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A Modified Arbitrage Condition For Commodity Marketing

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  • Karungu, Peter
  • Reed, Michael

Abstract

Commodity arbitrage condition equates expected commodity prices to nominal interest rates plus storage costs. Any risk premium is normally subsumed in storage costs. Such an arbitrage restricts commodity marketing to speculative activities. This is an oversimplification of all the activities undertaken in commodity marketing. Studies dating from the 1940s have demonstrated that commodities are often stored even when their carrying costs are negative. Such an observation imply that there is more than speculation in commodity marketing. This paper attempts to incorporate the role of convenience stocks in commodity marketing. The intrinsic value of carrying convenience stocks referred to as convenience yield is incorporated in the commodity arbitrage.

Suggested Citation

  • Karungu, Peter & Reed, Michael, 1993. "A Modified Arbitrage Condition For Commodity Marketing," Agrekon, Agricultural Economics Association of South Africa (AEASA), vol. 32(3), September.
    • Handle: RePEc:ags:agreko:267588
    DOI: 10.22004/ag.econ.267588
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    References listed on IDEAS

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    5. Nicholas Kaldor, 1939. "Speculation and Economic Stability," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 7(1), pages 1-27.
    6. Jeffrey A. Frankel, 1986. "Expectations and Commodity Price Dynamics: The Overshooting Model," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 68(2), pages 344-348.
    7. Schuh, G. Edward, 1976. "The New Macroeconomics Of Agriculture," 1976 Annual Meeting, August 15-18, State College, Pennsylvania 284009, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
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    Financial Economics; Marketing;

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