Location may have little effect on commodity prices these days
November 23, 2016
Not long ago, the region of the country in which agriculturalists produced largely impacted the price of their commodities sold. Thanks to technology and a sophisticated transportation infrastructure, the U.S. now sees negligible differences in commodity prices due to regional differences.
Price fluctuation due to regional location has been removed as a driving force in commodity process, said John Nalivka, president of Sterling Marketing, Inc. based in Vale, Oregon.
However, Dr. Derrell Peel, professor of agribusiness and extension livestock marketing specialist at Oklahoma State University, noted that there is a linear relation to cattle prices associated with transportation relative to Nebraska. In sum, Peel said, the highest average feeder cattle prices in the country are in Nebraska.
"Feeder cattle prices basically decline in all directions from Nebraska," Peel said. "It is very much tied to distance and transportation because most cattle tend to move to the middle of the country where the feedlots are. When you look at Georgia or Alabama or Florida, relatively speaking, you are going to see the bigger discounts because those cattle ship the farthest."
Peel and his students observed this trend over the course of five years focusing on the parameters of region, season, and weight class. As a result, they found a trend that is quite predictable.
"Nebraska tends to be the peak [of feeder cattle prices], and, basically, you can almost think of it as a bull's-eye," Peel summarized. "You can draw big circles around [Nebraska] as feeder cattle prices decline from that peak."
Recommended Stories For You
Considering all factors that go into price, however, Nalivka largely credits price variations to other factors outside of transportation costs and regional origin.
"Bottom line is that if you can move a product from point A to point B, the price difference between region is often negligible," Nalivka added. "The U.S. has the most sophisticated distribution and transportation network in the world, and that allows us to move stuff around to meet supply and demand for the end consumer. One way or another you are going to discount the price or add on the freight cost. It all comes out in the wash."
Navlika also noted that technology has eliminated the issue of time zone differences impacting the markets sold and is no longer a factor in the price equation.
"I deal with companies that are buying and selling protein on a daily basis," Nalivka said. "It's more about logistics than time zone."
The logistics that most impact the bottom dollar on commodities, Nalivka noted, include factors such as trends towards consumer-oriented demands and regulations
Using the cattle industry as an example, Nalivka said that cattle prices and variation could have as much to do with the kind and quality of cattle as it does the regional origin within the country.
"As the industry becomes more consumer-oriented, the finished product and carcass quality are obviously a big driving factor," Nalivka said. "In order to produce a product that has the greatest consumer acceptance, the packer has to buy the kind of cattle that will meet that standard."
The problem that concerns Nalivka most is the inefficiencies that regulations create for the transportation, distribution, or production systems.
"Regulations, be it taxes or environmental or what have you, is the constant challenge because they can distort the entire efficiency of a system," Nalivka said. "You watch the people in an industry respond to a new regulation by working towards getting around that to regain efficiency, and then the next regulation comes along about the time they work through the first one."
Largely, agriculture commodities are produced wherever a producer has the greatest competitive advantage, which is the result of a culmination of factors including the environment, weather, local markets, regulations, and taxes. Taxes, Nalivka said, can play a big role in the bottom dollar whether is due to regional land value, state income taxes, or conservation easements, regardless of the specific commodity produced.
Commodities fluctuate; it's the nature of the business that everyone involved is well aware of. Nalivka credits the expansive transportation infrastructure within the U.S. as a key component to the longevity of producers, regardless of geographical location. It may not always be perfect, but it does cut down on the geographical limitations that affected the U.S. agriculture industry in the past.