Competitive storage and commodity price dynamics

By buying cheap and selling dear, risk-neutral commodity speculators can smooth commodity pr-ices and induce serial dependence in price even when none would exist under a simple process of supply and demand, Commodity prices are variable and strongly positively correlated from one year to the next. The variability is often explained by supply factors, and the autocorrelation by the activities of speculators. We show that this explanation is not consistent with the evidence. Speculation tan substantially increase autocorrelation for prices that are weakly autocorrelated in its absence, but not to the high levels that are observed in the data.