Optimal Storage and Marketing over Space and Time

Borrowing from the theory of optimal resource xtraction, we develop the mechanism guiding efficient commodity storage and marketing over producing regions through the crop year. Optimal storage occurs at producing areas, and time in storage varies directly with distance to market. Prices grow with interest rates in locations where storage is efficient but more slowly elsewhere, which explains why market prices (i.e., prices at the market) grow more slowly than interest rates. The model is empirically supported by examining storage in the Corn Belt, rates of price growth at various points, and quarterly grain marketings. Key words: commodity prices, convenience yield, grain storage, normal backwardation, spatial econometrics, spatial markets. Many agricultural commodit ies are produced over wide areas, often far from markets. In ad-dition, harvest occurs within a short period but consumption is evenly spaced throughout he year. These features mean both transportation and storage are important and are closely inter-related. In a geographical ly dispersed market, commodity prices decl ine as distance to the market increases because transport costs in-crease. Therefore, the opportunity cost (interest foregone) of holding stocks declines as distance to the market increases. This means storage costs at two sites identical except for location wil l differ. In turn, these differences uggest that there exists an optimal (least cost) market-ing pattern over time. The question of interest here is the nature of the marketing pattern and the mechanism that brings it about. It turns out that the mechanism is rather simple. It is s imilar to the one that governs the exploitation of resource deposits with d i f ferent extract ion costs (Hartwick; Dasgupta and Heal, pp. 172-75), a hitherto un-recognized analogy. 10ur results are importan