A Simple Deterministic Model of the Volatility of Commodity Prices with Storage

Abstract. The paper investigates how producer’s storage may smoothen, or increase, the endogenous dynamic volatility of commodity markets. A two-season cobweb model is developed for annually harvested crops. This model of intra-year storage has risk averse and naive producers. The model is often periodic but can also be chaotic, i.e., endogenously volatile. The introduction of storage in the model opens the possibility for endogenous price volatility. The model is applied to the study of U.S. soybeans and sorghum prices. It explains the occurrence of high peaks of semi-annual prices with a positive price autocorrelation at lag one.