USDA Says DM&E Rail Project Would Slash Farm Subsidies
By CARSON WALKER , Associated Press Writer
SIOUX FALLS S.D. (AP) - The Dakota, Minnesota & Eastern Railroad expansion could save federal taxpayers $240 million a year in reduced corn subsidy payments, according to a report released Thursday.
The U.S. Department of Agriculture document, entitled “Benefits from the DM&E Rail Expansion,” says the added rail capacity would also cut farm program payments for soybeans, wheat and other grains.
Rail competition lowers shipping rates, which increases profits to farmers, the report states.
“The presence of effective rail-to-rail, rail-to-barge or rail-to-truck competition is necessary to stimulate lower rail rates for shippers. When effective competition is present, rail rates are much lower. Generally, savings from lower transportation costs go directly to agricultural producers,” it says.
U.S. Sen. John Thune, R-S.D., said it confirms the scope of the project.
So why wouldn’t reduced transportation costs mean lower prices for agricultural consumers? Does the agricultural consumer (flour mill, ethanol plant, etc.) have control over the price? “Okay, we are going to pay $3.55 per bushel, and we don’t care how you get it to us but the transportation costs are on you.” Or what market mechanisms are in place that the reduction in transportation costs benefits only the producer?
That is how the farmers/co-ops make their money. The difference between the price of their particular commodity (wheat, corn, soy, etc) and their cost to produce it plus transportation equals their net revenues. So, the lower the transportation cost, the more the agricultural producers make per unit.
But what’s to prevent the agricultural consumers from reducing the price that they are willing to pay to the producers if they know that the transportation costs have been reduced?
I doubt it, as the prices of commodities are based upon supply and demand and the transportation cost is a fraction of the cost of the commodity itself. Reducing the price would merely cause the commodity to flow to competitors domestic or foreign and could result in the various consumers damaging themselves. Remember that the consumers will try to take advantage of prices, but because consumers have different needs (food, animal feed, chemical production, and others) they are willing to pay somewhat different prices depending upon their own business and margins. Accordingly, there is no unified consumer market.
Prices for argicultural commodities are generally expressed in “points” relative to the exchange trading price. The farm-gate price is nearly always several points lower, because of transportation and other costs. The USDA seems to be working on the assumption that the farmers along the route will get better points because of improved transportation.
However, there will also be a downward pressure on the exchange trading price if the access to market of a large volume of grain or oilseed is improved, or farmers along the route increase their output of commodity crops as a result of getting better prices for them, so the saving on subsidies might not actually be realised.
(I’m not a farmer, but have had good cause to listen to the concerns of quite a few farmers over the last few years.)
But the way I see it (and I might be wrong) is that farmers who are located in the boonies will always be disadvantaged when it comes to transportation costs. Competition might reduce the disadvantage to some degree, but those farmers will still have higher transportation costs than farmers who happen to live much closer to the buyers of their produce, particularly since the agricultural buyers are almost always located near areas that have multiple alternatives for transportation.
Actually, I’ve always maintained that farm subsides have a lot to do with RR’s.
Such subsidies are in fact unintended mitigation for the various unnatural costs borne by farmers, more so environmental regulations, but a significant portion due to railroads’ monopolistic pricing for transporting farm products.
Take away the environmental regs and monopolistic pricing, and we can then start talking about getting rid of ag price supports.