Government buffer stock schemes seek to stabilize prices and incomes in agricultural markets. Buffer stock schemes involve governments buying excess supply of agricultural commodities when prices are low, and selling from these stockpiles when prices rise. This helps smooth out volatility in prices and farm incomes. However, many buffer stock schemes have failed or been dismantled in recent decades due to high costs of administration and storage. Setting the appropriate target price that balances buying and selling is also difficult for buffer stock managers.

1. AS Economics

2.  Buffer Stocks
 Students should be able to apply
the concept of government
intervention in the form of buffer
stocks that seeks to stabilize
prices and incomes in agricultural
market.

3.  Many price stabilization schemes
have collapsed or been
withdrawn over the last twenty
years

4.  Examples of former buffer stock
schemes:
 Cotton Price Stabilization Board
 International Coffee Agreement
 International Tin Council

5.  Many farmers of primary
commodities face the problems of
volatile prices and incomes

6.  Buffer stock schemes seek to
stabilize the market price of
agricultural products by buying up
supplies of the product when
harvests are plentiful and selling
stocks of the product onto the
market when supplies are low.

10.  Should there be a large rise in
supply due to better then
expected yields of wheat at
harvest time, the market supply of
wheat will shift out putting
downward pressure on the free
market equilibrium price.

11.  In this situation, the government
will have to intervene once more
in the market and buy up the
surplus stock of wheat to prevent
the price from falling.

13.  Setting up a buffer stock scheme
requires a significant amount of
start up capital, since money is
needed to buy up the product
when prices are low. There are
also high administrative and
storage costs to be considered.

14.  The success of a buffer stock
scheme however ultimately
depends on the ability of those
managing a scheme to correctly
estimate the average price of the
product over a period of time

15.  If the target price is significantly
above the correct average price
then the organization will find
itself buying more produce than it
is selling and it will eventually run
out of money.

16.  Conversely if the target price is
too low then the organization will
often find the price rising above
the boundary, it will end up selling
more than it is buying and will
eventually run out of stocks.

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