Storage, Slow Transport, and the Law of One Price: Theory with Evidence from Nineteenth-Century U.S. Corn Markets

Abstract

This paper argues that localized price spikes should be a regular feature of competitive commodity markets. It develops a rational expectations model of physical arbitrage in which trade takes time, and shows that inventory management plays a crucial role in the way regional prices are determined. In equilibrium, arbitrageurs choose export quantities to ensure inventories in the importing center regularly fall to 0. They earn enough profits from high prices on these occasions to offset small losses at other times. An analysis of detailed data from Chicago and New York corn markets provides empirical support for the model. Copyright by the President and Fellows of Harvard College and the Massachusetts Institute of Technology.

Managing Food Price Volatility in a Large Open Country: The Case of Wheat in India

“…While that is an important motive per se, it excludes many other important transactional or precautionary motives that could explain much actual stock-holding behaviour (Williams, 1986). Given that trade is instantaneous in the model, there is also no reason to accumulate stocks to account for time to ship (Coleman, 2009). These motivations are quantitatively important, as evidenced by historical stock data.…”

Commodity Market Dynamics and the Joint Executive Committee, 1880–1886

“…In terms of transporting grain from Chicago to New York, elevators tried to stock inventories supplied by the cheap and slow, but closed during the winter, mode of transportation. During the period 1878 to 1890, Coleman (2009) model and provides empirical evidence that the weekly discrepancy between the spot commodity price in Chicago and the future commodity price in New York is a good measure of the expected transportation and storage costs of moving grain from Chicago to New York. We use this variable in both our demand and pricing equations.…”

“…As demonstrated in Coleman (2009), New York (NY) was by far the main receiving city from Chicago (CH). So we can use the difference between a spot and a future price in New York as a good measure of the (expected) marginal net convenience yield or the level of inventories.…”

On the Price Spread of Benchmark Crude Oils: A Spatial Price Equilibrium Model

“…Models with instantaneous transportation can rationally exhibit spatial price differentials without violating no-arbitrage assumptions because of transportation costs; an uncontroversial result of such a model is that locational price spreads are bounded by transportation costs (see Williams and Wright, 1991). A second type of cost, as described by Coleman (2009), arises from the time that transportation takes. Coleman (2009) explains how unbounded price differentials can exist in the short-run without violating no-arbitrage assumptions if transportation is non-instantaneous.…”

“…A second type of cost, as described by Coleman (2009), arises from the time that transportation takes. Coleman (2009) explains how unbounded price differentials can exist in the short-run without violating no-arbitrage assumptions if transportation is non-instantaneous. However, in the context of the LLS-WTI spread, the applicability of a non-instantaneous transportation model is limited: St. James and Cushing are merely 650 miles apart, and thus the delay in transportation is minimal.…”