Spatial price variation & spatial market structure
Agribusiness Management 420
Exercise 5 Hardcopy Due Tuesday in class, Week #6
Softcopy due in drop box before class, see file naming guidelines on Assignment
Guidelines.
Topic: Spatial price variation & spatial market structure
Background
Questions to think about: If every region could produce a product for the same cost,
would there be any spatial arbitrage between regions? On the other hand, suppose each
region can only produce one product, would there be spatial arbitrage? What would be
the benefits of trade? These are important questions that have persisted in taking center
stage in public debate for centuries. The past decade has seen the question rise to the
level of Presidential campaigns and debates where questions such as: Where should
automobiles, tractors, wheat, oranges, etc. be produced? Google your favorite politician
and see what she says about trade. If the U.S. has higher production costs, should we
allow imports from lower cost locations? Check out readings over the next week.
This exercise requires you to answer the following questions.
Assignment Answer the following questions.
1) Consider price variation over space. Availability of price data will vary
depending on what product you are studying. The idea here is to choose a set of
spatial locations and collect prices for them. The locations can be highly specific,
e.g. Farmdoc.com has specific locations for grains in Midwest states. Or, the
locations can be geographically aggregate, e.g. countries or states. Choose a
spatial location. One location must be considered as your home market and
collect prices for at least 3 locations including your home market over time for
your product. Try to collect 60-100 observations over time for each location, and
try to collect most recent prices.
Define a “source market” as a place where your product is generally in excess
supply, e.g. it is produced in excess of consumption at that location. Define a
“destination market” as a place where the product is generally in excess demand,
so there are generally imports. Choose a market location as a “home market”.
This is a place where you want to study price variation for your product. Here,
we will look at countries as markets, or other types of specific locations like
cities, states, or counties.
Choose a small set (3-4 each) of important source and destination markets of your
product that are outside of the US (or your home market country) and collect
prices in each of those markets. (if your product has not proven suitable for this,
choose a related product, e.g. beer would be difficult!~ ok, try corn.
The prices in each market should be measured for the same time period, with the
same frequency if possible, and have the same number of observations as you
have for your home market price. Open a new spreadsheet and in the second
column put your home market price series. Add columns to the right and put the
source and destination market prices in these.
For example, for crude oil,
Destination markets might be:
Column 3 Chicago Price
Column 4 San Francisco Price
Column 5 Houston Price
Source markets might be:
Column 6 Rotterdam Price
Column 7 Antwerp Price
Column 8 West Texas Price
You might choose West Texas as your “home market” but to explore exchange rates later, it
would be best to choose a market outside of the US as a home market. So, choose e.g. Rotterdam.
2) If product is flowing across borders, the sources and destination prices are in
different currencies, collect exchange rates for each and convert all prices to US
dollars. (see Resources subdirectory for sources of exchange rates.) Put the
exchange rates in columns next to each price, and calc in another column the price
in US dollars. So, your column headings might be:
Rotterdam(Euro) US$/Euro Rot-US$
Create a graph of the exchange rate over time. Write a paragraph describing its
variation over time. Is it constant? Can you decompose the variation as you did in
assignment 2? What do you see as the most important components of exchange rate
variation?
3) From 2), you have all prices converted to US dollars. Graph US$ price for each
origin market in a single figure, label this Figure 1. Write a paragraph or two
reporting presenting your interpretation of the differences across these prices over
time. What characteristics in these differences do you see? Do the prices move
together, or diverge?
4) For each origin market, compute the spatial margin (in US$) for imports into your
home market from each origin. Compute the mean, mode, and standard deviation
for the spatial margin for each source and put this at the bottom of the column for
each source’s spatial margin. Graph the spatial margins. Write a brief paragraph
describing the variation you see in these spatial margins noting randomness,
trends, cycles…
5) For each destination, compute the spatial margin for exports out of your home
market in US$. Compute the mean, mode, and standard deviation for the spatial
margin for each source and put this at the bottom of the column for each
destination’s spatial margin. Graph this and label it Figure 3. Spatial Margin for
Imports – your product. Write a short paragraph describing the variation you see
in these spatial margins. Looking back at variation in exchange rates, what role
do you see exchange rates playing in the variation of the export market prices?
Sources:
Prices for different countries are available from numerous sources, in addition to USDA, and World Bank,
FAO-Stat is a good example. See the Resources link in Angel. Exchange rates are readily available on the
web though sometimes those sites only have the current exchange rate. For historical rates, annual,
monthly, weekly, daily one good source is:
http://www.federalreserve.gov/econresdata/releases/statisticsdata.htm
http://www.federalreserve.gov/releases/h10/hist/
