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Maximum Likelihood Estimation of the Standard Commodity Storage Model: Evidence from Sugar Prices

Author

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  • Carlo Cafiero
  • Eugenio S.A. Bobenrieth H.
  • Juan R.A. Bobenrieth H.
  • Brian D. Wright

Abstract

We present a Maximum Likelihood estimator for the standard commodity storage model with stockouts, based on prices only. While it imposes no additional assumptions on the model, the Maximum Likelihood estimator has small sample properties superior to those of the Pseudo Maximum Likelihood approach. We provide a proof that is crucial for applying our estimator to the model with normal harvests and possibly unbounded prices, thereby eliminating an inconsistency in the empirical storage model literature. Applying our Maximum Likelihood estimator to a series of annual sugar prices from 1921 to 2009 provides new evidence for the empirical relevance of the standard storage model. Our results imply a cutoff price at which discretionary stocks go to zero, which is higher than the price obtained by applying the Pseudo Maximum Likelihood estimator to the same data. The implied frequency of stockouts is lower, and price correlations, skewness, and kurtosis implied by the model closely match those seen in the annual sugar price data. We find the price of sugar to be highly responsive to small changes in consumption. When inventories are not available to buffer the effects of negative supply shocks on consumption, prices must increase sharply to induce the consumption changes needed to clear the market. Our results show why production shocks are not necessarily aligned with price spikes; the same production shock can give rise to very different price responses, depending on whether or not there are sufficient stocks to buffer its impact.

Suggested Citation

  • Carlo Cafiero & Eugenio S.A. Bobenrieth H. & Juan R.A. Bobenrieth H. & Brian D. Wright, 2015. "Maximum Likelihood Estimation of the Standard Commodity Storage Model: Evidence from Sugar Prices," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 97(1), pages 122-136.
  • Handle: RePEc:oup:ajagec:v:97:y:2015:i:1:p:122-136.
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    File URL: http://hdl.handle.net/10.1093/ajae/aau068
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    Citations

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    Cited by:

    1. Fabio G., Santeramo & Emilia, Lamonaca, 2018. "On the Drivers of Global Grain Price Volatility : an empirical investigation," MPRA Paper 86795, University Library of Munich, Germany.
    2. repec:wly:japmet:v:32:y:2017:i:4:p:744-763 is not listed on IDEAS
    3. Gouel, Christophe & Legrand, Nicolas, 2016. "Bayesian Estimation of the Storage Model using Information on Quantities," 2016 Annual Meeting, July 31-August 2, Boston, Massachusetts 235599, Agricultural and Applied Economics Association.
    4. Santeramo, Fabio Gaetano & Lamonaca, Emilia & Contò, Francesco & Stasi, Antonio & Nardone, Gianluca, 2017. "Drivers of grain price volatility: a cursory critical review," MPRA Paper 79427, University Library of Munich, Germany.
    5. Gabriela Simonet & Julie Subervie & Driss Ezzine-De-Blas & Marina Cromberg & Amy Duchelle, 2015. "Paying smallholders not to cut down the amazon forest: impact evaluation of a REDD+ pilot project," Working Papers 1514, Chaire Economie du climat.
    6. Gutierrez, Luciano & Piras, Francesco & Olmeo, Maria Grazia, 2015. "Forecasting Wheat Commodity Prices using a Global Vector Autoregressive model," 2015 Fourth Congress, June 11-12, 2015, Ancona, Italy 207264, Italian Association of Agricultural and Applied Economics (AIEAA).
    7. repec:eee:ecosta:v:4:y:2017:i:c:p:39-56 is not listed on IDEAS
    8. Christophe Gouel & Nicolas Legrand, 2017. "Estimating the Competitive Storage Model with Trending Commodity Prices," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 32(4), pages 744-763, June.
    9. Oglend, Atle & Kleppe, Tore Selland, 2017. "On the behavior of commodity prices when speculative storage is bounded," Journal of Economic Dynamics and Control, Elsevier, vol. 75(C), pages 52-69.
    10. Bobenrieth, Eugenio & Wright, Brian D. & Zeng, Di, 2014. "How Biofuels Policies Boosted Grain Staple Prices: A Counterfactual Analysis," 2014 Annual Meeting, July 27-29, 2014, Minneapolis, Minnesota 170709, Agricultural and Applied Economics Association.
    11. Santeramo, Fabio Gaetano, 2017. "Market Fundamentals And International Grain Price Volatility," 2017 International Congress, August 28-September 1, 2017, Parma, Italy 260908, European Association of Agricultural Economists.
    12. Vorotnikova, Ekaterina, 2016. "Optimal Storage Capacity Allocation in Grain Merchandizing," 2016 Annual Meeting, February 6-9, 2016, San Antonio, Texas 230128, Southern Agricultural Economics Association.

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