Local markets are defined in more than one way. This adds unexpected confusion to a simple term like, ‘local’. Mathematicians have a definition for local that adds clarity. In calculus, local, regarding local maxima, is defined as a relative measure, rather than an absolute boundary. This definition does not explicitly define the boundaries of local. Local markets in the context of the bioenergy industries benefit from a similar relative definition.
Teaching undergraduate economics requires explanations at a time of trade wars, pandemics, supply-chain stoppages, real wars, and high inflation. The cessation of expansion in global trade – since 2009 – infers that local markets are playing a larger role in economies of all sizes. But local legitimately means different things in different situations. These variations of local are based on different levels of demand and supply.
- Only Demand Considerations: Buy local. This can indicate a demand preference of the buyer. But it also refers to a strategic marketing strategy to target a seller’s sales based on preferences of regional and local consumers.
- Local Supply with Restricted Demand: Local industry protection. This is a restriction on demand that influences/elevates the benefit of local supply. Raising import tariffs and elevating barriers to trade may be done to provide a more competitive environment for domestic industries.
- Local Supply AND Local Demand: Grain commodity market prices are bounded by cash markets and futures markets. The difference in the cash price less the futures price is the basis. Because the futures prices of U.S. grains are often higher than the local cash prices, basis is generally negative in value. The presence of a local ethanol plant or a livestock feeding facility increases the local demand for corn and the basis will likely be positive. When the local cash price is higher than the global futures price, local demand has a higher value than sending it to a more distant market.
All these definitions of local are legitimate, relevant, and practiced in markets today. At Biomass Rules, LLC, the definition of local that works best is the last one that includes both local supply and demand. This is consistent with the definition of local provided by calculus.
Mathematicians define a local maximum as a relative maximum, or in the neighborhood. This is a fitting definition for local markets in an economic sense. The loosely defined aspect of this definition is that there is no definition for ‘in the neighborhood.’ Defining the neighborhood (city, county, state, or nation) therefore changes the answers.
In economics, the lowest opportunity cost producer is the one who has the comparative advantage. Theory states that producers do what they are best at and trade for things for which they are not the best. In this local equilibrium of supply and demand, the alignment of local resources to local consumption provides a comparative advantage.
The calculus of local indicates that market equilibrium is balanced locally, in the neighborhood.