Price Volatility and Buffer Stocks

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Updated revision presentation covering price volatility in commodity markets and the economics of buffer stock "price stabilisation" schemes. designed for unit 1 micro course

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Price Volatility and Buffer Stocks

  1. 1. Commodity Price Volatility and Buffer Stocks AS Micro – November 2013
  2. 2. Price Volatility
  3. 3. Why are prices volatile in the markets for many commodities? Low Ped (<1) Low Pes (<1) Volatile Supply Market Specula -tors
  4. 4. Using analysis diagrams Price Price Quantity Quantity
  5. 5. Using analysis diagrams Price S1 Price D1 Quantity Quantity
  6. 6. Using analysis diagrams Price P2 S1 Price D1 D2 P1 Quantity Quantity
  7. 7. Using analysis diagrams Price P2 S1 Price S1 D1 D2 D1 P1 Quantity Quantity
  8. 8. Using analysis diagrams Price P2 S1 Price S1 S2 P1 P1 P2 D1 D2 Quantity D1 Quantity
  9. 9. Problems arising from price volatility Risk and Uncertainty • Uncertain incomes and profits • May limit capital investment by poorer farmers Risk of extreme poverty and unemployment • Millions of smaller farmers suffer • Many do not gain when world prices rise Macroeconomic effects • Volatile export revenues affects the trade balance • High prices can cause inflation and food poverty
  10. 10. Problems arising from price volatility Risk and Uncertainty • Uncertain incomes and profits • May limit capital investment by poorer farmers Risk of extreme poverty and unemployment • Millions of smaller farmers suffer • Many do not gain when world prices rise Macroeconomic effects • Volatile export revenues affects the trade balance • High prices can cause inflation and food poverty
  11. 11. Problems arising from price volatility Risk and Uncertainty • Uncertain incomes and profits • May limit capital investment by poorer farmers Risk of extreme poverty and unemployment • Millions of smaller farmers suffer • Many do not gain when world prices rise Macroeconomic effects • Volatile export revenues affects the trade balance • High prices can cause inflation and food poverty
  12. 12. Buffer Stocks – Do They Work?
  13. 13. Cocoa Prices Describe two significant features of the data on world cocoa prices shown in the chart
  14. 14. Cocoa Prices Describe two significant features of the data on world cocoa prices shown in the chart 1/ Prices are volatile – e.g. ranging from $3700 per tonne to $2100 during 2010 alone 2/ Significant trend rise in prices from 2006-2011 but a steep decline from the peak of nearly $3750
  15. 15. Ghana to establish Buffer Stock The government in Ghana is to establish a Buffer Stock Management Agency as a long term measure to ensure food security. Such an Agency would have the dual responsibility of holding food security buffer stocks and intervening in markets to ensure competitive prices to farmers in times of glut News reports: 18th October 2013
  16. 16. Ghana to establish Buffer Stock The government in Ghana is to establish a Buffer Stock Management Agency as a long term measure to ensure food security. Such an Agency would have the dual responsibility of holding food security buffer stocks and intervening in markets to ensure competitive prices to farmers in times of glut News reports: 18th October 2013 Key aims: 1. Stabilise food prices 2. Ensure food supplies 3. Prevent farmers / producers going out of business because of drop in world prices
  17. 17. Ghana – Primary Product Dependence
  18. 18. Ghana Imports
  19. 19. How might a buffer stock help to stabilise prices? Price of Cocoa Planned Supply Upper Target Upper Target Price Lower Target Lower Target Price Market Demand A buffer stock scheme is a government plan to stabilise prices in volatile markets Quantity
  20. 20. How might a buffer stock help to stabilise prices? Price of Cocoa Protect consumers Planned Supply Upper Target Upper Target Price Lower Target Lower Target Price Market Demand A buffer stock scheme is a government plan to stabilise prices in volatile markets Quantity
  21. 21. How might a buffer stock help to stabilise prices? Price of Cocoa Planned Supply Protect consumers Upper Target Upper Target Price Protect producers Lower Target Lower Target Price Market Demand A buffer stock scheme is a government plan to stabilise prices in volatile markets Quantity
  22. 22. How might a buffer stock help to stabilise prices? Price of Cocoa Planned Supply Market price free to vary between the upper & lower band Protect consumers Upper Target Upper Target Price Protect producers Lower Target Lower Target Price Market Demand A buffer stock scheme is a government plan to stabilise prices in volatile markets Quantity
  23. 23. How might a buffer stock help to stabilise prices? Price of Cocoa Planned Supply Market price free to vary between the upper & lower band Protect consumers Upper Target Upper Target Price Protect producers Lower Target Lower Target Price Market Demand A buffer stock scheme is a government plan to stabilise prices in volatile markets Quantity
  24. 24. Current market price is at P1 Price of Cocoa Actual Supply Planned Supply Upper Target Upper Target Price P1 Lower Target Lower Target Price Market Demand Q1 Quantity
  25. 25. Consider an unexpected rise in actual market supply Price of Cocoa Actual Supply Planned Supply Upper Target Upper Target Price P1 Lower Target Lower Target Price Market Demand Q1 S1 Quantity
  26. 26. A rise in market supply Price of Cocoa Actual Supply Planned Supply Upper Target Upper Target Price Lower Target Lower Target Price Market Demand S1 Quantity
  27. 27. A rise in market supply Price of Cocoa Actual Supply Planned Supply Upper Target Upper Target Price Lower Target Lower Target Price Excess supply at this price Market Demand Q1 S1 Quantity
  28. 28. A rise in market supply Price of Cocoa Demand with purchases Actual Supply Planned Supply Upper Target Upper Target Price Lower Target Lower Target Price Market Demand Q1 S1 Quantity
  29. 29. A rise in market supply Price of Cocoa Demand with purchases Actual Supply Planned Supply Upper Target Upper Target Price Lower Target Lower Target Price Cost of buying up stocks Market Demand Q1 S1 Quantity
  30. 30. Do Buffer Stock Schemes Work?
  31. 31. Could a buffer stock scheme stabilise onion prices? An eye-watering rise in the price of onions has contributed to an unexpected surge in Indian inflation. Onion prices have more than tripled over the past year, with the wholesale price up 245 per cent. Many Indians use onions in almost every meal, and some form of bread with onion is regarded as a basic diet for the poor Onion prices in India have been high since January 2013, with officials blaming first a water shortage and then excessive monsoon rains, although business leaders say the underlying problems include bad roads and the country’s poor infrastructure for storage and distribution of fresh produce (Source: FT and BBC News)
  32. 32. Problems in using buffer stocks for commodities such as cocoa Buffer stock may not be large enough to change price High intervention price leads to rising producer surpluses Expensive to buy up the surpluses – might cause big losses Costs of storage and falling quality of product Might be better alternative long run policies for farmers
  33. 33. Problems in using buffer stocks for commodities such as cocoa Buffer stock may not be large enough to change price High intervention price leads to rising producer surpluses Expensive to buy up the surpluses – might cause big losses Costs of storage and falling quality of product Might be better alternative long run policies for farmers
  34. 34. Problems in using buffer stocks for commodities such as cocoa Buffer stock may not be large enough to change price High intervention price leads to rising producer surpluses Expensive to buy up the surpluses – might cause big losses Costs of storage and falling quality of product Might be better alternative long run policies for farmers
  35. 35. Problems in using buffer stocks for commodities such as cocoa Buffer stock may not be large enough to change price High intervention price leads to rising producer surpluses Expensive to buy up the surpluses – might cause big losses Costs of storage and falling quality of product Might be better alternative long run policies for farmers
  36. 36. Problems in using buffer stocks for commodities such as cocoa Buffer stock may not be large enough to change price High intervention price leads to rising producer surpluses Expensive to buy up the surpluses – might cause big losses Costs of storage and falling quality of product Might be better alternative long run policies for farmers
  37. 37. Alternatives to buffer stocks Mobile technology to help farmers Encourage processing / branding by farmers Improved basic storage facilities + irrigation Micro insurance policies for poorer farmers
  38. 38. Alternatives to buffer stocks Mobile technology to help farmers Encourage processing / branding by farmers Improved basic storage facilities + irrigation Micro insurance policies for poorer farmers
  39. 39. Alternatives to buffer stocks Mobile technology to help farmers Encourage processing / branding by farmers Improved basic storage facilities + irrigation Micro insurance policies for poorer farmers
  40. 40. Alternatives to buffer stocks Mobile technology to help farmers Encourage processing / branding by farmers Improved basic storage facilities + irrigation Micro insurance policies for poorer farmers
  41. 41. Alternatives to buffer stocks Mobile technology to help farmers Encourage processing / branding by farmers Improved basic storage facilities + irrigation Micro insurance policies for poorer farmers
  42. 42. Alternatives to buffer stocks Mobile technology to help farmers Encourage processing / branding by farmers Improved basic storage facilities + irrigation Micro insurance policies for poorer farmers Good evaluation always includes suggesting alternatives to the policy / strategy under discussion
  43. 43. Buffer stock multiple choice question
  44. 44. Buffer stock multiple choice question
  45. 45. Get help from fellow students, teachers and tutor2u on Twitter: #econ1 @tutor2u_econ
  46. 46. Tutor2u Keep up-to-date with economics, resources, quizzes and worksheets for your economics course.

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