Regional Wholesale Price Relationships: The Case of Peaches

Abstract

An important characteristic of agricultural commodity markets is the extent to which those markets respond to price changes in related markets. Given a competitive market structure, the Law of One Price (LOP) postulates that spatial price relationships are determined by transfer cost1 among regions and that spatial arbitrage restores market equilibrium (Tomek and Robinson, 2003). Spatial price relationships are of particular relevance to farmers in designing market strategies. Measurements of spatial price relationships provide insights about the dynamics of price movements, thus increasing understanding of likely behavior of supply or demand areas in the market (Jordan and Van Sickle, 1998). For example, knowledge of which regions lead prices, the degree to which market shocks are transmitted via prices among regions, and the regional market reaction time can all be useful in designing market strategy. This study analyzes spatial wholesale price relationships for fresh U.S. peaches using vector autoregressive analysis (VAR) on weekly prices from the primary wholesale markets of four U.S. regions. Primary objectives of the study are: (1) to determine the degree of market segmentation as well as the direction and magnitude of market integration among regions, and (2) to evaluate the sensitivity of U.S. fresh peach wholesale markets to individual shocks in the five regions. The study is organized as follows. We first present an overview of the U.S. fresh peach sector. Next, the relevant methodology and data is described. Results and conclusions follow.Demand and Price Analysis,