A Model of Inter-Regional Trade in Grains with Storage

Abstract

When there is spatial arbitrage between food markets, the price differential between the markets should equal the cost of transfer. This simple arbitrage rule has formed the basis of many empirical tests of the performance of developing countries’ food markets. Here, a more complex structure to regional food markets is hypothesised. By including commodity storage into a model of inter-regional trade, it is shown that, in an optimal dynamic program, trade is intermittent. The possibility of periods without trade casts doubt on the validity of using tests for correlation in market prices as indicators of market performance.Food markets, optimal control, storage, spatial equilibrium.