13-1473
lune 1984

 

Rail Freight Services

for Country Elevators
"i in the Texas Panhandle

The Texas Agricultural Experiment Station, Neville P. Clarke, Director, The Texas A&M University System, College Station, Texas

Contents v
INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . l

ANALYTICAL PROCEDURE AND STRUCTURE OF MODELS . . . . . . . . . . . . . . . . . . . . . . . . . 2

DATA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

Wheat Supply and Farm Storage Capacity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

Farm Assembly Cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

Farm Storage Cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

Country Elevator Storage, Gross Margins, and Cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Investment Costs of Upgrading Country Elevators to Handle
Multicar Grain Shipments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

Annual Fixed Costs Associated with Upgrading Country Elevators . . . . . . . . . . . . . . 7

Grain Inventory Costs . . . . . . . . . . . . . . ." . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

Inland Terminal and Port Terminal Costs and Storage Capacities . . . . . . . . . . . . . . . 7

Commercial Truck Transportation Rates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

Railroad Rates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 8

Grain Inspection and Grading Costs at Upgraded Elevators . . . . . . . . . . . . . . . . . . . . 9

RESULTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

Average Wheat Production Level . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

High and Low Wheat Production Levels . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . l0

Elevators’ Declining Gross Margins . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . l0

Effect of Not Operating the Study Region Short-Line Railroad . . . . . . . . . . . . . . . . . . . ll

SUMMARY and CONCLUSIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12

LITERATURE CITED . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . l4

ACKNOWLEDGEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . l4

9 CONTRACTING RAIL FREIGHT SERVICES FOR

l9

COUNTRY ELEVATORS IN THE TEXAS PANHANDLE

Stephen Fuller
Department of Agricultural Economics
Texas Agricultural Experiment Station

College Station, Texas

Summary

The Stagger Rail Act of 1980 has legalized con-
tracts between shippers and carriers. Generally, con-
tracts between rail carriers and grain shippers involve
volume commitments from the shipper in exchange for
lowered rates. Multicar grain shipments lower railroad
costs; accordingly, railroads are often willing to con-
tract at reduced rates to grain handlers making mul-
ticar, point-to-point shipments. Unfortunately, many
country elevators are not capable of making multicar
grain shipments for which significant rate reductions
are offered. This study focuses on the economic feasi-
bility of upgrading l0 elevators to load-out multicar
wheat shipments in a 15-county area in the upper
portion of the Texas Panhandle. The study shows that
careful and thorough analysis must be carried out by
elevator management before investing in multicar
shipping capacity and contracting with railroads.

l

l

i

CONTRACTING RAIL FREIGHT SERVICES FOR
F‘ COUNTRY ELEVATORS IN THE TEXAS PANHANDLE

Stephen Fuller

INTRODUCTION

Contracts between shippers and rail carriers
were legalized by the Staggers Rail Act of 1980.
Contracting allows the railroads to plan service
and allocate equipment more efficiently while

\ simultaneously assuring shippers of specific ser-

vices at established rates. Contracting permits
railroads and shippers to recognize special trans-
portation requirements and to enter into agree-
ments which may bring economic advantage to
both parties (6).

Negotiated railroad contracts generally in-
volve rate and service provisions and may include
additional features which are important to either
shipper or carrier. The inflexible tariff rates of
common carriers may be replaced by a fixed rate
or any rate schedule the parties to the contract may
devise and agree upon. Other contract provisions
may involve a change of service levels to better fit
shipper needs. Additional contract provisions may
deal with dispatch, noncompliance, methods of
adjudication, and damage provisions (1).

Many contracts between rail carriers and
grain shippers involve volume commitments from
the shipper in exchange for lower rates. Railroads
are able to reduce operating costs through multi-
ple-car, point-to-point grain movements. Multicar
shipments generally expedite equipment han-
dling, shorten equipment turnaround, and permit
more productive use of railroad capital. Therefore,
railroads are willing to contract at reduced rates to
grain handlers that make multicar, point-to-point
shipments. Unfortunately, many country elevator
facilities are not capable of making multiple car-
load shipments for which significant rate reduc-
tions are offered. Most contract arrangements
allow the grain shipper only 24 hours for purposes
of loading the multicar unit. Most country eleva-
tors do not have the necessary rail car loading
capacity nor track space (rail car holding capacity)
to accommodate multicar shipments, thus, sub-
stantial investment may be necessary before con-
tracting can be an alternative (5). Presumably, the
lower rail rates resulting from new elevator invest-
ment would ultimately be reflected in higher farm-
er grain prices which would subsequently expand
the elevators’ market area and volume. Obviously,
the feasibility of upgrading country elevators and
:ontracting is dependent on the economic returns
associated with the investment in new multicar
handling facilities.

This study focuses on the economic feasibility
of upgrading IO country elevators to load multicar
wheat shipments in a 15-county area in the upper
portion of the Texas Panhandle (Figure l). The l0
selected elevators are located at Dalhart, Hartley.
Stratford, Lautz, Etter, Dumas, Spearman, Perry-
ton, Panhandle, and Pampa, Texas. The economic
feasibility of upgrading the elevators is evaluated
under different rail rate reductions, investment
costs, wheat production levels, and elevator gross
margins. In addition, the analysis examines the
effect of a lack of short-line railroad operation
(Texas North Western) on the feasibility of upgrad-
ing investment in nearby country elevators. The
selected study region is a major producer of corn,
sorghum, and wheat; however, the intensive cattle
feeding activity in the area consumes much of the
feedgrain production. Thus, wheat is the principal
grain exiting the region and in most cases is des-
tined for export. It is estimated that 75 to 95% of the
area's annual wheat production moves to foreign
destinations. Since export movements lend them-
selves to multicar, point-to-point hauls, the eco-
nomic feasibility of upgrading is based only on
anticipated wheat volumes at the l0 potential mul-
ticar loading facilities.

The 15-county study region is located approxi-
mately 725 miles from Texas Gulf ports. This re-
gion is served by country elevators located at 53
separate cities; 44 of these locations are served by
railroads while 9 locations have only truck service.
The Atchinson, Topeka and Santa Fe (ATSF), Bur-
lington Northern (BN), Texas North Western (TNW),
and Southern Pacific (SP) railroad companies oper-
ate in the study area. The ATSF and BN railroads
are the area's principal grain carriers. Historically,
the region's railroads offered a single-car transit
rate which allowed wheat to be shipped from coun-
try elevators to Gulf ports on a single car through-
rate that included a stop-over at inland terminals.
A grain shipper's transportation charge on export-
destined wheat was not unfavorably affected by
transshipment at inland elevator locations, ac-
cordingly, substantial volumes moved through
these facilities. Much of the study area's wheat
production moved to inland terminals at Enid,
Oklahoma and Amarillo, Texas. In 1981 ATSF in-
troduced multicar rates which continued to feature
transit at inland terminals. These rates allowed
one or more cars to be shipped from a country
elevator to a transit station (inland terminal) and
reshipped to a port facility in not less than 60 car

     

HUTCHWSON

   
 

ROBERTS

OLDHAM POTTER

 

 

Approximate location of arable land

I I Location of potential multicar loading facility
""""'* Operating railroad line
BN Burlington Northern
ATSF Atchinson, Topeka and Santa Fe
SP Southern Pacific

TNW Texas North Western

Figure 1. Fifteen-county study region with railroads, arable land, and country elevator locations con-
sidered as potential multicar grain loading facilities identified.

shipments. More recently the ATSF has offered multicar units. Additional elevator revenues as-
several shipment options. These include: (l) the sociated with the upgraded elevators’ increase in
country elevator making direct 5-car shipments to wheat volume resulting from the lower multicar
port elevators, and (2) the country elevator ship- rates are calculated with information generated in
ping one or more cars to a transit station (inland this research phase. In the second phase, elevator
terminal) for reshipment to a Gulf port elevator in upgrading and operating costs are subtracted from
not less than 25-car lots. In most cases, the transit the added revenues to calculate return on each
station guarantees rates to the selling country ele- elevator's upgrading investment. Insight into the
vator which reflect 25-car, out-bound shipments. desirability of remodeling the country elevator to

handle multicar shipments is provided by the cal-
culated return on investment.

The initial phase is accomplished with a least-
cost network flow model which includes essentialfl

ANALYTICAL PROCEDURE
AND STRUCTURE OF MODELS

Study objectives were accomplished in two elements of the study area's export wheat market-
separate phases of research activity. The initial ing system. The decision to employ a least-cost
phase involves estimating wheat receipts and framework to estimate wheat receipts at the up-
gross margin revenues at the upgraded country graded elevators is based on several assumptionw
elevators as these facilities’ export rail rates are First, it is assumed that elevators operate in a
adjusted downward to reflect their shipments in competitive environment and their farmer offering

price is a reflection of costs incurred in grain han-
dling and transportation of grain to principal mar-

I kets; i.e., if an e1evator's transportation charge is

lowered, the elevator will offer an increased grain
price to the farmer. Further, it is assumed that a
farmer's elevator marketing decision is based on
nearby e1evator's offering prices and delivery costs
to these elevators.

A cost-minimizing network model is developed
to represent elements of the entire export grain
marketing system. The model's principal elements
include: (1) farm storage cost; (2) farmer grain de-
livery costs; (3) truck and rail transportation rates
or costs that link country elevators, upgraded

$country elevators, inland terminals, and port ter-

minals; and (4) elevator facilities grain handling
costs or gross margins and storage costs.

The analytical model represents a wheat crop
year (Iune 1 to May 30). The crop year is subdivided
into three time periods to make a chronological
analysis. Based on historical data it was deter-
mined that the first time period, the harvest period,
includes 21 days. During this time period annual
wheat supply is generated. The following 45-day
period represents post-harvest repositioning activ-
ity, and the final period is the remaining 299 days
of the crop year.

To develop the network model, the 15-county
study area was subdivided into 3 >< 3 mile areas (9
square miles) and 4 X 4 mile areas (16 square
miles) resulting in 1,251 production origins or
farms. The harvest-time wheat supply and avail-
able wheat storage at each production origin was
predetermined. Producers may store their wheat
production at farms (production origins) for later
delivery by farm truck to country elevators or up-
graded country elevators or they may ship to these
facilities at harvest. Any country elevator or up-
graded country elevator within 30 miles of a farm
represents a potential delivery point. Wheat must
be gathered and sent to country elevators or up-
graded country elevators prior to further movement
through the export grain marketing system.

Country elevators and upgraded country ele-
vators included in the network model have prede-
termined quantities of storage capacity available
for area wheat production. Country elevators may
ship to an upgraded elevator, inland terminal, or
Gulf port terminal. Any movement from country
elevator to upgraded elevator is constrained to
less than 80 miles. Truck and rail modes are avail-
able for all country elevator shipments to inland
and port terminals, only truck carriage is available
for movements from country elevator to upgraded
elevators. l

The described least-cost model is used to esti-
mate elevator wheat receipts before and after the

glower multicar rates are introduced at the l0 coun-

try elevators. In addition, the model is used to
evaluate several scenarios that reflect changes in
the economic and wheat production environment.

Analysis with the network model estimates the
effect of changing wheat production levels, alter-
native multicar rate reductions, and nonoperation
of a short-line railroad (Texas North Western) on
volume of wheat received at the l0 studied eleva-
tors. Information on the elevators’ wheat receipts
is subsequently used in the second phase of the
analysis to calculate the effect on return to upgrad-
ing investment.

The return on elevator upgrading investment
is calculated in the second phase of the analysis.
Based on estimated elevator wheat receipts (first
phase) and gross margins (free on board [f.o.b.]
elevator grain sale price - farmer price), elevator
revenues are calculated. Elevators’ estimated
costs are subtracted from revenues for purposes of
estimating returns. In general, the following steps
are followed for purposes of estimating the rate of
return on new elevator investment.

1. Elevator returns, prior to new investment.
are calculated by subtracting estimated
costs from revenues.

2. Elevator returns after investment are cal-
culated and subtracted from returns prior to
the new investment for purposes of estimat-
ing return attributable to the upgrading in-
vestment.

3. Returns attributable to new investment are
divided by the estimated value of this in-
vestment for purposes of calculating a rate
of return.

Analysis is carried out to identify how differ-
ing levels of elevator upgrading investment and
gross margins impact the rate of return on upgrad-
ing investment at the l0 elevators. Rate of return is
estimated for investments necessary to facilitate
loading of 25-, 50-, and 75-car grain shipments and
for six gross margin levels. Rate of return was
estimated with use of a developed computer
model.

The following list identifies data required for
calibration of the identified models and for carry-
ing out the necessary analysis.

1. Production Origins
Quantity of wheat harvested
Wheat storage capacities
Cost of on-farm wheat storage

2. Country Elevators and Upgraded Country

Elevators

Grain handling and storage capacities
Gross margins

Costs of upgrading elevators to accom-
modate multicar shipments

Costs of handling and storing wheat

Grain inventory cost of multicar grain
shippers

3. Inland and Port Terminals
Grain handling and storage capacities
Costs of handling and storing wheat

4. Transportation

Cost of transporting wheat by farm truck
to nearby country elevators

Costs of transporting grain by commer-
cial trucker from country elevators to
upgraded elevators, inland terminals
and port terminals

Rail rates associated with moving wheat
from country elevators to Gulf ports

DATA

This section describes how the parameters
used in this analysis were developed.

Wheat Supply and Farm Storage Capacity

Because annual variability in wheat produc-
tion may impact the expected return on invest-
ment, a historical review of wheat production in
the study area was conducted. This revealed sub-
stantial variability in annual wheat production in
the 15-county region. (Table 1). Between 1970 and
1982 the study area wheat production varied from a
low of 14.1 million bushels (1974) to a high of 48.3
million bushels (1979). County-level production
data also revealed extensive variability. Coeffi-
cients of variation ([standard deviation + mean] ><
100) were estimated for each county's wheat pro-
duction—the estimated parameters range from
35.2 to 58.7%.

To identify whether annual county wheat pro-
duction in the 15-county area varies in a similar
manner, a simple correlation analysis was per-
formed. Results indicate a strong positive correla-
tion between county wheat production levels; this
indicates annual county wheat production in the

TABLE 1. FIFTEEN-COUNTY STUDY AREAS’ ANNUAL WHEAT
PRODUCTION, 1970-82

Wheat Production

Year (1,000 bu)
1970 16,241
1971 15,486
1972 17,542
1973 41 yes
1974 14,149
1975 37,453
1976 30,034
1977 27,752
1978 15,238
1979 48,261
1980 37,876
1991 37,919
1982 37,950

Source: Texas Small Grain Statistics, Texas Department of Agriculture, Sta-
tistical Reporting Service, USDA, Austin, Texas.

15-county study area tends to vary similarly. Thus,

scaling each county's production in a similar man- \ _ g
ner in order to reflect varying study area produc- '

tion levels is a valid procedure. Accordingly, re-
turns to investment were estimated for l0 elevator
locations at regional production levels of 21.6, 28.4,
and 35.7 million bushels. The 28.4 million-bushel
production level approximates average production
while the 21.6 and 35.7 million bushel values ap-
proximate the upper and lower bounds of a 95%
confidence interval estimated for the 15-county
study area wheat production}

A county's wheat production was estimated by
determining the portion which the county had his-

-\

torically contributed to the 15-county area and mul- w A

tiplying this portion by study area production (21.6,
28.4, and 35.7 million bushels). A county's es-
timated production was distributed among its pro-
duction origins (3 >< 3 and 4 >< 4 mile areas) on the
basis of cultivated land area in each production
origin. Quantity of cultivated land in each produc-
tion origin was estimated from the Soil Conserva-
tion Services aerial photographs (7).

To estimate on-farm storage in each county, a
1978 Agricultural Stabilization and Conservation
Service (ASCS) survey was updated by telephone
interviews with ASCS office managers in each of
the 15 counties. Office managers were asked to
verify the reasonableness of the 1978 survey re-
sults and estimate amount of storage added since
1978. Study area counties were estimated to have
14.4 million bushels of on-farm storage. The es-
timated wheat production associated with each
county's production origin was the basis for es-
timating its on-farm storage. (8).

Farm Assembly Cost

Cost of truck-transporting wheat from area
farms (production origins) to country elevators was
based on a Texas Crop and Livestock Reporting
Service publication entitled, "1981 Texas Custom
Rate Statistics." This study showed producers in
the Plains area paying a flat rate of $.10 per bushel
(/bu) for hauls of ll miles and less. For hauls in
excess of l1 miles, the flat rate ($.10/bu) plus a per
mile rate of $.01/bu was applicable; i.e., for a 15 v
mile haul the rate would be $.l4/bu.

‘Several major economic forces appear to affect study area
wheat production. Government programs in the 1960's and
early 1970's curtailed wheat production, thus the low produc-
fion levels In [$70-72 Expanding foreign ‘Wheat demand in the
mid- and late 1970s resulted in expanded wheat production
while increasing energy costs (rising energy costs increased
cost of irrigated feed grain production) in the latter 1970's
improved the relative profitability of wheat production. Es-
timating future study region wheat production involves numer-
ous risks. The study region's average wheat production of 28.4
million bushels appears to be a conservative estimate since
the annual production from 1978-83 approximated or exceeded

the upper estimate of 35.7 million bushels. In view of

moderating foreign wheat demand the more conservative esti-
mate may be preferable for purposes of planning elevator
investment.

Farm Storage Cost

Farm storage cost includes three cost items: (1)
zost of placing wheat into storage, (2) cost of wheat
storage, and (3) cost of removing wheat from stor-
age. The cost of placing wheat into farm storage
was estimated to be $.0Z85/bu while per bushel
removal cost was estimated to be $.0l95. Estimates
of variable on-farm storage cost was based on a
recent study which developed cost budgets for
alternative size steel bins (2). Based on an earlier
survey, it was estimated that 5,000-, 10,000-, and
20,000-bushel steel bins comprised 38, 20, and 42%
of the study areas’ on-farm storage capacity. The
weighted annual on-farm variable storage cost

mwas estimated to be $.18/bu.

Country Elevator Storage.
Gross Margins, and Costs

Country elevator grain storage capacities of
the study area's facilities were taken from federal
and state grain warehouse license directories. De-
tailed information on the grain handling and stor-
age capacities of the l0 renovated facilities was
obtained from interviews with elevator manage-
ment.

To calculate the renovated elevators return on
new investment, information on per bushel gross
margins (f.o.b. elevator grain sale price - farmer
price) and costs were required. Information on per
bushel gross margins was obtained from a survey
of Texas Panhandle country elevators. The survey

was conducted by the Texas Agricultural Exten-

sion Service and Texas Grain and Feed Associa-
tion in August 1982.2 Survey results indicate eleva-
tors to have had an average gross margin of
$.2l5/bu of received Wheat and a per month stor-
age charge of $.U23/bu in 1982.

Based on information provided by financial
institutions and grain elevator management, three
elevator cost models were developed. Costs were
developed for 600,000-, 800,000-, and 1,000,000-
bushel elevator plant firms. This plant size range
approximated that of the l0 elevators to be up-
graded. The plant size cost model, which was most
like the bushel storage capacity of the upgraded
facility, was selected for estimating elevator costs.
Plant depreciation estimates of existing plants
varied and in some cases plants were fully or

 nearly depreciated. Depreciation of existing plants

was not “an estimated expense. However, annual
depreciation expense associated with elevator up-
grading was included in the analysis for purposes
of estimating rate of return on upgrading invest-

..\ment. Calculation of this expense is shown in a

later section.
Full-time personnel was a major expense and
included salaries for a manager, bookkeeper,

¢"\

zSurvey was conducted by Ed Smith, Extension Economist,
Grain Marketing and Policy.

weigh scale operator, and elevator superinten-
dent. Table 2 shows the base salaries of these
employees. Salaries were adjusted to reflect
changing plant volume levels, and were increased
1% for each 10% increase in volume above the
elevators rated storage capacity; i.e., if a l million-
bushel elevator were to annually handle 1.1. mil-
lion bushels, the full-time employee salaries
would be increased by 1%.

The need for part-time employees was based
on the elevator's annual volume. The following
equation was used to estimate hours of part-time
elevator and office help:

Part-time elevator help (hours) = 150.0 +
0.00075V.

Part-time office help (hours) = —300.00 +
0.00075V where,

V = annual elevator volume in bushels
The estimated cost of part-time labor, including
per hour wages and benefits, was $5.30.

A $.02/bu charge represents utility costs. Mis-
cellaneous expenses include grain fumigants, of-
fice supplies, postage, advertising, and mainte-
nance and repair. These cost items are determined
by elevator size. The 600,000-, 800,000-, and
1,000,000-bushel elevator models had an estimated
per bushel miscellaneous expense of $.05, $045.
and $.04, respectively. Inventory insurance was
based on a rate of $.12 per $100 of grain inventory.
Inventory value was based on a 60% occupancy
rate and a per bushel grain value of $3.25. See
Figure 2 for graphed average cost relationships of
the 600,000-, 800,000-, and 1,000,000-bushel cost

models.

Investment Costs of Upgrading
Country Elevators to Handle

Multicar Grain Shipments

On-site inspection by experienced elevator
construction personnel would have been required
to precisely estimate upgrading costs at each stud-
ied country elevator. Since this was not feasible,
an alternative procedure was used. General char-
acteristics of each elevator were collected by tele-
phone interviews with elevator management and
this information subsequently related to individu-
als with experience in remodeling country eleva-
tors for purposes of accommodating multicar grain

TABLE 2. ESTIMATED BASE SALARIES OF FULL-TIME PER-
SONNEL IN THE 600,000-, 800,000- AND 1,000,000-BUSHEL
ELEVATOR COST MODELS, 1982‘

Elevator Cost Model

600,000 800,000 1 ,000,000
bu bu bu
Manager $22,000 $25,500 $29,000
Bookkeeper 1 7,000 20,500 24,000
Scale Operator 15,000 17,500 21,000
Elevator Superintendent 15,000 18,500 22,000

600000- Bushel Model

"25 800,000-Bushel Model

\.

2O

$/ Bushel

1,000,000- Bushel Model

 

5 00 600 700 800 900 1000

1200 1300 1400 1500 1600 1700 1800 1900 2000

Annual Volume (1.000 Bushels)

Figure 2. Estimated average full-time and part-time labor costs, insurance, utilities, and miscellaneous
costs for the 600,000; 800,000; and 1,000,000 bushel elevator cost models.

shipments? Information was collected on storage
capacity of the largest concrete house at each
location, number of legs included in this facility
and their per hour elevating capacity, truck receiv-
ing capacity, per hour grain handling capacity of
the bottom belt, railcar holding capacity, avail-
ability of a car puller and trackmobile, and ability
of the facility to simultaneously receive and load
grain. All study elevators are constructed of con-
crete and most have storage capacity ranging be-
tween .7 and 1.2 million bushels. Most elevators
have (1) two legs with per leg capacity ranging
from 6,000 to 8,000 bushels per hour (bu/h), (2) truck
unloading capacity ranging from 6,000 to 10,000
bu/h, (3) bottom belt per hour capacity which ap-
proximates the capacity of the two legs, and (4) the
ability to simultaneously receive and load grain.
Industry personnel judged each elevator's charac-
teristics to be generally alike and remodeling costs
to be similar. Investment costs were estimated at
$210,000, $333,000, and $435,000 for remodeling the
studied elevators to handle 25-, 50-, and 75-car

sNumerous individuals, academic institutions, and firms were
contacted for purposes of estimating elevator upgrading costs.
These include: (l) Ming-Hong Chow, Department of Economics,
Kansas State University; (2) Frank Meyer, Custom Metal Fab-
ricators, Herington, Kansas; (3) Bill Sanders, Evans Grain Co.,
Salina, Kansas; (4) L. D. Schnake, USDA-HRS, Manhattan, Kan-
sas; (5) Gene Theyer, Montana Merchandising Inc., Great
Falls, Montana; (6) G. F. Cook Contruction Co., Minneapolis,
Minnesota; (7) Dave Treffer, Ehrsam Products, Salina, Kansas;
and (8) Blaine Pounds, Burlington Northern, St. Paul, Min-
nesota.

grain shipments, respectively. These costs include
modifications in spouting and belts, additional leg
capacity, a track scale, and an automatic sampler.
These costs reflect facility modification which en-
able per hour load out capacities of 15,000, 25,000.
and 30,000 bu/h at the 25-, 50-, and 75-car grain
handling facilities, respectively. Table 3 identifies
the estimated investment costs of remodeling.

New elevator investment is required in railcar
track capacity to accommodate additional cars as-
sociated with the 25-, 50-, and 75-car shipments.
Estimates of additional trackage were calculated
from information on each facility's current rail sid-
ing and the estimated amount of siding to handle
the 25-, 50-, and 75-car shipments. It was assumed
that a trackmobile would be required at each loca-
tion for shuttling railcars. Table 4 identifies the
estimated investment cost of a used trackmobile
and additional track at each elevator.

TABLE 3. ESTIMATED INVESTMENTCOST OF REMODELING
COUNTRY ELEVATORS TO HANDLE 25-, 50-, AND 75-CAR
GRAIN SHIPMENTS

Investment Cost

Grain Shipments a

Item 25-car 50-car 75-car
Leg, Spouting, Belts $125,000 $200,000 $260,000
Track Scale 75,000 1 15,000 150,00(
Automatic Sampler 10,000 18,000 zspolflt‘

Total $21 0,000 $333,000 $435,000

~'\

TABLE 4. ESTIMATED INVESTMENT COST AT EACH ELEVA-
TOR FOR ADDING TRACK AND A TRACKMOBILE TO MAKE 25-,

fiSOq AND 75-CAR GRAIN SHIPMENTS

lnvestment Cost

Elevator Grain Shipment
Location 25-car‘ 50-car‘ 75-car‘
Dalhart $126,520 $284,520 $452,520
Stratford 63,600 1 75,000 389,600
Lautz 97,920 255,920 423,920
Spearman 137,960 295,960 463,960
Perrytonz 35,000 50,000 75,000
Hartley 35,000 193,000 361 ,000
Etter 1 26,520 284,520 452,520
Dumas 103,640 261 ,640 429,640
fi Panhandle 126,520 284,520 452,520
Pampa 103,640 261 ,640 429,640

‘Costs include a used trackmobile with an estimated purchase price of
$35,000, $50,000, and $75,000 for a 25-, 50-, and 75-car grain handling
facility, respectively. Personnel experienced in country elevator remodeling
estimated 110 ft of trackage to be required for each additional railcar of
holding capacity. The per foot cost of this investment was estimated to
average $52 and included costs of track, ballast, ties, and switches.

zManagement at this location indicated adequate track capacity to load the
25-, 50-, and 75-car grain shipments.

Annual Fixed Costs Associated
with Upgrading Country Elevators

Annual fixed costs include depreciation, inter-
est on investment, and additional facility insur-
ance and property taxes. Assets were depreciated
using the straight-line method. Investment in addi-
tional rail trackage was depreciated over a 40-year
period, while the trackmobile was assumed to
have a 15-year life. Remodeling investment in the
elevator (leg, belts, automatic sampler) was depre-
ciated over a 10-year period while the track scale
was depreciated over 20 years.

Interest on investment was estimated at 10%
on half of the total initial investment. Insurance on
structures and installed equipment was estimated
at 13.40 cents per $100 of initial investment. Proper-
ty taxes were estimated by multiplying investment
cost by .9, then dividing this value by $100, and
multiplying the resulting quotient by $1.50.

Table 5 identifies the estimated annual fixed
costs at each location.

Grain Inventory Costs

The single-car rate structure allows the eleva-
tor operator to ship grain as purchased from the
producer. In contrast, multicar shipping organiza-
tions will require the elevator operator to accumu-
late a grain inventory equal to the quantity in-
cluded in the multicar shipment. This will incur an

f additional cost. The estimated inventory costs of

the multicar organization are based on the follow-
ing assumptions: (1) Half of an elevator's annual
wheat receipts are purchased at or near harvest.
l thus negligible inventory costs are incurred on this
grain. The elevator's remaining per month pur-
chases are made at a rate equaling 6% of the

TABLE 5. ESTIMATED ANNUAL FIXED COST ASSOCIATED
WITH UPGRADING COUNTRY ELEVATORS TO ACCOMMO-
DATE 25-, 50-, AND 75-CAR GRAIN SHIPMENTS

Total Annual Fixed Cost

Elevator Grain Shipments

Location 25-car 50-car 75-car
Dalhart $43,568 $76,472 $107,478
Stratford 38,000 67,229 101 ,872
Lautz 41,217 73,940 104,947
Spearman 44,579 77,484 108,491
Perryton 10,231 55,717 74,068
Hartley 35,467 68,372 99,379
Etter 43,568 76,472 1 07,478
Dumas 41,543 . 74,446 107,329
Panhandle 43,568 76,472 107,478
Pampa 41 ,543 74,446 107,329

plant's annual volume; (2) Interest cost is 12%; and
(3) Grain is valued at $3.25/bu.

Figure 3 shows the per bushel inventory costs
of a 25-car, 50-car, and 75-car loading facility at
annual volumes ranging from 1.0 to 2.5 million
bushels. As expected, per bushel inventory costs
decrease as annual grain volume increases,
whereas inventory costs increase as the size of the
unit train to be accommodated increases.

Inland Terminal and Port Terminal
Costs and Storage Capacities

The Economic Research Service (under USDA)
has conducted a series of studies on grain han-
dling and storage costs at inland and port termi-
nals. Costs used in this study are based on a 1977
to 1978 estimate which was revised and upgraded
to meet 1982 costs using producer price indices and
volume estimates for more recent years.‘ The es-
timated per bushel variable cost of receiving grain
from truck and rail modes at inland terminals is
$.0275 and $.0345/bu, respectively. The estimated
costs of loading trucks and rail modes is $.0238 and
$.0312/bu, respectively. Per bushel variable costs
of receiving truck and rail-delivered grain at port
terminals are $.021l and $.0227. The port elevators
estimated per bushel variable cost of loading to
ship is $.0l53. Annual per bushel storage charge
for holding grain at inland and port terminals is
$.279.

Study area inland terminal and port terminal
storage capacities were obtained from federal and
state grain warehouse licensing agencies.

Commercial Truck Transportation Rates

In this study, truck movement of wheat from
all elevators was assumed to be by commercial
truckers. Rates are for diesel-powered, cab-over,
twin screw, tractor-trailer rigs. Two sources of rate

‘Analysis provided by Mack Leath, USDA-HRS. University of
Illinois.

TABLE 9. ESTIMATED RATE OF RETURN ON 25-, 50-, AND 75-CAR UPGRADING INVESTMENTS WITH PER BUSHEL RAIL RATE
REDUCTIONS OF $.05, $.075, AND $.10 AND STUDY REGION WHEAT PRODUCTION OF 28.4 MILLION BUSHELS‘

Estimated Rate of Return with Rail Rate Reductions of @
ELEVATOR $.05 $.075 $.10 $.05 $.075 $.10 $.05 $.075 $.10
LOCATION (%) (%) (%) (%) (%) (%) (%) (%) (%)
25-CAR INVESTMENT 50-CAR INVESTMENT 75-CAR INVESTMENT
Dalhart — 16.5 20.9 — — — — — —
Stratford — 17.7 26.7 —- — — -— — —
Lautz — -— 9.5 — — — —— — -
Spearman 19.0 24.1 32.0 — — 12.5 — — —
Perryton 114.3 129.8 151.1 23.9 28.8 35.4 14.4 18.0 23.0
Pampa 15.3 19.0 21.5 —- — — — — —

‘Estimated rates of return are based on a gross margin of $.215/bu. Results are only shown for those locations where combinations of investment levels and rate

reductions yield rate of return approximating or exceeding 10%.

locations with low returns on upgrading invest-
ment have volume increases which average about
25%. The very high rate of return on elevator in-
vestment at Perryton is due to the substantial
volume increase and the relatively modest invest-
ment which management indicated to be required
in order to accommodate multicar shipments

(Table 5).

High and Low Wheat Production Levels

Tables l0 and ll relate the expected annual
wheat receipts at the l0 elevator locations with
study region production of 21.6 and 35.7 million
bushels, respectively. Tables 12 and l3 identify for
each production level the expected rate of return
on upgrading investment at elevators where the
estimated rate approximates or exceeds 10%.

In general the results are as expected. The
subset of elevators’, which generate attractive re-
turns at the average production level (28.4 million
bushels) are often suitable investments at the low
and high production levels. However, the study
shows the return on upgrading investment is posi-
tively correlated with the study regions level of
wheat production. For example, Lautz is not a
suitable investment at the lowest production level

TABLE 10. ESTIMATED ANNUAL WHEAT RECEIPTS AT STUD-
IED ELEVATOR LOCATIONS WITH EXISTING RATES AND
THREE REDUCED RAIL RATE LEVELS, AND STUDY REGION
WHEAT PRODUCTION OF 21.6 MILLION BUSHELS

Per bushel rate reductions

Elevator Existing
Location Rate $.05 $.075 $.1 0
(1 ,O00 bu)

Dalhart 567 931 1,111 1,196
Stratford 442 71 7 899 1 ,040
Lautz 494 71 2 794 863
Spearman 823 1 ,828 2,000 2,083
Perryton 1 ,067 2,075 2,256 2,429
Hartley 1 ,458 1 ,469 1 ,480 1,480
Etter 61 2 778 843 867
Dumas 762 880 957 957
Panhandle 816 876 897 934
Pampa 724 1 ,366 1 ,453 1 ,512

l0

TABLE 11. ESTIMATED ANNUAL WHEAT RECEIPTS AT STUD-
IED ELEVATOR LOCATIONS WITH EXISTING RATES AND
THREE REDUCED RAIL RATE LEVELS, AND STUDY REGION
WHEAT PRODUCTION OF 35.7 MILLION BUSHELS

Per bushel rate reductions

Elevator Existing
Location Rate $.05 $.075 $.10
(1,000 bu)

Dalhart 932 1 ,531 1,826 2,009
Stratford 724 1 ,180 1 ,477 1 ,706
Lautz 808 1 ,202 1 ,461 1,583
Spearman 1,100 2,242 2,382 2,595
Perryton 1,290 2,530 2,710 2,902
Hartley 2,392 2,410 2,428 2,428
Etter 1 ,006 1 ,339 1,359 1 ,366
Dumas 1,229 1,301 1,372 1,372
Panhandle 960 1,180 1,264 1,297
Pampa 964 1 ,680 1 ,767 1 ,826

but becomes marginally feasible at the average
level of production with a $.10/bu rail rate reduc-
tion and 25-car load-out system. At the highest
production level, Lautz is a suitable location for
investment with either a $.075 or $.10/bu rail rate
reduction and investment in a 25-car shipment
system. This general trend is similar at other loca-
tions where upgrading investment was feasible.
The exception is Spearman where the estimated
rate of return on investment is greater at the low
production level (21.6 million bushels) than the
average production level (28.4 million bushels).
This is due to the relatively dramatic increases in
annual volume resulting from rail rate reductions
when study region production is at the lowest
level.

Elevators’ Declining Gross Margins

A recent survey of Texas country elevators
revealed an average gross margin (f.o.b. elevator
grain sale price - farmer price) of $.2l5/bu, thus all
previous analysis assumed this margin when cal-
culating rate of return on upgrading investment.

Changes in the competitive environment may unQ

favorably impact the upgraded elevator's margin
and return. Competing elevators may reduce their

U

t»

TABLE 12. ESTIMATED RATE OF RETURN ON 25-, 50-, AND 75-CAR UPGRADING INVESTMENT WITH PER BUSHEL RAIL RATE
REDUCTIONS OF $.05, $.075, AND $.10 AND STUDY REGION WHEAT PRODUCTION OF 21.6 MILLION BUSHELS

'\
Estimated Rate of Return with Rail Rate Reductions of
ELEVATOR $.05 $.075 $.10 $.05 $.075 $.10 $.05 $.075 $.10
LOCATIONS (%) (%) . (%) (%) (°/=) (%) (%) (%) (%)
25-CAR INVESTMENT 50-CAR INVESTMENT 75-CAR INVESTMENT
Dalhart —- 10.4 13.8 — — — — — —
Stratford — 10.7 18.1 — — — — — -
Spearman 25.4 31.9 35.1 — 12.4 14.2 — — -
Perryton 102.6 122.5 141.6 20.3 26.5 32.5 11.6 16.3 20.8
Pampa 13.8 17.5 20.0 — — — — — —

‘Estimated rates of return are based on a gross margin of $.215/bu. Results are only shown for those locations where combinations of investment levels and rate
reductions yield rates of returns approximating or exceeding 10%. .

F\

TABLE 13. ESTIMATED RATE OF RETURN ON 25-, 50-, AND 75-CAR UPGRADING INVESTMENT WITH PER BUSHEL RAIL RATE
RIDUCTIONS OF $.05, $.075, AND $.10 AND STUDY REGION WHEAT PRODUCTION OF 35.7 MILLION BUSHELS

Estimated Rate of Return with Rail Rate Reductions of

ELEVATOR $.05 $.075 $.10 $.05 $.075 $.10 $.05 $.075 $.10
LOCATIONS (%) (%) (%) (%) (%) (%) (%) (%) (%)
25-CAR INVESTMENT 50-CAR INVESTMENT 75-CAR INVESTMENT
Dalhart 11.2 22.9 30.2 — — 11.1 — — —
Stratford 9.8 24.3 35.5 — — 13.4 — — —
Lautz — 15.9 21.2 — — — — — —
Spearman 30.6 35.9 44.0 11.7 14.6 19.1 — — 9.9
Perryton 128.1 148.0 169.1 28.3 34.5 41.1 17.6 22.3 27.3
Pampa 17.0 20.6 23.1 -- — — — — —

‘Estimated rates of return are based on a gross margin of $.215/bu. Results are only shown for those locations where combinations of investment levels and rate
reductions yield rate of returns approximating or exceeding 10%.

margin or obtain rail rate concessions, thus un- Effect of Not Operating the
favorably affecting the upgrading e1evator's abili- Study Regiqn ShQfl-Line Railroad
ty to charge $.215/bu. Analysis in this section is In November 1982' the Texas North Western

based on the assumption that the upgraded eleva-
tor will meet competition by lowering its gross
margin in order to retain its original volume. That
is, competition is met by lowering its gross margin
and retaining the original volume rather than re-
taining the $.215/bu margin and subsequently re-
ducing annual wheat receipts.

Table 14 provides information on the effect of a
declining gross margin on return of investments in
multicar shipping capacity. The tabled informa-
tion focuses on those locations where the es-
timated rate of return approximates or exceeds

Railway Co. (TNW) began operation of 83 miles of
former Rock Island track between Etter, Texas and
Hardesty, Oklahoma. Some recently created short-
line railroads in the midwest have ceased opera-
tion because of financial problems, accordingly
this analysis focuses on the feasibility of upgrad-
ing elevators to accommodate multicar shipments
under the assumption that the TNW cease opera-
tions.

The analysis found the quantity of wheat re-
ceived at Stratford, Lautz, Etter, Dumas, and

. . . Spearman to increase with nonoperation of the
O
10A’ when study reglon wheat productlon 1s the TNW railroad. Wheat receipts and return on up-

historical average of 28.4 million bushels. The re- grading investment increased modestly at Snub

...sults reveal the expected negative effect of a de- . .
clining gross margin on upgrading elevator re- fsicinwilrfiteéfiiierl $'?Z5aa£c%c:1'r1?/gig$e rzilifitgg:
turns. In general, the rate of return on upgrading with rod flog of 28 4 .11. ob h 1SYAbandon_
investment declines 2 to 3% for each $.01/bu reduc- mentpoi Ffiw t‘. m1 10%  e. s‘ d
tion in gross margin. The exception is Perryton . s opera Ions mo es Y mcreas? Fe-
which experiences an abnormally large rate of Celpts atd aearrrflan’ Etter‘ and Dumas athexlstlng

T return as a result of small upgrading investment. rates an t e t tee reduced If“? levels’ owever’
the effect on returns was negligible. As a result of

At Perryton‘ the rate of return on a 25cm loadout railroad abandonment the Lautz facility's return
system declines by approximately l0 to 12% for . . ' . . .
on upgrading investment with rail rate reductions

Eeach $.01/bu decline in gross margin. (See Tables of $075 and the 25cm handling system became

I15 and l6 for the effect on returns of a declining marginally profitable while the rate of return with

gross margin at low and high annual wheat pro- . . _
duction levels.) a $.10/bu reduction improved the return rate sever

ll

TABLE 14. ESTIMATED RATE OF RETURN ON 25-, 50-, AND 75-
CAR UPGRADING INVESTMENT WITH PER BUSHEL RAIL
RATE REDUCTIONS OF $.05, $.075, AND $.10/BU, GROSS MAR-
GINS VARYING FROM $.165 TO $.215 AND STUDY REGION
WHEAT PRODUCTION OF 28.4 MILLION BUSHELS‘

$.05 Rail Rate Reduction

Gross Margins
Elevator $.215 $.205 $.195 $.185 $.175 $.165
LOCGIIOFI (°/o) (°/o) (o/o) (°/o) (yo) (°/o)

25-CAR INVESTMENT

$.05 Rail Rate Reduction
Spearman 19.0 16.6 14.2 11.8 9.4 7.0

Perryton 114.3 105.0 95.7 86.4 77.1 67.8

Pampa 15.3 13.2 11.0 8.9 6.7 4.5
$.075 Rail Rate Reduction

Dalhart 16.5 14.4 12.3 10.2 8.0 5.9

Stratford 17.7 15.5 13.3 11.1 8.9 6 7

Spearman 24.1 21.3 18.5 15.7 12.9 10:1
Perryton 129.8 119.3 108.9 98.4 88.0 77.5

Pampa 19.0 16.6 14.1 11.7 9.3 6.8
$.10 Rail Rate Reduction
Dalhart 20.9 18.5 16.0 13.6 11.1 8.7
Stratford 26.7 23.8 20.9 18.0 15.2 12.3
Lautz 9.5 7.6 6.0 4.5 2.9 1.3
Spearman 32.0 28.6 25.2 21.8 18.4 15.0
Perryton 151.1 139.0 126.9 114.9 102.8 90.7
Pampa 21.5 18.9 16.3 13.6 11.0 8.4

50-CAR INVESTMENT
$.05 Rail Rate Reduction

Perryton 23.9 21.0 18.1 15.2 12.3 9.4
$.075 Rail Rate Reduction
Perryton 28.8 25.5 22.2 19.0 15.7 12.4

$.10 Rail Rate Reduction

Spearman 12.5 10.6 8.7 6.8 5.0 3.1
Perryton 35.4 31.7 27.9 24.1 20.3 16.6

75-CAR INVESTMENT
$.05 Rail Rate Reduction

Perryton 14.4 12.2 10.0 7.8 5.6 3.4
$.075 Rail Rate Reduction
Perryton 18.0 15.6 13.1 10.6 8.2 5.7
$.10 Rail Rate Reduction
Perryton 23.0 20.2 17.4 14.5 11.7 8.8

‘Results are only shown for those locations and combinations of investment
levels and rate reductions where the rate of return approximates or exceeds
10% when the gross margin is $.215/bu.

al percentage points. In general, abandonment of
TNW operations would not substantially improve
the feasibility of investing in a multicar loading
system at nearby elevators.

SUMMARY AND CONCLUSIONS

Recent legislation has legalized contracts be-
tween shippers and carriers. Generally, contracts
between rail carriers and grain shippers involve

I2

volume commitments from the shipper in ex-
change for lower rail rates. Multicar grain ship-
ments expedite railroad equipment handling.

shorten equipment turnaround, allow for more pro-é

ductive use of railroad capital, and subsequently
lower rail costs. Accordingly, railroads are often
willing to contract at reduced rates to grain han-
dlers making multicar, point-to-point shipments.
Unfortunately, many country elevator facilities are
not capable of making multicar grain shipments
for which significant rate reductions are offered.
Thus, substantial investment in elevator plants
may be necessary before contracting can be an
alternative.

This study focuses on the economic feasibility
of upgrading l0 country elevators to load multicar
wheat shipments (25-, 50-, and 75-car) in a 15-
county area in the upper portion of the Texas
Panhandle. Economic feasibility of upgrading the
elevators is evaluated under alternative rail rate
reductions ($.05, $.075, $.10), investments in 25-,
50-, and 75-car grain handling systems, three re-
gional production levels and differing grain eleva-
tor margins. In addition, the analysis examines
the impact of not operating a short-line railroad on
the feasibility of upgrading investment in nearby
elevators. Since export movements lend them-
selves to multicar, point-to-point hauls, the eco-
nomic feasibility of upgrading is based only on
wheat export volume.

Research objectives were accomplished in two
phases of activity. The initial phase involves es-
timating wheat receipts and margin revenues at
the upgraded country elevators as these facilities’
export rail rates are adjusted downward to reflect
their shipment in multicar units. This phase was
accomplished with a network flow model which
included export wheat flows which commenced at
farm-level and terminated with port elevator load-
ing of ocean-going vessels. In the second phase.
elevator upgrading and operating costs are sub-
tracted from the added revenues to calculate re-
turn attributable to each upgrading elevators’ in-
vestment. Desirability of remodeling the country
elevator to handle multicar shipments is provided
by a return on upgrading investment.

Several scenarios were examined to identify
the effect of various factors on the feasibility of
upgrading investment at the l0 analyzed eleva-
tors. Initial analyses included study region wheat
production approximating the historical average
(28.4 million bushels), a gross elevator margin of
$.2l5/bu and operation of the study region's short-
line railroad. Rate of return on elevator upgrading

investment was estimated for three rail reductionsa

($.05, $.075, and $.10) and three levels of upgrading
investment (25-, 50-, and 75-car). Results show up-
grading country elevators to accommodate 25-car

grain shipments to be the most feasible. Six of th i‘

l0 study elevators had a rate of return on upgrad-
ing investment which approximated or exceeded

,- ,

‘l

fi

\

10 percent when operating with an export rail rate
reduction of $.10/bu and investing in a 25-car grain
shipment system. Investment in a 25-car grain
shipment system was feasible for five elevators
(earned a rate of return on upgrading investment
exceeding 10%) when receiving a $.075/bu rail rate
reduction and three elevators when operating with
a $.05/bu rate reduction. Two elevators were feasi-
ble with upgrading investment in a 50-car system
while only one elevator warranted investment in a
75-car grain handling system.

Further analysis showed rate of return on up-
grading investment is effected by variation in an-
nual wheat production, declining elevator mar-
gins, and nonoperation of the region's short-line
railroad. As expected, the rate of return on upgrad-
ing investment is positively correlated with plant
volume. When study region wheat production de-
clines about 25% (21.6 million bushels) below
average, the rate of return on 25-car upgrading
investment declines 2 to 8 percentage points and
investment in one plant which is feasible at the
average production level becomes unwarranted
(Table l5). When study region production in-
creases to 35.7 million bushels, rate of return on
plants increase (2 to 8%) and additional combina-
tions of rail rate reductions ($.05, $.075, $.10) and
investments (25-car, 50-car, 75-car) become feasi-
ble (Table 16). For example, five plants have at-
tractive returns with a $.05/bu rail rate reduction
and investment in a 25-car system, rather than the
three plants which are feasible at the average
production level.

Competing elevators may reduce their margin
or obtain rail rate concessions which unfavorably
affect the upgrading elevators ability to charge
$.2l5/bu. The analysis revealed a negative effect of
a declining margin on rate of return. In general,
rate of return declined 2 to 3 percentage points for
each $.01/bu reduction in margin. Additional anal-
ysis revealed that nonoperation of a short-line rail-
road would favorably effect nearby elevators but
would not sufficiently increase returns at infeas-
ible facilities to warrant investment.

Based on this study, careful and thorough
analysis must be carried out prior to investing in
multicar shipment capacity. Feasibility of invest-
ment is highly correlated with the cost of upgrad-
ing; that is, a plant which requires only modest
investment has a much higher likelihood of ob-
taining an adequate return than a plant requiring
extensive remodeling. Further, the quantity of
grain flowing to the upgraded elevator is directly
correlated with the size of the rail rate reduction.
Rate of return on upgrading investment is closely
associated with the amount of additional grain
that flows to the upgraded elevator at lowered rail
rates. For example, the six feasible elevator loca-
tions (25-car investment) had an average volume
increase of 108% when rates were lowered $.10/bu,
in contrast, the four infeasible locations had a 25%

TABLE 15. ESTIMATED RATE OF RETURN ON 25-, 50-, AND 75-
CAR UPGRADING INVESTMENT WITH PER BUSHEL RAIL
RATE REDUCTIONS OF $.05, $.075, AND $.10/BU, GROSS MAR-
GINS VARYING FROM $.165 TO $215 AND STUDY REGION
WHEAT PRODUCTION OF 21.6 MILLION BUSHELS‘

Gross Margins

Elevator $.215 $.205 $.195 $.185 $.175
Location (%) (%) (%) (%) (%) (%)

25-CAR INVESTMENT

$.05 Rail Rate Reduction
Spearman 25.4 22.5 19.6 16.7 13.8 11.0

Perryton 102.6 94.2 85.8 77.4 69.0 60.6

Pampa 13.8 11.8 9.7 7.7 5.6 3.6
$.075 Rail Rate Reduction

Dalhart 10.4 8.8 7.2 5.6 4.0 2.4

Stratford 10.7 9.1 7.4 5.7 4.1 2.4

Spearman 31.9 28.5 25.2 21.8 18.4 15.0

Perryton 122.5 112.6 102.7 92.8 82.9 73.0

Pampa 17.5 15.2 12.9 10.5 8.2 5.9
$.10 Rail Rate Reduction

Dalhart 13.8 12.0 10.1 8.2 6.4 4.5

Stratford 18.1 16.0 13.8 11.6 9.4 7.2

Spearman 35.1 31.5 27.8 24.2 20.6 17.0
Perryton 141.6 130.2 118.9 107.5 96.2 84.8
Pampa . 20.0 17.5 15.0 12.5 9.9 7.4

SO-CAR INVESTMENT

$.05 Rail Rate Reduction
Perryton 20.3 17.6 15.0 12.4 9.7 7.1
$.075 Rail Rate Reduction

Spearman 12.4 10.6 8.7 6.8 4.9 3.1
Perryton 26.5 23.4 20.3 17.2 14.1 11.0

$.10 Rail Rate Reduction

Spearman 14.2 12.2 10.2 8.2 6.2 4.2
Perryton 32.5 28.9 25.4 21.8 18.3 14.7

75-CAR INVESTMENT
$.05 Rail Rate Reduction

Perryton 11.6 9.6 7.7 5.7 3.7 1.7
$.075 Rail Rate Reduction

Perryton 16.3 14.0 11.7 9.3 7.0 I 4.7
$.10 Rail Rate Reduction

Perryton 20.8 18.1 15.5 12.8 10.1 7.4

‘Results are only shown for those locations and combinations of investment
levels and rate reductions where the rate of return approximates or exceeds
10 percent when the gross margin is $.215 per bushel.

volume increase with a similar rate reduction.
Density of grain production and competition from
elevators in the upgrading elevators expanded
market area impacts on the ability to attract larger
volumes. Also, elevators that make the decision to
upgrade must give special attention to the dura-
tion of their contracted rate advantage. Because of
the long-term nature of the upgrading investment,
the contract must include provisions that allow for
lowered rates over an extended time period.

13

TABLE 16. ESTIMATED RATE OF RETURN OF 25-, 50-, AND 75-
CAR UPGRADING INVESTMENT WITH PER BUSHEL RAIL
RATE REDUCTIONS OF $.05, $.075, AND $.10/BU, GROSS MAR-
GINS VARYING FROM $.165 TO $.215 AND STUDY REGION
WHEAT PRODUCTION OF 35.7 MILLION BUSHELS‘

Gross Margins

Elevator $.215 $.205 $.195 $.185 $.175 $.165
Location (%) (%) (%) (%) (%) (%)

25-CAR INVESTMENT

$.05 Rail Rate Reduction

Dalhart 11.2 9.4 7.6 5.8 4.0 2.3
Stratford 9.8 8.1 6.5 4.8 3.1 1.5
Spearman 30.6 27.3 24.0 20.8 17.5 14.2
Perryton 128.1 117.8 107.5 97.1 86.8 76.5

Pampa 17.0 14.7 12.4 10.1 7.8 5.5
$.075 Rail Rate Reduction
Dalhart 22.9 20.2 17.6 14.9 12.3 9.6
Stratford 24.3 21.6 18.8 16.1 13.3 10.6
Lautz 15.9 13.7 11.6 9.5 7.4 5.3
Spearman 35.9 32.2 28.6 24.9 21.2 17.5
Perryton 148.0 136.1 124.3 112.5 100.6 88.8
Pampa 20.6 18.1 15.5 12.9 10.4 7.8
$.10 Rail Rate Reduction
Dalhart 30.2 26.9 23.8 20.6 17.4 14.2
Stratford 35.5 31.9 28.4 24.7 21.2 17.6
Lautz 21.2 18.6 16.1 13.6 11.1 8.6

Spearman 44.0 39.7 35.4 31.1 26.8 22.5
Perryton 169.1 155.7 142.3 128.8 115.4 102.0
Pampa 23.1 20.4 17.6 14.9 12.1 9.4

50-CAR INVESTMENT

$.05 Rail Rate Reduction

Spearman 11.7 9.9 8.1 6.3 4.4 2.6
Perryton 28.3 25.0 21.8 18.6 15.3 12.1

$.075 Rail Rate Reduction
Spearman 14.6 12.6 10.6 8.5 6.5 4.5

Perryton 34.5 30.8 27.1 23.4 19.7 16.0
$.10 Rail Rate Reduction
Dalhart 11.1 9.4 7.6 5.9 4.1 2.4
Stratford 13.4 11.5 9.5 7.6 5.7 3.7
Spearman 19.1 16.7 14.4 12.0 9.6 7.2
Perryton 41.1 36.9 32.7 28.5 24.3 20.1

75-CAR INVESTMENT
$.05 Rail Rate Reduction

Perryton 17.6 15.2 12.8 10.3 7.9 5.5
$.075 Rail Rate Reduction
Perryton 22.3 19.5 16.7 14.0 11.2 8.4
$.10 Rail Rate Reduction
Spearman 9.9 8.3 6.6 4.9 3.2 1.6
Perryton 27.3 24.1 21.0 17.8 14.6 11.5

‘Results are only shown for those locations and combinations of investment
levels and rate reductions where the rate of return approximates or exceeds
10 percent when the gross margin is $.215 per bushel.

14

LITERATURE CITED

. Bagby, I. W., I. R. Evans, and W. R. Wood.

i

"Contracting for Transportation." Transporta-$
tion ]ourna1 Winter 1982. pp. 63-73.

. Davis, C. D., and R. L. Oehrtman. "The Costs of

On-Farm Storage for Wheat in Oklahoma/l Un-
published manuscript, Oklahoma State Univer-

. Interstate Commerce Commission. Contract Ad-

visory Service, Summary No. 15, March 25, 1983.

. Iohnson, M. A., R. C. Brooks, and T. E. Nichols,

Ir.. Contracting Rail Freight Services for Poultry
Feed Ingredients Moving to the South. Econom-
ics Information Report No. 68, Department of a
Economics and Business, Raleigh, North Caroli-
na, November 1982.

. Iohnson, M. A., and L. O. Sorenson. Contracting

for Railroad Freight Service. Western Rural De-
velopment Center, Report 17, Ianuary 1983.

. Morton. I. R. "Contract Rates by Rail—A Tool in

Ratemaking." ICC Practitioners’ Iourna] 49: 413-
419. May-lune 1982.

. U.S. Department of Agriculture. County Soil

Survey Maps. Soil Conservation Service and
Texas Agricultural Experiment Station, 1970.

 . Grain Storage Capacity Survey. Ag-
ricultural Stabilization and Conservation Ser-
vice, October 1978.

ACKNOWLEDGEMENTS
Special appreciation is expressed to Dr. Cal-

vin Parnell, Department of Agricultural Engineer-
ing, Texas A8zM University for advice and counsel
regarding the upgrading of country elevators.
Equal appreciation is expressed to elevator man-
agement for their counsel and willingness to share
iniormation regarding their facilities. Drs. Shan
Chiyarath and Larry Makus made valuable contri-
butions as did Hector Viscencio. Special thanks is
extended to Ruth Clearfield and Helen Schiffhauer
for manuscript preparation.

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up!

ii

Mention of a trademark or a proprietary product does not constitute a guarantee or a warranty of the product by the Texas Agricultural
Experiment Station and does not imply its approval to the exclusion of other products that also may be suitable.

All programs and information of The Texas Agricultural Experiment Station are available to everyone without regard to race, color, religion, ser ~
age, handicap, or national origin. 

2.5M—6-84