Spatial and supply/demand agglomeration economies: State- and industry-linkages in the U.S. food system

Cost-impacts of spatial and industrial spillovers on economic performance are evaluated by incorporating activity level measures for nearby states and related industries into a cost function model. We focus on localization and urbanization economies for state level food processing industries, from activity levels of similar industries in neighboring states, agricultural input suppliers, and final product demand. We find significant cost-savings from proximity to other food manufacturing centers, and areas with high purchasing power. Cost savings from locating near an agricultural area are also evident, although it seems costly to be located within a rural agricultural state, implying thin market diseconomies. Marginal production costs instead appear higher in more urban, and lower in more rural, areas. These spillover patterns also have input composition implications; materials demand responses are the most closely tracked by the agglomeration cost effects, and capital and labor impacts vary.