Is Storage Rational When the Price is Expected to Decline? An Initial Study Using Data from U.S. Futures and Options Markets

Carl R. Zulauf and Kim Sanghyo

No 170593, 2014 Annual Meeting, July 27-29, 2014, Minneapolis, Minnesota from Agricultural and Applied Economics Association

Abstract: The expected net return to storage is conventionally calculated as the expected change in price over the storage period minus the cost of storage. However, this value is almost always negative, thus raising the question why would anyone store. Numerous explanations have been proposed, but none is widely accepted. This study initiates a new line of investigation based upon the identification of the different options embedded in the holding of stocks. Specifically, the traditional calculation of the net return to storage is shown to be equivalent to the value of a put option minus the value of a call option. Both options mature at the end of the storage period and have a strike price equal to the initial storage period price plus the cost of storage. This conceptual derivation is confirmed using data from the U.S. corn and soybean options traded on the Chicago Mercantile Exchange.

Keywords: Agribusiness; Agricultural Finance; Farm Management; Financial Economics (search for similar items in EconPapers)
Pages: 21
Date: 2014
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Persistent link: https://EconPapers.repec.org/RePEc:ags:aaea14:170593

DOI: 10.22004/ag.econ.170593

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