The Impact of Transportation Costs on Spatial Competition of Grain Buyers: An Iowa Case Study

Hotelling’s classic model of spatial competition is adapted to estimate the impacts on grain price of the closure of one of three grain buyers on the Mississippi River in the vicinity of Scott County, Iowa. The customers of the buyer who is closing (River Gulf Grain Company) in Davenport, Iowa, are assumed to deliver their grain to a buyer in either Buffalo, Iowa, to the south or to a buyer in Clinton, Iowa, to the north. Calibration of Hotelling’s framework to this situation leads to an estimated decline in grain bids of 1.5¢ per bushel for the buyer located in Clinton and by 2.5¢ per bushel for the buyer located in Buffalo. These estimates are based on an incremental transportation cost of 0.15¢ per mile between the seller’s farm and the buyer. This price decline would reduce gross receipts of the farmers who currently deliver to Davenport by approximately $264,000 per year. The effect of lower price bids on gross receipts of all area farmers would be approximately $750,000 per year. Transportation costs would increase by an estimated $75,000 for those farmers who would have to haul their grain farther because of the closure