+ Essay/Term paper: Theory of economics
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theory
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)
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