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How much of commodity price behavior can a rational expectations storage model explain?

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  • Hikaru Hanawa Peterson
  • William G. Tomek

Abstract

A rational expectations competitive storage model was 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 was 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 did not depend on the unrealistic assumption of zero ending stocks. Our model generated cash prices that were distributed with positive skewness and kurtosis, and mean and variance that increased over the storage season, comparable to the persistence and the occasional spikes observed in commodity prices. Futures prices were generated as conditional expectations of cash prices at contract maturity, and the variances of futures prices exhibited realistic time-to-maturity and seasonal patterns. Model realizations of cash and futures prices over many "years" were used to demonstrate the wide variety of price behaviors that could be observed in an efficient market with a similar market structure, implying that economic and policy implications drawn from short, historical samples of prices could be misleading. Copyright 2005 International Association of Agricultural Economics.

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  • Hikaru Hanawa Peterson & William G. Tomek, 2005. "How much of commodity price behavior can a rational expectations storage model explain?," Agricultural Economics, International Association of Agricultural Economists, vol. 33(3), pages 289-303, November.
  • Handle: RePEc:bla:agecon:v:33:y:2005:i:3:p:289-303
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    1. Zhu, Xiaohong, 2016. "New models to estimate costs of US farm programs," ISU General Staff Papers 201601010800006209, Iowa State University, Department of Economics.
    2. 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.
    3. Zhou, Wei & Babcock, Bruce A., 2014. "Endogenous Price in a Dynamic Model for Agricultural Supply Analysis," 2014 Annual Meeting, July 27-29, 2014, Minneapolis, Minnesota 170584, Agricultural and Applied Economics Association.
    4. Zhu, Xiaohong, 2016. "New models to estimate costs of US farm programs," ISU General Staff Papers 3547, Iowa State University, Department of Economics.
    5. Christophe Gouel, 2012. "Agricultural Price Instability: A Survey Of Competing Explanations And Remedies," Journal of Economic Surveys, Wiley Blackwell, vol. 26(1), pages 129-156, February.
    6. Kornher, Lukas & Kalkuhl, Matthias, 0. "Food Price Volatility in Developing Countries and its Determinants," Quarterly Journal of International Agriculture, Humboldt-Universität zu Berlin, vol. 52.
    7. Hervé Ott, 2014. "Extent and possible causes of intrayear agricultural commodity price volatility," Agricultural Economics, International Association of Agricultural Economists, vol. 45(2), pages 225-252, March.
    8. Ye, Shiyu & Karali, Berna, 2016. "The informational content of inventory announcements: Intraday evidence from crude oil futures market," Energy Economics, Elsevier, vol. 59(C), pages 349-364.
    9. Zhou, Wei & Babcock, Bruce A., 2014. "Pricing RINs and Corn in a Competitive Storage Model," 2014 Annual Meeting, July 27-29, 2014, Minneapolis, Minnesota 170581, Agricultural and Applied Economics Association.
    10. Batts, Ryan M. & Irwin, Scott & Good, Darrel, 2009. "The Pricing Performance of Market Advisory Services in Wheat Over 1995-2004," AgMAS Project Research Reports 183426, University of Illinois at Urbana-Champaign, Department of Agricultural and Consumer Economics.
    11. Zhou, Wei, 2015. "Three essays on modeling biofuel feedstock supply," ISU General Staff Papers 201501010800005728, Iowa State University, Department of Economics.
    12. Berna Karali & Walter N. Thurman, 2009. "Announcement effects and the theory of storage: an empirical study of lumber futures," Agricultural Economics, International Association of Agricultural Economists, vol. 40(4), pages 421-436, July.
    13. 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.
    14. 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).
    15. Shaun K. Roache, 2010. "What Explains the Rise in Food Price Volatility?," IMF Working Papers 10/129, International Monetary Fund.
    16. 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).
    17. Hansen, Bjørn Gunnar & Li, Yushu, 2015. "Future world market prices of milk and feed looking into the crystal ball," Discussion Papers 2015/17, Norwegian School of Economics, Department of Business and Management Science.
    18. Zhou, Wei & Babcock, Bruce A., 2017. "Using the competitive storage model to estimate the impact of ethanol and fueling investment on corn prices," Energy Economics, Elsevier, vol. 62(C), pages 195-203.
    19. Haase, Marco & Seiler Zimmermann, Yvonne & Zimmermann, Heinz, 2016. "The impact of speculation on commodity futures markets – A review of the findings of 100 empirical studies," Journal of Commodity Markets, Elsevier, vol. 3(1), pages 1-15.
    20. 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).
    21. 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).
    22. Zhu, Drew, 2016. "The Mechanism of Giffen Behaviour," MPRA Paper 75707, University Library of Munich, Germany.
    23. Good, Darrel L. & Irwin, Scott H. & Martines-Filho, Joao Gomes & 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.
    24. Irwin, Scott H. & Good, Darrel L. & Martines-Filho, Joao Gomes & 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.
    25. 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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