Assessing the Impacts of Closing the River Gulf Grain Company on Local Producers of Corn and Soybeans

Miguel Carriquiry, Bruce A. Babcock
March 2004  [04-WP 357]

Hotelling's classic model of spatial competition is used to estimate the impacts on 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 $745,000 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. Cost savings to other farmers would total approximately $60,000. These are farmers who chose to haul their grain to Davenport even though one of the alternative buyers was closer. The total impact on local economic activity from the closure of the River Gulf Grain Company would be higher than this amount because of the direct and indirect consequences of a loss of 19 jobs, some increased damage to roads from increased miles traveled, and increased waiting times at grain-buying facilities.

Keywords: grain transportation, local monopsony.

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