Friday, March 17

A Controversial Question; are High Railroad Rates Good or Bad for Montana?

It is almost an unquestioned truth that low railroad rates and 110 car loading facilities are good for Montana.

I am not sure that this is so, and I'll tell you why.

I have used this space before to argue that we need to build an infrastructure to process the raw foodstuffs we produce in Northcentral Montana. More than just flour, we need more investment like the Pasta or Malting plants that have recently sprouted up here.

Such development seems like a natural fit; we produce grain, cattle, etc. Adding value to those raw products here would bring jobs, spur economic development and revitalize our economy. The idea has its basis in a concept called vertical integration.

To my way of thinking, one of the real benefits of vertical integration is to take economic advantage of the high cost of transporting products; why should we ship grain to parts East and West to be processed into finished products when it could be processed here, saving the fuel costs?

However, it may now be true that the cost of transporting raw grain or flour is overshadowed by the cost of transporting those finished goods. The lower the price of a railcar, the more economic advantage can be found in shipping products elsewhere for processing; especially if that elsewhere is geographically close to retail distribution centers.

I haven't quite finished thinking this through. I would like to read what some of you think about this, particularly those of you (and you, and you) that are more intimitely involved with agricultural production.


WolfPack said...

I’m not in ag but I think high transportation is bad for any industry. The value of a commodity to the supplier is market price less transportation costs. This means if wheat has a $50 per bushel value in Michigan and it costs $5 per bushel to get it there, than the MT farmer only receives $45 per bushel. Building inefficiencies into our MT market (unduly high transportation) would work if we were the only grain supplier, but we’re not. The extra amount the shippers get comes right out of the MT farmers pocket. If the rest of the state wants to make money by vertically integrating, fine, but they shouldn’t do it on the farmers back. These satellite industries should be competitive on their own merit and for the most part the ones you mentioned are.

Sarpy Sam said...

I commented on this at my blog Aaron. You can see it here.