Price, Production, Storage and Futures Markets

24 Pages Posted: 11 Jul 2001

Date Written: May 31, 2001

Abstract

We model seasonal, uncertain production of a commodity, with speculative storage. We allow agents to be risk averse, and we allow planned production to respond to price prospects. We also explicitly consider the presence or absence of a futures market in the commodity. Our technique involves a two phase extension of the usual dynamic program, to solve for the equilibrium price and inventory held by storers. In our extra phase, we numerically solve the First Order Conditions for the planned production and futures position taken by the producer. Our main conclusions are: First, we confirm that storage reduces the price volatility, but the availability of futures is important in making storage feasible. Second, the producer takes a longer futures position, in many cases positive (i.e. he hedges by going long the future), than he would in the absence of storage. Third, futures increase average production, but this effect is generally less when storage is available, and might be quite marginal in cases when the producer's optimal futures position is near zero.

Suggested Citation

Carverhill, Andrew Peter, Price, Production, Storage and Futures Markets (May 31, 2001). Available at SSRN: https://ssrn.com/abstract=276181 or http://dx.doi.org/10.2139/ssrn.276181

Andrew Peter Carverhill (Contact Author)

City University of Hong Kong ( email )

Department of Economics and Finance
Tat Chee Avenue, Kowloon Tong
Hong Kong, Hong Kong SAR 000000
China
+852 3442 9247 (Phone)