A Tale of Two Markets: Local and Global

Local and global markets for ag and biomass products are two distinct markets that are interdependent. They are two parts of the same system.  It is a ‘both and’, rather than ‘one or the other.’ One of these unique markets will dominate the other. But to understand market potential, the system of local and global must both be considered. There can be a politics to local vs. global market, but this is a distraction and does not have the same economic support. Every business needs to maximize the market that works best for their situation.

The biomassrules.com blog on January 17, Local, the Uneasy Substitute to Global, established that global economies have slowed a 70-year growth in trade, since the financial crisis of 2008-2009.  If economies around the world are growing and trade is not, then economies are becoming more comfortable trading locally.

Similarly, in the January 25 blog, Bioenergy Success Depends on Local Markets that ‘Are in the Neighborhood,’ established multiple definitions of local in the marketing world.  One flavor of local is focused only on demand attributes defined by either buyer or seller.  This context focuses primarily on preferences to the extent it becomes a passion.  Another definition relies on local supply but restricts external demand through trade barriers and constructs to encourage and protect new industry development. This form of local also can draw political distractions. Finally, local markets that are in equilibrium with supply and demand in the neighborhood, make access to local supply a comparative advantage.

This is not a new idea.  Corn ethanol and livestock feeding operation pay a premium for local corn, because there are risks and costs in hauling corn from longer distances.  U.S. corn production industry is quite good at selling U.S. grown corn to countries around the world.  Why? Because U.S. farmers also have a comparative advantage in producing corn over countries that purchase US exported corn.

It is possible, and often common, for the comparative advantage of local to be greater than the global comparative advantage (cash price > futures price).  The choice of which market to enter behaves similar to the economic concept of price discrimination. For the corn example, corn is sold into the market of highest value first.  Once that revenue has been maximized, the same product, corn, is sold into markets of lower value.

When defined properly, both local and global markets exist and operate efficiently as a system.  It should not be a local vs. global market debate, but a ‘both and’ decision.  The either/or debate is a political trap.    It is not always obvious which market has the greatest comparative advantage.   Multiple definitions of local markets currently in use cloud the clarity on this issue.

While it is easy to talk about well-established markets for corn, the same principles work for most cultivated or fermented plant-based products.  These tend to be lower in value and costly to transport.  It always makes sense to maximize the comparative advantage whether that is a local market with value or a global market with a different kind of value.