INVENTORIES AND THE SHORT-RUN DYNAMICS OF COMMODITY PRICES

Competitive producers hold inventories to reduce costs of adjusting pr oduction and to reduce marketing costs by facilitating scheduling and avoiding stockouts. Using data for copper, heating oil, and lumber, I estimate these costs within a structural model of production, sales, a nd storage, and I study their implications for inventory and price beh avior. Unlike earlier studies, this work focuses on homogeneous and fu ngible commodities. This avoids aggregation problems, and it allows th e use of direct measures of units produced, rather than inferences fro m dollar sales. Also, I estimate Euler equations and allow the margina l value of storage to be a convex function of the stock. This fits the data better, and helps explain the role of storage. Finally, I use fu tures prices to directly measure the marginal value of storage. I find a production-smoothing role for inventories only for heating oil, and during periods of low or normal prices. A more important role is to r educe marketing costs.