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A theoretical model of semi-subsistence agricultural households was developed which explicitly accounted for the ability of households to store key food staples over the period between harvests. The model yielded a simple inventory demand equation in which carryout stocks are a linear function of current consumption of the stored commodity and the difference between its current and expected prices. These were interpreted as indicators of the strength of arbitrage and food security motives for holding stocks.

Using panel data from three villages in southern India, inventory demand equations for five groups of stored food staples were econometrically estimated. In all villages, food security motives generally dominated arbitrage motives in determining the level of inventory demand. Empirically significant arbitrage motives were found to exist only in the poorest of the three villages.

Comparative statics analysis based on the theoretical model indicated that stocks and expected revenue from future production will have wealth (or profit) effects on current consumption, and that these affect the response of marketed surplus through their effects on consumption and via the price response of inventory demand.

Own-price elasticities of demand and marketed surplus for stored commodities were computed. To do this, the parameters of commodity demand were econometrically estimated using a Rotterdam model. Theses were then combined with the structural coefficients of inventory demand and outside estimates of supply response. In most cases profit effects were sizeable. Where the share of stocks in household wealth was quite large, profit effects were strong enough to cause demand elasticities to be positive. Computed marketed surplus elasticities were quite variable, both within and across villages. In several instances these were found to be negative.

Comparison of these elasticities with those computed using traditional methods indicated that the traditional method yields larger elasticities for both commodity demand and marketed surplus. In several cases these differences were dramatic, the most important being that all marketed surplus elasticities calculated using the earlier method are positive.