At the heart of the problems of both the theory of normal backwardation and the portfolio theory of hedging is their failure to consider why firms hold inventory in the first place. Each theory pictures a risk-averse firm with a predetermined inventory whose fluctuating value causes it concern. Obviously, the most effective way of avoiding such a risk is to hold no inventory.

A more comprehensive theory begins by considering why firms hold inventory at the apparent cost of spreads below full carrying charges. The extent spreads fall below full carrying charges is the use charge for the commodity, in the terminology of Chapter 2. Thus, a more comprehensive theory investigates whether firms will pay a use charge to have commodities under their own control. That line of questioning immediately leads to the conclusion that risk-neutral firms have sufficient reason to use futures markets. Risk aversion is a red herring.

The theory for holding inventory presented in this chapter consciously parallels the analysis of the reasons firms hold money at the cost of forgone interest. The reasons for holding money not only resemble the reasons firms hold inventories but also illuminate the existence of spreads below full carrying charges, interest, after all, being a use charge for money expressed in percentage terms. Perhaps most significant, conventional models of the demand for money demonstrate that even risk-neutral firms desire to hold cash.

As with money, a minimum of four reasons for holding inventory can be discerned: pure storage to smooth out consumption, a speculative demand, a transactions demand, and a precautionary demand. Each of these will be examined in turn. The first two prove unimportant for the analysis of spreads and futures markets.