Analysis of Agricultural Commodity Storage Using Futures and Options Market

This dissertation focuses on agricultural commodity storage utilizing concepts and data from futures and options market. The first essay investigates the measurement of expected net return to private storage. The second essay examines the crowding out of private stocks by public stocks. The third essay analyzes the forecasting of returns to private storage.;The measurement of expected return to storage is of interest because expected storage return impacts the optimal inter-temporal allocation of storable commodities between harvests. Beginning with Working's seminal articles on the theory of storage, the conventional measure of the incentive to store has been a market-determined inter-temporal price spread involving the cash price or nearby futures contract price and the price for a futures contract that matures at a later date. The first essay proposes a new measure of expected return to storage using the concept of European options. Specifically, the conventional futures price spread measure is shown to be mathematically equivalent to the value of a European call option minus the value of a European put option. Both options mature at the end of a storage period and have a strike price equal to the initial storage period price plus the cost of storage until the end of the storage period. The mathematical derivation is empirically confirmed using data from Chicago corn and soybean futures and options traded between 1989 and 2014. This two-option measure allows the expected storage return to be decomposed into an expected profit from storage, which equals the call option value, and an expected loss from the same storage, which equals the put option value. Compared with using the conventional futures price spread, using the two option values as separate explanatory variables improved the explanatory power of the supply of storage for both crops over the analysis period.;The second essay investigates the crowding out effect of public stocks on privately-held stocks. The farm commodity price run up since 2006 has renewed interest in public stocks, spurring several studies of optimal food reserve policy. These studies have not included the potential crowding out of private stocks by public stocks. Empirical studies of this crowding out exist, but the reported magnitude varies widely and no conceptual model has been developed. Using the concept of options, a conceptual model is developed of the crowding out that occurs when accumulated public stocks are released. The model and results from an empirical analysis find the private stock crowding out decreases as public stocks increase. Previous studies reported a constant crowding out effect for a given commodity and storage policy. The model and empirical investigation also reveal that crowding out depends on the characteristics of the commodity's demand function and thus can vary by commodity. In particular, the crowding out effect is likely to be highest for commodities with the most inelastic demand. These commodities include wheat, rice, and other food staples that countries often hold as public stocks.;Forecasting net returns to private storage is a subject of interest because commodities that have a harvest must be stored to meet demand until the next harvest. In a seminal 1953 article, Working proposed that return to storage could be predicted using expected changes in the cash-futures basis. However, empirical studies of the effectiveness of the so-called basis strategy are inconclusive, especially for unhedged storage. Using data for the 1989-2012 crops of Illinois corn and soybeans, this study finds that both the rate of harvest progress and the ratio of demand to supply for storage bin space significantly add explanatory power to the basis strategy's forecast of observed net return to storage, especially for unhedged storage. Moreover, while the basis strategy in combination with hedged storage generates the lowest risk of net return to storage, unhedged storage using either a strategy of storing routinely each year or a strategy of storing based on harvest progress rate and storage bin space can generate higher net returns to storage. This finding implies that the choice of hedged and unhedged storage depends on the risk-return preference of the storage agent. In particular, if farmers prefer higher net return over lower risk, this finding helps explain the available evidence that farmers infrequently use hedging with futures contracts. In short, forecasting net returns to private storage is a richer area of study than just the basis strategy. (Abstract shortened by UMI.).