Kub's Den

Growing a crop (or producing any commodity) is only about half the battle. Producers must also get that commodity into the hands of eager end users, whether directly from the farm or through a complex supply chain of intermingling and merchandising. That's why transportation costs are so critical to the health of the grain markets -- when they are high, they damage the prices received by producers and sometimes simultaneously increase the prices paid by end users for products they may already be struggling to afford.

Trucking costs hit an all-time high in 2022, according to survey calculations released last month by the American Transportation Research Institute (ATRI), which showed total marginal costs of trucking at $2.25 per mile. That's up 21% over the previous year's marginal costs of $1.86 per mile. (https://truckingresearch.org/…)

These costs were highest in the Southeast ($2.30 per mile) and lowest in the West ($2.16), but elevated everywhere by high fuel costs, which made up 28% of the total calculation, and driver wages, which made up 32% of the total calculation.

Diesel fuel prices have come down roughly $2 per gallon since hitting their 2022 peak about a year ago, but anyone who's fueled up equipment lately will confirm that they're still pretty stiff. USDA's weekly series of Grain Transport Cost Indicators show diesel at $3.81 per gallon, or 255% of the baseline values they indexed starting in the year 2000.

Curiously, these high diesel trucking costs have been stickier than the high prices of other grain shipping categories. Barge shipping costs are only 204% of their year 2000 baseline; ocean shipping rates are either 209% (for a Gulf route to Japan) or 183% (for a Pacific route to Japan) of baseline values, and even rail shipping costs, which are also sensitive to fuel prices through a fuel surcharge, have softened relatively more than trucking costs.

What has caused this divergence in fortune for these various shipping categories?

The clearest explanation seems to be the poor export scenario for U.S. grains this summer. Cumulative U.S. exports of all wheat, corn and soybeans is only 81% of last year's progress at this point in the marketing year. Which is to say, almost at the Aug. 31 end of a disappointing 2022-23 marketing year. Corn exports, specifically, have been a bit of a black hole, with only 35 million metric tons (mmt) shipped out of the country as of the end of June, compared with 52 mmt at this time last year or compared with 67 mmt during the total 2020-21 marketing year.

So, while the relative softening of freight prices in certain modes of transportation (the barges that carry corn down to the Gulf or the shuttle trains that carry corn into Mexico) seems like it should be a nice thing for origin prices, in reality, freight weakness is likely a symptom of export weakness more than a cause of basis strength.

Because basis values are strong enough as it is, domestic demand remains urgent. Basis bids for corn in Colorado, western Kansas or the panhandle of Texas are still +$1.00 or more, in a region that still needs corn to feed to cattle and where drought years have created a scarcity in local supply. In Iowa, and as far east as Ohio too, old-crop corn basis is +$0.80 or more because end users (ethanol plants, or pork or poultry feeders) need to keep operations running until the 2023 crop becomes available. These basis figures for old-crop corn are hard to interpret in late July while the nearby September futures contract is reflecting the market's outlook for new-crop grain, but they're nevertheless an indication of strong domestic demand.

Many of the destination points for hot domestic demand are served by trucks though -- not barge or rail. So, the market will get it there, one way or another, but the freight prices will reflect the relative demand for the various transportation methods. When all the old-crop corn is being gobbled up by American livestock and American ethanol plants, there simply isn't much to share with the rest of the world. Truck freight prices remain elevated because they demonstrate this difference between lackluster exports versus the fierce domestic demand for grain.

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Comments above are for educational purposes only and are not meant as specific trade recommendations. The buying and selling of grain or grain futures or options involve substantial risk and are not suitable for everyone.

Elaine Kub, CFA is the author of "Mastering the Grain Markets: How Profits Are Really Made" and can be reached at masteringthegrainmarkets@gmail.com or on Twitter @elainekub.

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