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Abstract

Numerous studies and their results have maintained a general consensus that variation in transportation costs between a central futures market and a local delivery market is a main determinant of basis. However, surprisingly few empirical estimates exist to quantify the relationship between variation in transportation costs and basis. Our work is the first to directly model elevator-level grain pricing behavior (i.e., basis) and the transportation costs that those elevators face. We link elevator-specific basis data with actual rail costs incurred by those elevators, and then add elevator-level characteristics to control for numerous factors that can impact pricing behavior. These data are then use to empirically estimate and quantify the degree to which transportation costs affect elevators' pricing behaviors. We find that, as predicted by theory, increases in elevators' transportation costs results in weakening basis at those elevators, and that this is exacerbated in periods of higher expected rail costs and higher expected rail cost variability. However, our results also indicate that change in transportation costs are far from passed through to producers on a one-to-one basis and that variation in local spot market conditions and futures prices contribute more to elevators' price-setting behaviors than changes in rail costs.

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