Characterizing and managing the financial risks of drought along the Mississippi River
Droughts in the Midwestern U.S. impact both crop yields and crop transport via barges on the Mississippi River, an important transportation mode for corn and other agricultural products. We are modeling how both low yields and more expensive transport affect corn prices and corn flows, and evaluating strategies for managing their financial consequences.
The Mississippi River is a highly valuable transportation path for freight in the Midwestern U.S., much more efficient than trucks or trains, in terms of cost and environmental impact. This is particularly valuable for agricultural goods, such as corn, because transportation costs are a large percentage of their market price. During droughts, low water levels disrupt navigation on the River and result in restrictions on product volumes that can be moved by barge. At the same time, drought can impact agricultural harvests resulting in a reduction in supply of those commodities. Both of these impacts can result in financial losses for barge operators and agricultural market participants, though their impacts vary over time and space. There are well developed strategies for managing financial risks related to harvest reductions, such as crop insurance and commodity derivative contracts. There are limited options, though, for reducing risk resulting from low water level navigation restrictions that disrupt barge traffic. The US Army Corps of engineers will use emergency dredging operations if water levels threaten to close the river, but those actions can actually increase the costs for some market actors. In order to assess opportunities to better manage risks from navigation restrictions on the Mississippi River, we have built a model to connect the impacts of drought to specific economic outcomes in corn markets, an approach that could be extended to other agricultural products. With an improved understanding of how markets reacted to the two different drought impacts (e.g., reduced yield and barge traffic), we are now exploring how existing or new financial risk management tools might be effectively employed to develop more advanced
strategies for managing financial risk.
National Science Foundation: Graduate Research Fellowship Program
UNC Institute for the Environment