Futures markets and the supply of storage with rational expectations

An examination is made of the effects of futures trading on the amount of a good stored for sale in a subsequent period. In the analysis, the individuals holding the goods face price risks because of demand fluctuations and base their decisions on correct price distributions. The model considers the actions of consumers, traders, and merchants. The main source of price risk is presented by variations in consumer income. The analysis suggests that the futures markets provide insurance against price risk to holders of commodities. Because this insurance is attractive, the equilibrium futures price will be below the expected value of the new period's price, while exceeding the current spot price. The normal relationship between the futures price and the current spot price is that the former exceeds the latter by the marginal storage costs.