HOW MUCH OF COMMODITY PRICE BEHAVIOR CAN A RATIONAL EXPECTATIONS STORAGE MODEL EXPLAIN?

A rational expectations competitive storage model is applied to the U.S. corn market to assess the aptness of this framework in explaining monthly price behavior in an actual commodity market. Relative to previous models, extensive realism is added to the model in terms of how production activities and storage costs are specified. By modeling convenience yield, "backwardation" in prices between crop years does not depend on the unrealistic assumption of zero ending stocks. Our model produces cash prices that are distributed with positive skewness and kurtosis, and mean and variance that increase over the storage season, consistent with the persistence and the occasional spikes observed in commodity prices. Futures prices are generated as conditional expectations of spot prices at contract maturity, and the variances of futures prices have realistic time-to-maturity and seasonal patterns. Model realizations of cash and futures prices over many "years" are used to demonstrate the wide variety of price behaviors that can be observed in an efficient market with a similar market structure, implying that marketing strategies based on short, historical samples of prices to manage price risk can be misleading.