Forward shipping options for grain by rail: A strategic risk analysis

In the late 1980s, grain;hauling railroads began offering alternatives that have made shipping decisions more strategic. Shippers now confront alterna tives ranging from nearby and unguaranteed ordering to various durations of forward and guaranteed shipment. Each has varying penalties for cancellati on and payments from the railroad for nonperformance, and differing risks a nd payoffs. Because of the configuration of choices, shippers confront a po rtfolio of shipping alternatives. A dynamic stochastic simulation model was developed to analyze alternative strategies. The model includes the effect s of uncertainties in tariff rate changes, car premiums, basis levels, forw ard and spot grain purchases, and receiving railcars under each of three al ternatives. Shipping demand is determined by inter-month commodity price di fferences, carrying costs, transport costs, and storage capacity. Consideri ng these factors, the shipper chooses grain sales and shipping strategies t hat maximize net payoffs and confronts a tradeoff between expected profits and risk.