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Commodity Price Behavior: A Rational Expectations Storage Model of Corn

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  • Peterson, Hikaru Hanawa
  • Tomek, William G.

Abstract

A structural model is developed to simulate the probability distributions of corn prices by month. The intent is to determine the relationship between model specifications, based on a rational expectations competitive storage framework, and the probability distributions of monthly prices. Specifically, can a structural model generate corn prices with characteristics that are consistent with those observed in the 1990s? The model in this paper produces cash prices that inter alia have positively skewed distributions where the mean and variance increase over the storage season. The model also generates futures prices as conditional expectations of spot prices at contract maturity. The variances of these futures prices have realistic time-to-maturity and seasonal effects. The model is solved and simulated so that the consequences of making the model increasingly complex can be determined. A “curse of dimensionality” is inevitable with the increased complexity, resulting in lengthy computing times, but the final specification generates plausible probability distributions. In contrast to other models in the literature, our specification does not depend on the unrealistic assumption of zero stock-levels to generate skewed price distributions and the Abackwardation@ commonly observed in prices between crop years. Non-linearity in the supply of storage is achieved by modeling convenience yield. The model can be used to depict price behavior conditional on varying levels of the state variables, e.g., for large or small stock levels. Having created realistic probability distributions of prices, a logical next step is to use the distributions to appraise marketing strategies to manage price risk for corn.

Suggested Citation

  • 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.
  • Handle: RePEc:ags:cudawp:127682
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    File URL: http://ageconsearch.umn.edu/record/127682/files/Cornell_Dyson_wp0017.pdf
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    References listed on IDEAS

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    Cited by:

    1. 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.
    2. Peterson, Hikaru Hanawa & Tomek, William G., 2001. "Income Enhancing and Risk Management Properties of Marketing Practices," 2001 Conference, April 23-24, 2001, St. Louis, Missouri 18963, NCR-134 Conference on Applied Commodity Price Analysis, Forecasting, and Market Risk Management.
    3. Peterson, Hikaru Hanawa & Tomek, William G., 2001. "Income-Enhancing And Risk-Reducing Properties Of Marketing Practices," 2001 Annual meeting, August 5-8, Chicago, IL 20613, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).

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    Keywords

    Crop Production/Industries;

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