The theory of storage literature that begins with Kaldor (1939) holds that processors or consumers of a commodity receive an implicit stream of benefits from holding inventory. This stream of benefits is called convenience. Examples of convenience include the opportunity to benefit from unexpected demand or supply shocks, or the opportunity to reduce costs by smoothing a production process. This theory of storage also implies that commodity forward prices differ from contemporaneous spot prices by the storage and interest costs of holding inventory, less the benefit of convenience.
The theory of storage predicts that marginal convenience value, the benefit of holding inventory, declines as the aggregate level of inventory increases. Theory also predicts that the shape is convex—an additional unit of inventory leads to a larger reduction inmarginal convenience value if the current level of inventory is low (see the solid line in Fig. 1). Evidence presented by Working (1948, 1949), Telser (1958), and Brennan (1958, 1991) supports this prediction.