Buffer stock schemes aim to reduce price fluctuations and stabilize producer incomes by having a government agency buy or sell a commodity to maintain a target price. When supply is high and prices fall below the target, the agency adds to demand by purchasing the excess quantity. When supply is low and prices rise above the target, the agency adds to supply by selling from its stockpile. However, buffer stock schemes require large financial resources to implement and store commodities, have high costs, and setting the correct target price that benefits both consumers and producers can be difficult. Alternative long-run policies for farmers include research and development tax credits.

1. Buffer Stock
Schemes
Lower 6th Micro
Government Intervention

2. Intro to Buffer
Stock
Schemes
Buffer Stock Schemes
Mr O’Grady

3. Intro to Buffer Stock Schemes
Definition: A scheme whereby a government agency buys or sells a particular commodity
on the open market, in order to maintain a target price
The aim is to reduce price fluctuations and to stabilise producer incomes
E.g. Schemes have been used in the markets for coffee, sugar, natural rubber, tin, wool etc.
P
Q
D
A
Qp QB
P*
PB
PP
SPoor
SBumper
Q1
C
B
Q* Q2
Diagram: Target price is at P*
Bumper Harvest: Supply shifts right to SBumper and price
falls below target to PB , the quantity demanded is QB
The scheme will add to demand by buying quantity (Q2-Q*)
Consumers will buy the remaining quantity at price P*
The gov pays P*(Q2-Q*) for this, and keeps the goods in
storage
Poor Harvest: Supply shifts left to SPoor and price rises
above target to PP, the quantity demanded is QP
The scheme will add to supply by selling the quantity
(Q*-Q1) from their existing stores
Farmers will sell the remaining quantity at price P*
The gov gains revenue of P*(Q*-Q1) from selling their stores
N.B. There are BSS variations allowing fluctuations
between a min. and max. prices (i.e. a target range)

4. Limitations of
Buffer Stock
Schemes
Buffer Stock Schemes
Mr O’Grady

5. Limitations of Buffer Stock Schemes
Financial requirements: Need for large financial might of buffer stock agencies to
effect market
Gov. needs to have plenty of cash reserves in order to buy up output when supply is too high
Costly: High cost of storage/refrigeration for perishable goods
There can also be quality impacts when the gov sells items which have been stored for an
extended period
Difficulty in setting target price: If the intervention price is set too high, the
government spends majority of its time buying output (financial losses) & rising
surplus
If the price is too low, the producers won’t be sufficiently protected
Long run alternatives: Other policies may be better for farmers
R&D tax credits could promote capital investment to stabilise supply e.g. technology to
understand weather patterns, encourage branding/processing by farmers

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