Spatial Production Concentration, Demand Uncertainty, and Multiple Markets
Alexander E. Saak
July 2003 [03-WP 340]
Saak, A.E. 2003. "Spatial Production Concentration, Demand Uncertainty, and Multiple Markets." Working paper 03-WP 340. Center for Agricultural and Rural Development, Iowa State University.
The geographic concentration of production of main field crops in several growing regions is a distinctive feature of U.S. agriculture. Among many possible reasons for spatial concentration, I study here the effects of the distribution of end users and terminal markets on acreage allocation. The presence of multiple terminal markets in a growing area may allow for a more flexible marketing plan, along with introducing more idiosyncratic demand uncertainty associated with each consumption point. To take better advantage of future marketing opportunities, growers, depending on their location relative to terminal markets, may adjust the crop mix produced on the farm. I characterize the types of environments that lead to a spatial production concentration of a commodity in a growing area. I also analyze the equilibrium effects of an increase in transportation costs and a shift in acreage available for planting on spatial acreage allocation.
Keywords: commodity prices, location, marketing, production concentration, supermodularity, systematic risk.