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The precautionary demand for commodity stocks


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  • Boum-Jong Choe
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    This paper develops a theory of the precautionary demand for commodity stocks. It suggests that commodity stocks are held for precautionary purposes by producers, consumers, and intermediate processors, while speculators hold stocks on the expectation of capital gains from a subsequent price rise. Producer and consumer stocks usually account for the largest share of commercial stocks held at any point in time. For example, at the end of 1990, stocks held by producers and consumers of copper were 72 percent of all commercial stocks of the market economy countries. Yet, the theory explaining the behavior of this class of stocks has not progressed much beyond the concept of convenience yield, first introduced by Kaldor (1939). This paper proposes an alternative theory. Holding of stocks by producers and consumers is viewed as precautionary behavior towards output and price risks. As a theory of behavior towards risks, the precautionary stock demand model encompasses speculative demand by both producers and consumers. Furthermore, both stocks and futures are treated as precautionary instruments, in contrast to the dichotomy that only stocks provide convenience yield while futures are hedging instruments.

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    Bibliographic Info

    Paper provided by The World Bank in its series Policy Research Working Paper Series with number 935.

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    Date of creation: 31 Jul 1992
    Date of revision:
    Handle: RePEc:wbk:wbrwps:935

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    Keywords: Access to Markets; Markets and Market Access; Economic Theory&Research; Environmental Economics&Policies; Non Bank Financial Institutions;


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    1. Kimball, Miles S, 1990. "Precautionary Saving in the Small and in the Large," Econometrica, Econometric Society, Econometric Society, vol. 58(1), pages 53-73, January.
    2. Williams,Jeffrey C. & Wright,Brian D., 1991. "Storage and Commodity Markets," Cambridge Books, Cambridge University Press, Cambridge University Press, number 9780521326162.
    3. Lester G. Telser, 1958. "Futures Trading and the Storage of Cotton and Wheat," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 66, pages 233.
    4. Newbery, David M, 1989. "The Theory of Food Price Stabilisation," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 99(398), pages 1065-82, December.
    5. Hirshleifer, David, 1989. "Futures Trading, Storage, and the Division of Risk: A Multiperiod Analysis," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 99(397), pages 700-719, September.
    6. Deaton, Angus & Laroque, Guy, 1992. "On the Behaviour of Commodity Prices," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 59(1), pages 1-23, January.
    7. Gustafson, Robert L., 1958. "Carryover levels for grains: A method for determining amounts that are optimal under specified conditions," Technical Bulletins, United States Department of Agriculture, Economic Research Service 157231, United States Department of Agriculture, Economic Research Service.
    8. Rolfo, Jacques, 1980. "Optimal Hedging under Price and Quantity Uncertainty: The Case of a Cocoa Producer," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 88(1), pages 100-116, February.
    9. Marcus, Alan J & Modest, David M, 1984. "Futures Markets and Production Decisions," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 92(3), pages 409-26, June.
    10. Holthausen, Duncan M, 1979. "Hedging and the Competitive Firm under Price Uncertainty," American Economic Review, American Economic Association, American Economic Association, vol. 69(5), pages 989-95, December.
    11. Anderson, Ronald W & Danthine, Jean-Pierre, 1983. "Hedger Diversity in Futures Markets," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 93(37), pages 370-89, June.
    12. Turnovsky, Stephen J, 1983. "The Determination of Spot and Futures Prices with Storable Commodities," Econometrica, Econometric Society, Econometric Society, vol. 51(5), pages 1363-87, September.
    13. French, George, 1986. "Price smoothing and inventory behavior," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 10(3), pages 353-366, September.
    14. Cootner, Paul H., 1967. "Speculation and Hedging," Food Research Institute Studies, Stanford University, Food Research Institute, Stanford University, Food Research Institute.
    15. Scheinkman, Jose A & Schechtman, Jack, 1983. "A Simple Competitive Model with Production and Storage," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 50(3), pages 427-41, July.
    16. Feder, Gershon & Just, Richard E & Schmitz, Andrew, 1980. "Futures Markets and the Theory of the Firm under Price Uncertainty," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 94(2), pages 317-28, March.
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