Impacts of the North Dakota Oil Boom on Agricultural Prices

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One consequence of the technological revolution in the extraction of fossil fuels has been a dramatic increase in transportation of crude oil by rail.    Annual oil shipments from North Dakota increased from about 26,000 cars in 2010 to over 340,000 cars in 2014, which was 50% of all rail shipments from the state. This trend is largely due to hydraulic fracturing and the opening of new regions to large-scale oil and gas production.  The oil boom, and its associated impacts on railroads, may have caused substantial rail network congestion and declining service quality in 2013 and 2014.  Reports at the time claimed farmers and grain shippers bore the brunt of this congestion with long shipping delays, increased storage costs and spoilage.  

oil cars
TOP: The spread equals hub spot price (Minneapolis) minus silo price (average across North Dakota elevators). 
BOTTOM: BNSF is the main railroad serving North Dakota. Railcar auctions occur separately for shuttle and non-shuttle trains. Auction prices converted to dollars per bushel assuming 3,500 bushels per car. Mean spread is the same as the spread in the top figure. 

We investigate using panel data econometrics whether increased demand for rail access during the oil boom increased the costs of shipping grain from the Upper Great Plains.  We use the price spread between market hubs and country elevators to measure grain shipping costs. 

We present two main findings. First, oil shipments did indeed affect markets for grains, but counter to the narrative at the time, the results costs were borne mostly by buyers such as food processing firms, rather than farmers. Second, the effects differ by the type of grain being transported.  Wheat markets were affected much more than corn and soybeans.

The first figure to the right shows that the spread between the price of wheat at North Dakota elevators and at the Minneapolis hub increased as the number of oil railcars increased.  This relationship remains strong when we account for other factors that contributed to rail congestion during this period, including severe cold temperatures, large harvests and increased demand for rail transportation.

We show using time series techniques that nearly all of the wheat spread increase comes from an increase in the wheat market hub price with only a small decrease in elevator prices paid to farmers.  This contradicts accounts in the popular press of large price impacts of oil by rail shipments on farmers. 

We argue this incidence result and the differential effects for wheat versus corn and soybean spreads, come from a feature of rail pricing that enables price discrimination over the time sensitivity of a shipment.  Standard common carriage service, under which the vast majority of grain is shipped, requires an advanced posted price (public tariff) and provides no protections against delay. During times of high demand or congestion, railroads use auctions to allocate grain railcar capacity. In these auctions, a shipper can buy a guarantee that an empty railcar will be delivered to its facility by a specified date.

Auction winners pay the tariff price to ship the grain in addition to the railcar auction price. If no railcar is purchased for a shipment, then it is loaded on a first-come first-served basis and the shipper pays only the tariff price.  The second figure to the right shows that prices paid in railcar auction markets increased dramatically in 2013-2014, are highly correlated with wheat spread changes, and rise to levels that can account for the entire increase in the wheat spread during the period. Moreover, we find only small increases in tariff rates paid for wheat shipments when oil shipments were high; these increases are substantially smaller than the increase in wheat spreads during the period.  Thus, we conclude that the railways used railcar auctions to allocate scarce capacity to the customers with the highest willingness to pay, namely buyers of hard red spring wheat.

Citation: Food vs. Fuel? Impacts of the North Dakota Oil Boom on Agricultural Prices, Bushnell, J. B; Hughes, J. E; and Smith, A. Working Paper. 2020