Priewe, Steven R.

December, 1998

By: Wilson, William W.; Priewe, Steven R.; Dahl, Bruce L.
In the late 1980s, grain-hauling railroads began offering alternatives that have made shipping decisions more strategic. Shippers now confront alternatives ranging from nearby and unguaranteed ordering to various durations of forward and guaranteed shipment. Each has varying penalties for cancellation and payments from the railroad for nonperformance, and differing risks and payoffs. Because of the configuration of choices, shippers confront a portfolio of shipping alternatives. A dynamic stochastic simulation model was developed to analyze alternative strategies. The model includes the effects of uncertainties in tariff rate changes, car premiums, basis levels, forward and spot grain purchases, and receiving railcars under each of three alternatives. Shipping demand is determined by inter-month commodity price differences, carrying costs, transport costs, and storage capacity. Considering these factors, the shipper chooses grain sales and shipping strategies that maximize net payoffs and confronts a tradeoff between expected profits and risk.