Market Anatomy of a Drought: Modeling Barge and Corn Market Adaptation to Reduced Rainfall and Low Mississippi River Water Levels During the 2012 Midwestern U.S. Drought

Abstract:

In mid 2012, a severe drought swept across the Midwest, the heartland of corn production in the U.S. When the drought persisted into late Fall, corn markets were affected in two distinct ways: (1) reduced rainfall led to projected and actual corn yields that were lower than expected and (2) navigation restrictions, a result of low water levels on the Mississippi River, disrupted barge transportation, the most common and inexpensive mode for moving corn to many markets. Both (1) and (2) led to significant financial losses, but due to the complexity of the economic system and the coincidence of two different market impacts, the size of the role that low water levels played wass unclear. This is important, as losses related to low water levels are used to justify substantial investments in dredging activities on the Mississippi River.

An “engineering” model of the system, suggests that low water levels should drive large increases in barge and corn prices, while some econometric models suggest that water levels explain very little of the changes in barge rates and corn prices. Employing a model that integrates both the engineering and economic elements of the system indicates that corn prices and barge rates during the drought display spatial and temporal behavior that is difficult to explain using either the engineering or econometric models alone. This integrated model accounts for geographic and temporal variations in drought impacts and identifies unique market responses to four different sets of conditions over the drought’s length. Results illustrate that corn and barge price responses during the drought were a product of comingled, but distinct, reactions to both supply changes and navigation disruptions. Results also provide a more structured description of how the economic system that governs corn allocation interacts with the Mississippi River system during drought. As both public and private parties discuss potential managerial or infrastructural methods for keeping shipping channels open during drought, the results of this work should help them to decide how different interventions might benefit or hurt barge operators and/or corn sellers.