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Storage Under Backwardation: A Direct Test of the Wright-Williams Conjecture

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  • Andrew Coleman

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    (Motu Economic and Public Policy Research)

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    Abstract

    Commodities are often stored when the spot price exceeds the future price in a central market. Wright and Williams conjectured that inventories are held in locations far from the central market on these occasions. In these locations the spot price is lower than the price for forward delivery because transport costs are temporarily high. This hypothesis has not been directly tested, because prices for forward delivery are not normally available at non-central locations. This paper uses an example where these prices exist to test the hypothesis. The evidence, from the late nineteenth century corn markets in Chicago and New York, strongly supports the conjecture. Length: 30 pages

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    Bibliographic Info

    Paper provided by Motu Economic and Public Policy Research in its series Working Papers with number 08_13.

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    Date of creation: Oct 2008
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    Handle: RePEc:mtu:wpaper:08_13

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    Keywords: Inventories; commodity prices; transport costs;

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    1. Williams,Jeffrey C. & Wright,Brian D., 2005. "Storage and Commodity Markets," Cambridge Books, Cambridge University Press, number 9780521023399, October.
    2. Andrew Coleman, 2009. "A Model of Spatial Arbitrage with Transport Capacity Constraints and Endogenous Transport Prices," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 91(1), pages 42-56.
    3. Brennan, Donna & Williams, Jeffrey & Wright, Brian D, 1997. "Convenience Yield without the Convenience: A Spatial-Temporal Interpretation of Storage under Backwardation," Economic Journal, Royal Economic Society, vol. 107(443), pages 1009-22, July.
    4. George G. Tunell, 1897. "The Diversion of the Flour and Grain Traffic from the Great Lakes to the Railroads," Journal of Political Economy, University of Chicago Press, vol. 5, pages 340.
    5. Fackler, Paul L. & Goodwin, Barry K., 2001. "Spatial price analysis," Handbook of Agricultural Economics, in: B. L. Gardner & G. C. Rausser (ed.), Handbook of Agricultural Economics, edition 1, volume 1, chapter 17, pages 971-1024 Elsevier.
    6. Darren L. Frechette & Paul L. Fackler, 1999. "What Causes Commodity Price Backwardation?," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 81(4), pages 761-771.
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