Price Relations on Future Storable Comma

This paper presents a simple theoretical modei of the spot and futures markets for a storable commodity. We focus our attention in particular on the classical futures markets, those for harvested storable commodities. For these commodities which include grains such as wheat, corn, and soybeans, while there is active trading on the spot and futures markets at each instant, the output of the production process does not occur continuously in time but appears rather at the end of each crop year (production period) at harvest time. For this class of commodities we present a simple partial equilibrium model for which the predicted relations between the spot and futures prices are broadly consistent with those familiar from empirical data. The analysis is divided into two parts. We first introduce spot markets 2nd establish the existence of a spot market equilibrium (Sections 3-6). We then introduce futures markets and by an arbitrage argument determine equilibrium futures prices (Section 6). This subdivision of the probiem of determining a simultaneous spot and futures market equilibrium is clearly artificial in a more general analysis but is the appropriate first approximation under the assumptions of this paper. Section 3 sets up the model of intertemporal equilibrium on the spot market. A single representative firm produces, sells, and stores the commodity. An important component in the description of the firm’s profit maximising activity is summarised in a slack-out cosl fzmcfion. This function