A buffer stock scheme is an intervention carried out by the government which aims to limit fluctuations in the price of a commodity. It involves the government and/or local authorities buying these storage stocks and selling them back to the famer. Price stability is indicated by low inflation whereby the value of money is also stable. A buffer stock is an attempt at stabilising the prices of key commodities. Extract C states that ‘when prices fall governments are more likely to be concerned’ this may be because more people are likely to buy them so the government is more likely to have to buy more from the farmer.
The free market usually determine the prices of commodities such as sugar and tin, yet, without intervention, the prices of coffee and sugar have been unstable as Extract A shows a significant increase in the price of coffee in 2008 and sugar in 2005. Should there be a large rise in supply due to better than expected yields at harvest time, the market supply will shift out – putting downward pressure on the free market equilibrium price. In this situation, the intervention agency will have to intervene in the market and buy up the surplus stock to prevent the price from falling.
It is easy to see how if the market supply rises faster than demand then the amount of wheat bought into storage will grow. The stable prices help maintain farmers’ incomes and improve the incentive to grow legal crops; this stability enables capital investment in agriculture needed to lift agricultural productivity, as farming has positive externalities it helps to sustain rural communities. The stable prices prevent excess prices for consumers – helping consumer welfare.
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However, a minimum price legislation may be applicable as it not only protects the producer, the farmer in this case but it ensures he receives some revenue for his commodities although it can’t be guaranteed as to whether the income the farmer receives will be appropriate and substantial. Extract C also states that ‘very often schemes fail because stocks of commodities such as foodstuffs and metals are more frequently bought than sold’ which means that the government are buying more stocks than are actually being sold, creating a surplus stock.
Extract B says ‘India… would require substantial sugar imports to compensate for the failure of the domestic sugar crop’, another problem with buffer stocks is that the farmer is reliant on good weather, to result in a good harvest and a high yield to cater for the strong demand, and examples such as the ‘Colombian crop’ being ‘damaged by heavy rainfall’ supports the fact that if farmers harvests are affected by natural disasters and unforeseen circumstances, then their job will also be affected as all farmers’ harvests are subject to changing weather conditions.
Furthermore financing the scheme is also difficult as buffer stocks are usually financed by the government, so in effect, the taxpayer, indirectly. As a reult this creates an opportunity cost for the government. It is also difficult to determine how the prices are set as the law of demand and supply suggests that if the price increases, then demand will decrease due to the inverse relationship of the two and the downwards sloping demand curve as consumers want lower, affordable prices whereas farmers would prefer higher prices.
Generally, buffer stock schemes are the majority of the time, a failure. As Extract C states ‘the schemes that failed typically involved commodities whose prices were disturbed by long-lasting shocks’. They’re generally erratic and unpredictable, therefore unreliable due to the factor that you cannot forecast a good harvest.
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Supply and demand plays a vital role in the economy. Price is the central determinant of both the demand and supply, for example the higher the price of a good or a service the less the product is demanded. In circumstance where the price goes down, demand increases. The response of price and quantity demanded create an inverse relationship between the two. Whereas demand portrays the consumer ...
