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Theory of economics
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 AGRICULTURAL 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 bin space 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.”
