The Storage of Potatoes and the Maine Potatoes Futures Market

The relationship between the storage of potatoes and the carrying charges reflected on the futures market for Maine potatoes gives rise to a situation in which the observed facts do not seem to agree with the accepted theory. The theory regarding intertemporal price relationships based on the work of Brennan, Telser, and Working establishes that the difference between the current price and the expected price of a storable commodity must be equal to the marginal cost of storage minus the convenience yield. The relationship between the amount of a commodity held in storage and the equality of the marginal cost of storage with the temporal price spread gives rise to a supply of storage curve. As estimated by Brennan, Telser, and Working, this supply of storage curve slopes upward to the right. More storage will be supplied at a high return per unit and less storage at a low return per unit stored. The carrying charges reflected on the Maine potatoes futures market seemingly contradict the theory of the price of storage in two respects. First, the spreads between futures, which establish a return to storage, sometimes appear to greatly exceed any typically plausible cost of storage. On 1 March 1976, the March future for Maine potatoes sold for $8.35 per hundredweight, whereas the May future was selling for $12.63 per hundredweight. The return to storing potatoes for two months was $4.28 per hundredweight. Second, the relationship between the level of potato stocks and the carrying charge appears to be the opposite of that previously estimated for commodities with continuous inventories. For potatoes, the seasonal pattern associates large stocks with a narrow carrying charge and small stocks with a wide carrying charge. The level of potato inventories and the spread on the futures market produce a relationship that slopes downward to the right. The fall potato crop accounts for over 75% of annual U.S. production and in recent years has been about 84% of the total. Fall crop potatoes are stored for consumption over a sevenor eight-month period. However, potatoes cannot be effectively stored for a whole year, since they are semiperishable. Potatoes, therefore, give rise to a discontinuous inventory situation. The task of intertemporal allocation is more difficult for a discontinuous inventory commodity. Potato prices must be established during the storage season with the objective of exhausting the supply of potatoes in storage coincidently with the availability of spring and early summer potatoes (Gray). Potato storage is conducted not by merchandising or storage specialists but primarily by growers. The primary requirements of a potato storage facility are adequate insulation, ventilation, and heating and the means to enter and remove the tubers efficiently.