@article{Pratt:122691,
      recid = {122691},
      author = {Pratt, James E. and Bishop, Phillip M. and Erba, Eric M.  and Novakovic, Andrew M. and Stephenson, Mark W.},
      title = {Normative Estimates of Class I Prices Across U.S. Milk  Markets},
      address = {1998-07},
      number = {640-2016-42994},
      series = {RB 98-5},
      pages = {59},
      year = {1998},
      abstract = {Economists have long considered issues of spatial economic  activity, trade, and location values. Among all the various  theories presented over the past century, it is safe to say  that not one predicts that goods, services, or factors of  production must attain the same value at different  locations in geographic space. Only under the most extreme  conditions, such as zero transportation costs, would it be  even conceivable that the same commodity or factor of  production be expected to command the same price in two  geographically separated markets. With costly  transportation, it is possible that two separate markets  have nearly the same, or even identical, prices, but there  are no theoretically justified reasons to expect such an  outcome, a priori.
When the question is raised "why should  the same hundred pounds of milk sell for as much as $3.00  more in some regions of the country than in the Upper  Midwest?"1 the answer is that I) local supply, 2) local  demand, and 3) transportation costs, as well as all those  attendant conditions which determine these three factors  simultaneously, interact to determine the location value of  milk. Indeed, one would not expect that the same hundred  pounds of milk have the same value everywhere. The  important component of this question is 'how much  different' these location values will be. Different prices  for identical goods at separated locations is not difficult  for the 'man/woman in the street' to acknowledge and should  not be a mysterious concept to the dairy industry. Why is  fresh seafood more expensive inland, why are grapefruit  dearer in Ithaca, New York than Miami, Florida, why are  apples higher priced in Miami; supply, demand, and  transportation.
The U.S. Dairy Sector Simulator (USDSS) was  constructed to provide insight into the optimal, efficient  geographic flows of milk and dairy products; to provide  guidance with respect to efficient plant location and size;  and to evaluate the spatial value of milk and milk  components across the U.S. Using 240 supply locations, 334  consumption locations, 622 dairy processing plant  locations, 5 product groups, 2 milk components, and  transportation and distribution costs between all  locations, USDSS determines mathematically consistent  location values for milk and milk components.
The results  of our analysis demonstrate that, under conditions which  prevailed in May and October of 1995, milk produced in the  U.S. has distinct location values at geographically  dispersed points of processing. A mathematically derived  price surface for milk used in fluid uses indicates that  these values have a range of $3.63 from the lowest valued  location to the highest in May and $3.99 in October.  Locally low levels are found in the Upper Midwest, the  Northwest, and the West. Eau Claire, Wisconsin is not the  lowest valued location in the U.S. nor do values increase  unifonnJy away from Eau Claire or from any of the low  valued locations. In fact, the spatial dispersion of values  from low to high valued locations is much less than  transportation costs alone would indicate. From the low  valued locations there is an increasing value gradient  generally to the east and, more markedly, to the southeast.  Milk used in other dairy products also has locationally  distinct values which are much less pronounced than those  for fluid milk uses. When compared to USDA's current system  of location differentials for class I uses, and holding the  total level of class I differential dollars constant, the  calculated differential surface is generally flatter than  the actual surface, despite the fact that the range from  lowest to highest value for the calculated surface is  slightly greater. Relative, revenue-adjusted values in the  Upper Midwest, much of the Midwest, and in Florida are  calculated to be higher than the current differential  levels, while for much of the rest of the country, the  calculated values are lower than current levels. Some of  these federally-regulated areas with low calculated values,  such as near Dallas, Texas, are estimated to have location  values at or exceeding a dollar lower than the current  relative differential. Other state regulated areas, such as  Maine, Montana, and Virginia also have differences in  excess of one dollar. As with fluid milk uses, the value of  milk used in manufacturing varies with location, despite  the conventional wisdom that the 'national' character of  these product markets somehow means there should be only  one national manufacturing milk value. The optimally  determined manufacturing values vary much less than the  fluid values.},
      url = {http://ageconsearch.umn.edu/record/122691},
      doi = {https://doi.org/10.22004/ag.econ.122691},
}