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We propose a state-space model (SSM) for commodity prices that combines thecompetitive storage model with a stochastic trend. This approach fits into theeconomic rationality of storage decisions, and adds to previous deterministictrend specifications of the storage model. Parameters are estimated using aparticle Markov chain Monte Carlo procedure. Empirical application to fourcommodity markets shows that the stochastic trend SSM is favored overdeterministic trend specifications. The stochastic trend SSM identifiesstructural parameters that differ from those for deterministic trendspecifications. In particular, the estimated price elasticities of demand aresignificantly larger under the stochastic trend SSM.

Estimating the Competitive Storage Model with Stochastic Trends in Commodity Prices