IDEAS home Printed from
MyIDEAS: Log in (now much improved!) to save this paper

Copper and the negative price of storage

Listed author(s):
  • Larson, Donald Frederick
  • DEC

Commodities are often stored during periods in which storage returns a negative price. Further, during periods of"backwardation,"the expected revenue from holding inventories will be negative. Since the 1930s, the negative price of storage has been attributed to an offsetting"convenience yield."It has been argued that inventories are a necessary adjunct to business and that increasing inventories from some minimal level reduces overall costs. This theory has always been criticized by proponents of cost-of-carry models, who argue that a negative price for storage creates arbitrage opportunities. Proponents of the cost-of-carry model have asserted that storage will occur only with positive returns. They offer a set of price-arbitrage conditions that associate negative returns with stockouts. Still, stockouts are rare in commodity markets, and storage appears to take place during periods of"backwardation"in apparent violation of the price-arbitrage conditions. For copper, inventories have always been available to the market regardless of the price of storage. The author argues that although inventories may provide a cost-reducing convenience yield, inventories also have value because of uncertainty. Just as the price of a call option contains a premium based on price variability, so the shadow price of inventories contains a dispersion premium associated with the unplanned component of inventories. The author derives a generalized price-arbitrage condition in which either a convenience and/or a dispersion premium may justify inventory holding even during an expected price fall. He uses monthly observations of U.S. producer inventories to estimate the parameters of the price-arbitrage condition. The estimates and simulations he presents are ambiguous with regard to the existence of a convenience yield but strongly support the notion of a dispersion premium for copper. And although the average value of such a premium is low, the value of the premium increases rapidly during periods when inventories are scarce.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL:
Download Restriction: no

Paper provided by The World Bank in its series Policy Research Working Paper Series with number 1282.

in new window

Date of creation: 30 Apr 1994
Handle: RePEc:wbk:wbrwps:1282
Contact details of provider: Postal:
1818 H Street, N.W., Washington, DC 20433

Phone: (202) 477-1234
Web page:

More information through EDIRC

No references listed on IDEAS
You can help add them by filling out this form.

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:wbk:wbrwps:1282. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Roula I. Yazigi)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.