The Theory of Storage

This essay The Theory of Storage has a total of 354 words and 2 pages.

The Theory of Storage

THE THEORY OF STORAGE. “THE SUPPLY OF STORAGE REFERS NOT TO THE SUPPLY Of
STORAGE SPACE BUT TO THE SUPPLY OF COMMODITIES AS INVENTORIES. IN GENERAL A
SUPPLIER OF STORAGE IS ANYONE WHO HOLDS TITLE TO STOCKS WITH A VIEW TO THEIR
FUTURE SALE, EITHER IN THEIR PRESENT OR IN A MODIFIED FORM. SINCE PRODUCTION IS
NOT STABLE FOR ALL COMMODITIES ESPECIALLY ARGICULTURAL CONSUMERS DEMAND THAT THE
STORAGE FUNCTION BE SO PERFORMED THAT THE FLOW OF COMMODITIES FOR SALE WILL BE
MADE RELATIVELY STABLE." (BRENNAN P. 51)

"the theory purports to provide an explanation of the holding of all stocks,
including those for which there is not an active future market. it will be
shown that, on the supply side, in addition to the marginal expenditure on
physical storage and the marginal convenience yield another variable, a risk
premium, is required to explain the holding of stocks as functions of price
spreads. in the empirical part of the study the theory will be applied to
stocks of several agricultural commodities. the risk premium for each commodity
will be measured residually under specified conditions by deducting form the
price spread between two periods the other two components of the marginal cost
of storage." (brennan p.50)

IN GENERAL WE CAN OBTAIN A MEASURE OF THE RELATIVE RISK PREMIUMS INVOLVED IN THE
STORAGE OF DIFFERENT COMMODITITES.

"allen Paul, in a 1970 American journal of agricultural economics article,
studied the pricing of grain storage space in the u.s. during the surplus period
of the 1950s and 1960s. Paul\'s work differs from other works in that he
investigates the pricing of all grain storage not just that available to a
particular commodity. While brennan\'s marginal storage cost is from the point of
view of the owner of the grain, Paul is looking at the first component only. he
is only looking at the charge to owners of grain for binspace by elevator
operators... while paul\'s estimated equations may suggest a traditional
positively sloped supply function, he was forced to concede that, despite his
assumptions of ‘no convenience yield,\' his estimated equation appeared to
reflect this phenomenon. the study suggests that commodity contracts are an
indirect means of pricing services." (book article p. 215-220)

Category: Business

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Related Topics

Financial markets, Pricing, Commodity, Futures contract, Theory of storage, Price, Convenience yield, Contango, Cost of carry

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