The empirical relevance of the competitive storage model

Abstract

"The empirical relevance of models of competitive storage arbitrage in explaining commodity price behavior has been seriously challenged in a series of pathbreaking papers by Deaton and Laroque (1992, 1995, 1996). Here we address their major criticism, that the model is in general unable to explain the degree of serial correlation observed in prices of twelve major commodities. First, we present a simple numerical version of their model which, contrary to Deaton and Laroque (1992), can generate the high levels of serial correlation observed in commodity prices, if it is parameterized to generate realistic levels of price variation. Then, after estimating the Deaton and Laroque (1995, 1996) model using their data set, model specification and econometric approach, we show that use of a much finer grid to approximate the equilibrium price function yields quite different estimates for most commodities. Results are obtained for coffee, copper, jute, maize, palm oil, sugar and tin that support the specifications of the storage model with positive constant marginal storage cost and no deterioration as in Gustafson (1958a). Consumption demand has low response to price and, except for sugar, there are infrequent stockouts. Observed magnitudes of serial correlation of price match those implied by the estimated model." [author's abstract

Optimal food price stabilisation policy

“…The model used in most of the work on commodity price stabilisation schemes, such as Miranda and Helmberger (1988) and Wright and Williams (1988a), is the single-country competitive storage model. Cafiero et al (2011) recently proved that this model performs well for explaining international commodity price behaviour.…”

A Staggered Pricing Approach to Modeling Speculative Storage: Implications for Commodity Price Dynamics

“…They also examine the ability of production lags and heteroskedastic supply shocks, multi-period forward contracts and convenience yields to generate an increased persistence in commodity prices. Cafiero, Bobenrieth, Bobenrieth, and Wright (2011) demonstrate that the competitive storage model can give rise to high levels of serial correlation observed in commodity prices if more precise numerical methods are employed. Moreover, estimates for seven commodities supported the specification of the speculative storage model with positive constant marginal costs and no deterioration, which is in line with Gustafson (1958).…”

“…Furthermore, Cafiero, Bobenrieth, Bobenrieth, and Wright (2011) use a maximum likelihood framework to estimate the storage model with stock-outs, which is extended to include unbounded harvests and free disposal. Their results produce more accurate small sample estimates of the structural parameters of the model compared to the previous studies based on the pseudo-maximum likelihood procedure.…”

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

“…Empirical evidence on storage models is also contradictory. Deaton and Laroque (1996) conclude that demand shocks are the dominant source of price fluctuations, while Cafiero et al (2011) show that supply shocks are the main drivers.…”