Rail costs to compete with trucking corn for Ethanol plants
In last week's column, we focused on corn and the location decision for a new ethanol plant. Two themes were emphasized. First, there are a lot of new plants that will begin drawing down the excess supplies in key corn growing states.
This will make for a competitive environment for buying corn in a local area. Second, even with intense ethanol development in states like Iowa, Nebraska, and others, corn prices there are still cheaper than areas where corn is less plentiful.
Which brings us to the topic of this week's column: If you are in an area with limited or no supplies of corn can you overcome this problem with imports of corn by rail or barge? Stated another way, will it be cheaper to get corn from a low-price Midwest market by rail/barge as compared to your local area which is a deficit area.
The answer depends, but in most cases bringing in corn by rail will be more expensive then getting it from the local market. However, even in a grain deficit area what likely will happen is you will get as much local corn as is feasible based on prices and trucking costs. Eventually, the plant will drive up local prices enough that a switch to rail is more cost effective then sourcing from distant truck markets around the plant.
As an example, we recently analyzed a proposed plant site in a region outside of the Corn Belt. It had reasonably good corn supplies and was on a rail line to receive corn shipments from Iowa. Within a 50-mile radius of the proposed plant, there was around 10 million bushels of corn, enough to supply about 55 percent of a 50 million gallon per year plant. If you went as far as a 100-mile radius, there was enough corn to supply the entire plant.
For this plant, is it cost effective to try and acquire supplies from 100 miles away and pay the trucking costs (or raise the plant price enough to have grain trucked to the plant)? Either way, trucking costs for 100 miles is not cheap at today's fuel prices -generally $0.25 to $0.35 a bushel depending on market conditions. As such, it may be a better solution to acquire some local corn, but eventually turn to rail.
This is, in fact, what we found in our analysis. For this plant, if it only tried to acquire corn from the local truck market, it would need to raise prices by about $0.29 a bushel to get the necessary supplies. However, by tapping into rail, it could limit that price impact.
It turned out that after a $0.18 price impact from buying local corn, the plant could acquire corn by rail out of Iowa for about the same price. As a result, it ended up with about one third of its supplies from local corn by truck and the remaining two-thirds by rail.
What if you have barge capabilities, will that limit the price impact further? Probably not, although barge is a cheap mode of transportation relative to rail, river markets are priced higher relative to rail markets because of this cost savings. As such, when you compare rail versus barge as a means of sourcing corn they generally work out to be the same delivery price to the plant.