On Pricing in the South African Renewable Commodities Market

In this contribution, we discuss and apply a stochastic model that may be used for the pricing of renewable commodities like (white and yellow) maize, wheat and sunflowers. More specifically, we conclude that an appropriate model for determining the spot price of the aforementioned commodities is the Schwartz model. An important feature of this model is that it reflects reality in the marketplace by making allowances for spot prices and convenience yields to be mean-reverting. In order to illustrate these ideas we provide simulations and numerical examples using data from the South African renewable commodities market. When using the Schwartz model, we find that the behaviour of the spot prices for the simulations and real data bear a close resemblance to each other.