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Can real option values explain apparent storage at a loss?

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Abstract:

Since decisions to sell grain are irreversible, waiting to sell grain can have a real option value. This real option value may explain why producers appear to store too long. A new seasonal mean reversion model is estimated that allows prices to be a random walk with drift within a season, but mean reverting across crop years. Unless prices are extremely low, selling before mean reversion begins is optimal. Thus, the real option value of waiting does not explain why some producers seem to store at a loss in the latter part of crop years.

Keywords: C22; D92; G13; Q13; grain; real option value; seasonal mean reversion; storage

Document Type: Research Article

DOI: http://dx.doi.org/10.1080/00036846.2011.558483

Affiliations: 1: Department of Climate Change,Green Growth Research, Korea Energy Economics Institute, 665-1 Naeson 2-dongEuiwang-si,Kyonggi-do 437-713, Korea 2: Department of Agricultural Economics,Oklahoma State University, Stillwater OK 74078-6026, USA

Publication date: June 1, 2012

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