conspicuous feature of commodity markets is the substantial quantities held in A store even when a commodity's price for future delivery is below the price for immediate delivery. Such storage in the face of backwardations, also known as inversz carrying charges, has been rationalized in various ways. The most popular interpretation is that stock holders gain a convenience yield from having inventories close at hand (Kaldor (1939)).
Another explanation is that the backwardation reflects a risk premium that drives the futures price below the spot price expected for a later date. The expected spot price nonetheless encompasses full carrying charges. Theories that appeal to a risk premium do not claim that it accounts for those instances when the backwardation is much larger than "normal." Such theories, especially the subset focusing on stockholding dealers, Dow (1940) and Stein (1979 and 1986, Chapter 4) concede convenience yield as a premise, and represent it as a unique, stable function of stocks.
Convenience yield as the explanation of storage at inverse carrying charges has not been analyzed beyond demonstration of its plausibility with brief examples related to the behavior of individual processors. Many of these emphasize the role of stocks in lowering costs. For example, Telser ( 1 9 5 8 , ~. 235) has argued, "First, the availability of stocks permits a processor or producer to maintain a given level of output at a lower cost than would be required without stocks. . . . Second, holding stocks permits the rate of production or sales to be varied at lower cost than would be incurred if the firm attempted to purchase stocks as they were needed" (emphasis in original). Earlier, Working (1948Working ( ,1949aWorking ( , 1949b) ) made much the same point by observing that storage is an adjunct to firms' main processing or merchandising business and may save them enough there to justify the loss from backwardation. Others have emphasized the revenue effects. Brennan (1958), Cootner (1967), and Weymar (1974) have suggested that wholesalers hold inventories because they increase the chances of a sale or of repeat business.
This paper defines the apparent negative price for storage as a positive difference between the full carrying cost (interest, insurance, warehousing fees, and spoilage) and the Giannini Foundation Paper #895 (for identification only). We thank David Newbery and Anne Peck for commenting on an earlier draft and Sarahelen Thompson for sharing her data with us. Jeffrey Williams received support from an Alfred P. Sloan Research Fellowship.