A buffer stock scheme is a government plan to stabilize prices in volatile markets. This requires intervention in buying and selling.
Prices for agricultural products are often volatile because:
- Supply can vary due to the weather.
- Demand is inelastic
- Supply is fixed in the short term
Buffer stock schemes aim to:
- Stabilized prices
- Ensure the supply of food
- Prevent farmers/producers from going out of business because of a drop in prices.
If there is a very good harvest and supply increases to S2, the market price would fall to P2. This price is below the target price (TP). To maintain the price at TP, the government will need to buy the surplus stocks (Q2-Q1) and store the goods. This reduces supply on the market and effectively keeps prices at the target price.
Advantages of buffer stocks
- Stable prices help maintain farmers’ incomes. A rapid drop in prices can make farmers go out of business, which leads to structural unemployment.
- Price stability encourages more investment in agriculture.
- Farming can have positive externalities e.g. helps rural communities. A drop in price could cause a negative multiplier effect within rural areas.
- Target prices help prevent excess prices for consumers and help reduce food inflation. This might be important for households living in poverty, who may struggle to pay high prices during years of shortage.
- It helps to maintain food supplies and avoid shortages.
- It is possible that the government could make a profit from a buffer stock scheme. If it buys during a glut and sells during a shortage, it can make a profit.
Problems with buffer stocks
- The cost of buying excess supply could become quite high for the government and may require higher taxes.
- Minimum prices and buffer stocks could encourage oversupply as farmers know any surplus will be bought. It could even encourage excess use of chemicals to maximize yields because farmers know any excess supply can be sold – even if the market doesn’t want it.
- Government subsidies to farmers may encourage inefficiency amongst farmers. There may be less incentive to cut costs and respond to market pressures.
- Some goods cannot be stored in buffer stocks, e.g. fresh milk, meat, etc.
- Government agencies may have poor information e.g. what price to set, how much to buy? and is there really a surplus? In practice, it can be difficult to know whether there is a surplus until later in the year.
- Administration costs of the scheme.
- Minimum prices for foodstuffs may require tariffs on imports.
- Globalized markets. Agriculture is a globalized market. If some countries form a buffer stock scheme and buy excess supply, they may find that other countries ‘free-ride’ on their efforts to keep prices high and undercut them.
- Are buffer stocks designed to help producers or consumers? Often agricultural buffer stocks aim to provide minimum prices and minimum incomes for farmers.
