 907 mln bu(2008) < 985 mln bu(2015) (+8.6%)

o Warehouse #s 77.4 k-tons(2008) < 93.7 k-tons(2015) (+21%) Kansas Grain Storage Capacity by Elevator

 Total Grain Storage Capacity per Elevator o Average: 1,304,075 bu(2008) < 1,433,357 bu(2015) (+10%) o Median: 725,500 bu(2008) < 840,000 bu(2015) (+16%) o Maximum: 47,000,000 bu(2009) < 40,100,000 bu(2015) (-15%)

 “Upright” Grain Storage Capacity per Elevator o Average: 1,127,758 bu(2008) < 1,179,347 bu(2015) (+4.6%) o Median: 656,500 bu(2008) < 733,500 bu(2015) (+12%)

 “Flat” Grain Storage Capacity per Elevator o Average: 199,490 bu(2008) < 256,099 bu(2015) (+28%) o Median: 0 bu(2008) =0 bu(2015)

Grain Storage Capacity by Business Type 2008 vs 2015

9,000 8,070 8,000 Average Storage Capacity 7,190 7,000 Median Storage Capacity 6,000 5,000

1,000 Bushels 4,000 3,000 2,267 2,112 1,735 2,000 1,340 894 1,107 1,000 720 829 764 844 0 COOP COOP Indep Indep Jnt Vntr Jnt Vntr 2008 2015 2008 2015 2008 2015 Business Type & Year Factors Affecting Elevator Competition in Kansas Grain Markets

 Feedgrain Demand for Livestock Feeding

 Consolidation of Local Grain Elevators o Formation of multi-location cooperatives o “Strategic” entry of national firms into local markets

 Grain Ethanol Plant Development

 Railroad Infrastructure Changes o Emphasis on Shuttle (75-110 cars) Train facilities o “Short Line” de-emphasis &/or abandonment over time

Market Factors Expected to Affect Local Basis & Cash Grain Prices…

 Competitive Environment (# of competitors) o Issue: Affiliated versus Nonaffiliated Firms

 Supply/Demand Conditions in Local Market o Issue: Equilibrium $ for grain S/D in local markets

 Elevator Grain Handling & Storage Capacity o Issue: Local market share (cost structure & market power-leadership)

 Form of Business Organization & Multi-Site Area Coverage o Issue: Cooperative dividends reflected in grain $s (????) Economic Principles @ Work

“Oligopsonistic” Competition likely exists among grain elevators in local-regional grain markets

 Regional competition among a small # of non-affiliated grain elevators (i.e., competing grain buyers) o Reflected in competitive local grain basis bids

 Barriers to entry into local markets o Cost of facilities for grain handling & storage o Rail car handling facilities access & scale/size issues o Affiliated elevators seek to secure procurement areas for grain

Economies of Scale & Scope

 Scale Economies o Theory: “Average cost falls as firm output increases”  Cost efficiency improves as firm – facilities grow larger

 Scope Economies

o Theory: “It is less costly for 1 firm to perform 2 integrated activities than for 2 specialized firms to perform them separately”

 Relevance to the Kansas Grain Industry o Grain procurement ability of multiple elevator companies o Efficiencies of large scale grain handling facilities Transmitting Grain Prices$ Through Grain Market Systems

 Impact of Shuttle Train Facilities on local grain prices? o Lower rail carrier rates & access during peak demand

 “Upstream” vs “Downstream” locations o “Upstream” – Coming from an upstream location through a grain elevator to get to another final grain user located downstream

o “Downstream” – A location closer to a final grain user than an upstream grain elevator

o “Cross Region Arbitrage” – Often via truck transportation • Responding to grain bids from outside regular sales region

Focus on Rail Transportation by Location & Region in Kansas Kansas Railroad Lines & Grain Elevator Map - 2013

# of Kansas Grain Elevators Served by Railroad Companies - 2008 vs 2015 200 Year 2008 Year 2015 160 156155 151 124 120

72 80 62 48 46 31 # Grain Elevators 40 26 18 25 18 14 8 9 10 0 0 Union BNSF K&O KYLE* SSW SKOL CKRY NCKR* Other Pacific BNSF Shuttle Loader Locations in Kansas

BNSF Shuttle Loaders in NE, KS, OK, IA UP Shuttle Loader Locations in Kansas

UP Shuttle Loaders in NE, KS, OK, IA Kansas Rail Access & Handling Capacity 2008 2008 2015 2015 Category # Elevators % of Total # Elevators % of Total No Rail Service 233 33.5% 280 40.8% Rail Access 457 66.5% 407 59.2%

2008 2015 % Change Category # Elevators # Elevators 2008 to 2015 0 to 49 rail cars 416 364  Down 13% 50 to 99 railcars 16 12  Down 25% 100+ railcars 25 31  Up 24%

All KS Railcars 8,875 7,717  Down 13%

Kansas Rail Access & Handling Capacity 2008 2008 2015 2015 Category # Elevators % of Total # Elevators % of Total No Rail Service 233 33.5% 280 40.8% Rail Access 457 66.5% 407 59.2%

2008 2015 % Change Category # Elevators # Elevators 2008 to 2015 0 to 49 rail cars 416 364  Down 13% 50 to 99 railcars 16 12  Down 25% 100+ railcars 25 31  Up 24%

All KS Railcars 8,875 7,717  Down 13% Kansas Elevator Rail Capacity - 2008 # Rail Cars Handled by Business Type (per Location)

350 302 300 250

200 168 150 113 100 65 50 15 2 1 5 11 0 7 3

Number of Grain Elevators 0 0 Cars 0-49 Cars 50-99 Cars 100+ Cars

Cooperatives 2008 Independents 2008 Joint Ventures 2008

Kansas Elevator Rail Capacity – 2015 # Rail Cars Handled by Business Type (per Location)

Versus 2008 350 302 – 113 – 1 Major changes in grain elevator Versus 2008 300 168 – 65 – 2 279 rail car capacity have occurred 250 over the 2008-2015 period in Kansas 193 200 150 87 85 Versus 2008 Versus 2008 100 5 – 11 – 0 7 – 15 – 3 50 17 1 002 10 10 4

Number of Grain Elevators 0 0 Cars 0-49 Cars 50-99 Cars 100+ Cars

Cooperatives 2015 Independents 2015 Joint Ventures 2015 KS Elevator Railcar # Changes: 2008-2015 # Rail Cars Handled by Business Type (per Location)

5,000 4,622 3,918 4,000 3,728 3,557

3,000

2,000 Number of Railcars 1,000 335 432 0 2008 Railcar Capacity 2015 Railcar Capacity

Cooperatives Independents Joint Ventures

Crop Production 2005-2008 vs Elevator Capacity 2008 by Kansas CRD*

350 232% 300.0% 187% 203% 145% 123% 200.0% 300 89% 84% 86% 91% 100.0% 250 220 197 0.0% 200 180 165 -100.0% 150 136 126 126 107 112 108 -200.0% 100 89 57 61 59 63 69 68 -300.0% 50 33 -400.0%

Million Bushels 0 -500.0% NW WC SW NC Central SC NE EC SE

Kansas Crop Reporting Districts

Wheat/Corn/Sorghum/Soybeans Off-Farm Storage % Grain Prodn / Off-Farm Storage Crop Production 2012-2015 vs Elevator Capacity 2015 by Kansas CRD*

191% 192% 350 139% 200.0% 134% 136% 114% 97% 83% 78% 300 100.0% 250 212219 214 0.0% 200 -100.0% 156 166 137 150 127 -200.0% 119 115 94 94 89 82 100 68 -300.0% 61 53 62 50 32 -400.0% Million Bushels 0 -500.0% NW WC SW NC Central SC NE EC SE Kansas Crop Reporting Districts Wheat/Corn/Sorghum/Soybeans Off-Farm Storage % Grain Prodn / Off-Farm Storage

Changes in Crop Production ÷ Elevator Capacity by Kansas CRD from 2008 to 2015

300%

250% 232% 203% 200% 187% 191% 192% 145% 150% 134% 139% 136% 123% 114% 97% 89% 91% 100% 83% 84%78% 86%

% ProdnStorge Off-Farm / 50%

0% NW WC SW NC Central SC NE EC SE Kansas Crop Reporting Districts 2008 % Grain Prodn / Off-Farm Storage 2015 % Grain Prodn / Off-Farm Storage Focus on Grain Truck Transportation by Location & Region in Kansas

Elevators Within 55 Miles of an Ethanol Plant by Kansas CRD in 2008 & 2015

120

100

80 72 71 72 64 60 57 55

36 40 30 31 31 27 25 21 20 18 7 0 1 0 0 Miles to KS Ethanol Plant NW WC SW NC Central SC NE** EC SE Kansas Crop Reporting Districts

July 2008 August 2015

Minimum Distances to Wheat Mills by Kansas CRD in 2015

300 Closest Wheat Mill 2nd Closest 3rd Closest 250 212 198 197 197 200 204 171 191 150 133 141 139 99 122 100 114 79 119 119 104 74 98 92 92 Miles to KS Wheat Mill 76 50 61 6060 68 69

0 NW WC SW NC Central SC NE EC SE Kansas Crop Reporting Districts Competitive Elevators within 15 & 35 miles by Kansas CRD in 2015 (Affiliated & Non-affiliated)

40 35 30 30 25 24 23 19 20 17 18

15 11 11 10 10 6 6 7 4 4 4 4 5 5 # of Grain Firms 5 3 3 2 3 3 3 2 3 2 0 NW WC SW NC Central SC NE EC SE

Kansas Crop Reporting Districts ALL Firms within 15 mi Non-Affiliated within 15 mi Non-Affiliated within 35 mi

Comparing Grain Production to Grain Stocks

 Analysis of trends in Kansas & U.S. grain production relative to changes in on-farm & off-farm grain storage

• 1969/70 - 2015/16 marketing years

• Combined Corn, Grain Sorghum, Soybeans & Wheat production & grain stocks

• Kansas - compared to 2008 & 2015 commercial grain storage

 Hypothesis: The Kansas & U.S. grain industry will construct enough storage capacity to meet its needs over time Kansas Grain Production & Grain Stocks Trends for the 1969/70 – 2015/16 Marketing Years Ethanol & Soy Exports 1,600 1,400 1980’s Farm Crisis & Freedom to Farm 1,200 1,000 800 600

Million Bushels 400 200 0

12/1 Cn-GS-Sb-Wht Stocks 12/1 Off-Farm Stks Production Cn-GS-Sb-Wht Off-Farm 3-YrAvg Off Farm 7-YrAvg

Kansas Grain Production & Off-Farm Stocks Trends for MY 1969/70 – 2015/16 Ethanol & Soy Exports 1,600 1,400 1980’s Farm Crisis & Freedom to Farm 1,200 1,000 800 600

Million Bushels 400 200 0

12/1 Off-Farm Stks Production Cn-GS-Sb-Wht Off-Farm 3-YrAvg Off Farm 7-YrAvg Kansas Grain Production & Off-Farm Stocks Trends Since MY 2006/07 Plus Kansas Storage (2008 & 2015)

1,400 1,200 1,065 985 1,000 907 832 861 800 774 809 600 645 400 Million Bushels 200 0 2006/07 2007/08 2008/09 2009/10 2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 2016/17

12/1 Cn-GS-Sb-Wht Stocks 12/1 Off-Farm Stks KS Upright Off-Farm Storage KS All Off-Farm Storage Production Cn-GS-Sb-Wht

Kansas Grain Production & On-Farm Stocks Trends for MY 1969/70 – 2015/16 Ethanol & Soy Exports 1,600 1,400 1980’s Farm Crisis & 1,200 Freedom to Farm 1,000 800 600

Million Bushels 400 200 0

12/1 Off-Farm Stks Production Cn-GS-Sb-Wht Off-Farm 3-YrAvg Off Farm 7-YrAvg U.S. Grain Production & Grain Stocks Trends for the 1969/70 – 2015/16 Marketing Years 25,000 Ethanol & Soy Exports 1980’s Farm Crisis & 20,000 Freedom to Farm

15,000

10,000 Million Bushels 5,000

0

12/1 Cn-GS-Sb-Wht Stocks 12/1 Off-Farm Stks Production Cn-GS-Sb-Wht Off-Farm 3-YrAvg Off Farm 7-YrAvg

U.S. Grain Production & Off-Farm Stocks Trends for the 1969/70 – 2015/16 Marketing Years 25,000 Ethanol & Soy Exports 1980’s Farm Crisis & 20,000 Freedom to Farm

15,000

10,000 Million Bushels 5,000

0

12/1 Off-Farm Stks Production Cn-GS-Sb-Wht Off-Farm 3-YrAvg Off Farm 7-YrAvg U.S. Grain Production & On-Farm Stocks Trends for MY 1969/70 – 2015/16 25,000 Ethanol & Soy Exports 1980’s Farm Crisis & 20,000 Freedom to Farm

15,000

10,000 Million Bushels 5,000

0

12/1 Off-Farm Stks Production Cn-GS-Sb-Wht Off-Farm 3-YrAvg Off Farm 7-YrAvg

Causes of Kansas Grain Industry Changes

 Large crops in 2013-2016 are straining local grain handling & storage capacity  Building more storage

 Railcar Shuttle Loaders have been built by grain elevators to assure they have access to railcar shipping

o Fits preference of major Railroad’s for 100+ railcar shuttle trains

o Local consolidation of grain elevators is partly driven by need for adequate procurement areas & supplies to have enough volume of grain to efficiently operate 100 railcar shuttle loaders Causes of KS Grain Industry Changes (more)

 With more large multiple-location firms the # of locally competitive non-affiliated grain bids may have declined

 Kansas ethanol plants have affected….

o The function of local grain elevators (some “store & feed” plants)

o The directional flow of grain to the “demand center” plants

o Regional feed supply-demand due to availability of DDGS

  Farmer use of Semi-Trucks for regional hauls (arbitrage!)

Questions?

Daniel O’Brien – Extension Agricultural Economist Kansas State university [email protected] KSUGrains on Twitter & Facebook

www.AgManager.info