The Economic Role of Commodity Storage

Abstract

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The empirical relevance of the competitive storage model

“…Subsequent numerical models in the Gustafson tradition, including Johnson and Sumner (1976), Gardner (1979), Newbery and Stiglitz (1981, Ch. 30) and Wright and Williams (1982) have confirmed that qualitative features of the price behavior of some important commodities are consistent with the effects of such arbitrage. In addition, numerical storage models (for example, Park 2006) can explain key qualitative features of peasants' economic behavior when they face high transaction costs, and the threat of hunger if local food crops fail and prices soar.…”

“…It is clear that this specification, and the others considered in Gustafson (1958a,b), Gardner (1979), Wright and Williams (1982), Williams and Wright (1991) and Deaton and Laroque (1992, Table 2, p. 11), in fact imply lower price variation than observed in major commodity markets. Although it is conceivable that variation in production has been substantially underestimated, it appears more likely that the consumption demand functions specified in the numerical models, with price elasticities (at consumption equal to mean production) in the range −0.5 to −0.1, are more sensitive to price than are consumption demands in the markets we consider.…”

“…For all twelve others in Table 1, the values are above 0.7, the 98.5 percentile of the distribution of simulated values; it is clear that the example does not match the data for these others at all well. The same criticism applies to many of the other examples in Wright and Williams (1982), and Williams and Wright (1991), with similar specifications.…”

“…Before moving to a discussion of estimation of the model, we discuss the choice of storage cost specification for the estimated model. Gustafson (1958a,b) and much of the subsequent literature (including Johnson and Sumner 1976;Newbery and Stiglitz 1979, chapter 29;Wright and Williams 1982;Helmberger 1988 andWilliams andWright 1991) focus on models where the marginal physical cost of storage is constant. In contrast, Samuelson (1971) and Deaton and Laroque (1992, 1995, 1996 specify storage cost as constant proportional deterioration or shrinkage of the stock.…”

150 Years of Boom and Bust: What Drives Mineral Commodity Prices?

“…Instead, my support the importance of models that take into account demand shocks due to world GDP such as Dvir and Rogoff (2010), Mitraille andThille (2009), Bodenstein et al (2012). My work also points to demand rather than supply shocks as an interpretation of shocks in competitive storage models (Gustafson, 1958a,b;Wright and Williams, 1982).…”