The following graph plots the level of U.S. inventories for corn (monthly plot, left scale, in blue) and the annualized percentage storage cost for corn that is implied by the term structure of futures prices (weekly plot, right scale, in orange). In the graph, the implied net percentage storage cost (denoted uy, i.e., net of the any convenience yield) is computed by inverting the futures-spot parity relationship and using 6-months-out and nearby corn futures prices (using the nearby price as a proxy for the spot/cash price) and subtracting the US dollar 6-month LIBOR interest rate:

a. Explain briefly why, intuitively, the orange and blue curves should be highly correlated.

b. In the case of corn, what likely explains the sharply negative value of uy (blue, right-hand scale) in the Summers of 1996, 2011, 2012 and 2013? (i) Storage costs must have been very high (ii) Storage costs must have been negative (iii) The convenience yield must have been positive (iv) Both (ii) and (iii) (v) Interest rates were super-low (vi) Either (ii) or (iii), but cannot tell without additional information

F1,1 = St (1+r+u - y)T-t u-y= (Ft,1 / St)1/(T-t) 1 - r i.e., in the 6-month case: F6 = S. (1+r+u - y)0.5 u - y = (F6 / So )2 1 - r Corn 2500 0.3 0.2 2000 0.1 0 1500 -0.1 1000 -0.2 CRrlSeries -0.3 500 C_Slope_6m -0.4 1/3/00 1/3/99 1/3/98 1/3/97 1/3/96 -0.5 1/3/04 1/3/03 20//1 90/8/1 SO//t 80//T 1/3/09 11/6/1 OT//T 1/3/12 1/3/95 1/3/13 1/3/01 1/3/02 F1,1 = St (1+r+u - y)T-t u-y= (Ft,1 / St)1/(T-t) 1 - r i.e., in the 6-month case: F6 = S. (1+r+u - y)0.5 u - y = (F6 / So )2 1 - r Corn 2500 0.3 0.2 2000 0.1 0 1500 -0.1 1000 -0.2 CRrlSeries -0.3 500 C_Slope_6m -0.4 1/3/00 1/3/99 1/3/98 1/3/97 1/3/96 -0.5 1/3/04 1/3/03 20//1 90/8/1 SO//t 80//T 1/3/09 11/6/1 OT//T 1/3/12 1/3/95 1/3/13 1/3/01 1/3/02