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How Much Of Commodity Price Behavior Can A Rational Expectations Storage Model Explain?

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  • Peterson, Hikaru Hanawa
  • Tomek, William G.

Abstract

A rational expectations competitive storage model is applied to the U.S. corn market to assess the aptness of this framework in explaining monthly price behavior in an actual commodity market. Relative to previous models, extensive realism is added to the model in terms of how production activities and storage costs are specified. By modeling convenience yield, "backwardation" in prices between crop years does not depend on the unrealistic assumption of zero ending stocks. Our model produces cash prices that are distributed with positive skewness and kurtosis, and mean and variance that increase over the storage season, consistent with the persistence and the occasional spikes observed in commodity prices. Futures prices are generated as conditional expectations of spot prices at contract maturity, and the variances of futures prices have realistic time-to-maturity and seasonal patterns. Model realizations of cash and futures prices over many "years" are used to demonstrate the wide variety of price behaviors that can be observed in an efficient market with a similar market structure, implying that marketing strategies based on short, historical samples of prices to manage price risk can be misleading.

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Bibliographic Info

Paper provided by Kansas State University, Department of Agricultural Economics in its series Staff Papers with number 30712.

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Date of creation: 2003
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Handle: RePEc:ags:ksaesp:30712

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Web page: http://www.agecon.ksu.edu/
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Keywords: Demand and Price Analysis; Marketing;

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References

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  1. Sergio H. Lence & Dermot J. Hayes, 2000. "U.S. Farm Policy and the Variability of Commodity Prices and Farm Revenues," Food and Agricultural Policy Research Institute (FAPRI) Publications 00-wp239, Food and Agricultural Policy Research Institute (FAPRI) at Iowa State University.
  2. Miranda, Mario J & Glauber, Joseph W, 1993. "Estimation of Dynamic Nonlinear Rational Expectations Models of Primary Commodity Markets with Private and Government Stockholding," The Review of Economics and Statistics, MIT Press, vol. 75(3), pages 463-70, August.
  3. Holt, Matthew & Johnson, Stanley R., 1989. "Bounded Price Variation and Rational Expectations in an Endogenous Switching Model of the U.S. Corn Market," Staff General Research Papers 267, Iowa State University, Department of Economics.
  4. Bryan Routledge & Duane Seppi & Chester Spatt, . "Equilibrium Forward Curves for Commodities," GSIA Working Papers 1997-50, Carnegie Mellon University, Tepper School of Business.
  5. Williams,Jeffrey C. & Wright,Brian D., 2005. "Storage and Commodity Markets," Cambridge Books, Cambridge University Press, number 9780521023399, October.
  6. Ng, S., 1995. "Looking for Evidence of Speculative Stockholding in Commodity Markets," Cahiers de recherche 9514, Centre interuniversitaire de recherche en ├ęconomie quantitative, CIREQ.
  7. Miranowski, John & Tegene, Abebayehu & Huffman, Wallace, 1988. "Dynamic Corn Supply Functions: A Model with Explicit Optimization," Staff General Research Papers 10699, Iowa State University, Department of Economics.
  8. Lester G. Telser, 1958. "Futures Trading and the Storage of Cotton and Wheat," Journal of Political Economy, University of Chicago Press, vol. 66, pages 233.
  9. Holt, Matthew T., 1999. "A Linear Approximate Acreage Allocation Model," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 24(02), December.
  10. Lence, Sergio H. & Hayenga, Marvin L., 2001. "On the Pitfalls of Multi-Year Rollover Hedges: The Case of Hedge-To-Arrive Contracts," Staff General Research Papers 1965, Iowa State University, Department of Economics.
  11. Scott H. Irwin & Carl R. Zulauf & Thomas E. Jackson, 1996. "Monte Carlo Analysis of Mean Reversion in Commodity Futures Prices," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 78(2), pages 387-399.
  12. Alexander Michaelides & Serena Ng, 2000. "Estimating the rational expectations model of speculative storage : a Monte Carlo comparison of three simulation estimators," LSE Research Online Documents on Economics 198, London School of Economics and Political Science, LSE Library.
  13. Holt, Matthew T., 1994. "Price-Band Stabilization Programs And Risk: An Application To The U.S. Corn Market," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 19(02), December.
  14. Peterson, Hikaru Hanawa & Tomek, William G., 2000. "Commodity Price Behavior: A Rational Expectations Storage Model of Corn," Working Papers 127682, Cornell University, Department of Applied Economics and Management.
  15. Myers, Robert J., 1994. "Time Series Econometrics and Commodity Price Analysis: A Review," Review of Marketing and Agricultural Economics, Australian Agricultural and Resource Economics Society, vol. 62(02), August.
  16. Shonkwiler, J S & Maddala, G S, 1985. "Modeling Expectations of Bounded Prices: An Application to the Market for Corn," The Review of Economics and Statistics, MIT Press, vol. 67(4), pages 697-702, November.
  17. Goodwin, Barry K. & Roberts, Matthew C. & Coble, Keith H., 2000. "Measurement Of Price Risk In Revenue Insurance: Implications Of Distributional Assumptions," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 25(01), July.
  18. Miranda, Mario J, 1998. "Numerical Strategies for Solving the Nonlinear Rational Expectations Commodity Market Model," Computational Economics, Society for Computational Economics, vol. 11(1-2), pages 71-87, April.
  19. Miranda, Mario J & Helmberger, Peter G, 1988. "The Effects of Commodity Price Stabilization Programs," American Economic Review, American Economic Association, vol. 78(1), pages 46-58, March.
  20. Tomek, William G. & Myers, Robert J., 1993. "Empirical Analysis Of Agricultural Commodity Prices: A Viewpoint," Working Papers 6847, Cornell University, Department of Applied Economics and Management.
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Cited by:
  1. Irwin, Scott H. & Good, Darrel L. & Martines-Filho, Joao & Batts, Ryan M., 2006. "The Pricing Performance of Market Advisory Services in Corn and Soybeans Over 1995-2004," AgMAS Project Research Reports 37513, University of Illinois at Urbana-Champaign, Department of Agricultural and Consumer Economics.
  2. Verpoorten, Marijke & Arora, Abhimanyu, 2011. "Food Prices, Social Unrest and the Facebook Generation," 2011 International Congress, August 30-September 2, 2011, Zurich, Switzerland 114230, European Association of Agricultural Economists.
  3. Tokovenko, Oleksiy & Gunter, Lewell F., 2008. "Quarterly Storage Model of U.S. Cotton Market: Estimation of the Basis under Rational Expectations," 2008 Annual Meeting, July 27-29, 2008, Orlando, Florida 6435, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
  4. Kornher, Lukas & Kalkuhl, Matthias, 2013. "Food price volatility in developing countries and its determinants," 53rd Annual Conference, Berlin, Germany, September 25-27, 2013 156132, German Association of Agricultural Economists (GEWISOLA).
  5. von Braun, Joachim & Tadesse, Getaw, 2012. "Global Food Price Volatility and Spikes: An Overview of Costs, Causes, and Solutions," Discussion Papers 120021, University of Bonn, Center for Development Research (ZEF).
  6. Ghoshray Atanu & Kejriwal Mohitosh & Wohar Mark, 2014. "Breaks, trends and unit roots in commodity prices: a robust investigation," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 18(1), pages 23-40, February.
  7. Shaun K. Roache, 2010. "What Explains the Rise in Food Price Volatility?," IMF Working Papers 10/129, International Monetary Fund.
  8. Franken, Jason R.V. & Garcia, Philip & Irwin, Scott H., 2006. "Do Interest Rates Explain Disaggregate Commodity Price Growth?," 2006 Annual meeting, July 23-26, Long Beach, CA 21319, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
  9. Lin, Chuanyi & Roberts, Matthew C., 2006. "Storability on Modeling Commodity Futures Prices," 2006 Annual meeting, July 23-26, Long Beach, CA 21484, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
  10. Good, Darrel L. & Irwin, Scott H. & Martines-Filho, Joao & Hagedorn, Lewis A., 2005. "The Pricing Performance of Market Advisory Services in Corn and Soybeans over 1995-2003," AgMAS Project Research Reports 14775, University of Illinois at Urbana-Champaign, Department of Agricultural and Consumer Economics.
  11. Etienne, Xiaoli L. & Irwin, Scott H. & Garcia, Philip, 2014. "Bubbles in food commodity markets: Four decades of evidence," Journal of International Money and Finance, Elsevier, vol. 42(C), pages 129-155.

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