Buffer stock scheme

For the "buffer" inventory scheme operated by individual businesses, see safety stock.

A buffer stock scheme (commonly implemented as intervention storage, the "ever-normal granary") is an attempt to use commodity storage for the purposes of stabilising prices in an entire economy or, more commonly, an individual (commodity) market.[1] Specifically, commodities are bought when there is a surplus in the economy, stored, and are then sold from these stores when there are economic shortages in the economy.[1]

Operation

Two-price scheme

Graphical example of a two-price buffer stock scheme

Most buffer stock schemes work along the same rough lines: first, two prices are determined, a floor and a ceiling (minimum and maximum price). When the price drops close to the floor price (after a new rich vein of silver is found, for example), the scheme operator (usually government) will start buying up the stock, ensuring that the price does not fall further. Likewise, when the price rises close to the ceiling, the operator depresses the price by selling off its holding. In the meantime, it must either store the commodity or otherwise keep it out of the market (for example, by destroying it). If a basket of commodities is stored, their price stabilization can in turn stabilize the overall price level, preventing inflation. This scenario is illustrated on the right. Taking the market for wheat as an example, here, in years with normal harvests (S1) the price is within the allowed range and the operator does not need to act. In bumper years (S3), however, the prices begins to fall, and the government must buy wheat to prevent the price from collapsing; likewise, in years with bad harvests (S2), the government must sell its stock to keep prices down. The result is far less fluctuation in price. Price stability then leads to greater joint welfare (the sum of consumer and producer surplus.[2]

Single price scheme

A single price buffer stock scheme, such as an ever-normal granary

As illustrated, the term "buffer stock scheme" can also refer to a scheme where the floor price and ceiling price are equal: in other words, an intervention in the market to ensure a fixed price. In order for such stores to be effective, the figure for "average supply" must be adjusted periodically to keep up with any broad trends toward increased yield. That is, it must truly be an average of probable yield outcomes at that given point in time.

The diagram shows the supply and demand for a grain market. S3 and S2 show the supply of grain in high and low yield years respectively, and S1 shows the average supply. The government buys grain during high yield years and sells grain during low yield years. The price is thus stabilized to P3, rather than fluctuating between P1 and P2, as it did before.

Side effects

The primary action of buffer stocks, creating price stability, is often combined with other mechanisms to meet other goals such as the promotion of domestic industry. That is achieved by setting a minimum price for a certain product above the equilibrium price, the point at which the supply and demand curves cross, which guarantees a minimum price to producers, encouraging them to produce more and thus creating a surplus ready to be used as a buffer stock. The price stability itself may also tempt firms into the market, further boosting supply.

The upside is security of supply (such as food security), the downside huge stockpiles or, in other cases, destruction of commodities. The scheme also makes domestic food more expensive for other countries to purchase and operation of such a scheme can be costly to the operator.

Their main advantage, when compared to other forms of government intervention in markets, is that they are a mechanism that achieves its objectives "quickly and directly".[3]

History

Many agricultural schemes have been implemented over the years although many have collapsed. Rubber and timber schemes have also been created in order to guarantee prices for the producers.

Ever-normal granaries

The "ever-normal granary" form of buffer stock has been instituted in the Western world since at least biblical times, because there is reference to such granaries in the Old Testament. In Genesis, the Egyptians used an ever-normal granary to stabilize their food market during the seven years of high yields and subsequent seven years of famine. Another well-known example of ever-normal granaries is during the Sui dynasty in China (7th century).[4]

Storage of agricultural products for price stabilization has also been used in modern times in many countries, including the United States. The term "ever-normal granary" itself was probably coined by US Secretary of Agriculture Henry A. Wallace around 1926 (some time before he came into office) and brought into the mainstream of American agro-political thinking after the 1934 drought.[5] One example of this idea is presented by Benjamin Graham in his book, Storage and Stability, which was written in 1937 during the Great Depression. Graham suggested that much like years of high agricultural yields, years of overproduction of commodities in general could be neutralized by storing commodities until periods of underproduction. This idea was in response to the overproduction of goods during the depression, and the desire to preserve jobs and keep prices stable during this time.[4]

EU intervention storage

The creation of the EU's Common Agricultural Policy was the trigger for the creation of modern Europe's large-scale intervention storage. In an attempt to stabilize markets, and set prices across the EU member states, the Common Agricultural Policy allowed the states to place huge reserves of produce into intervention storage in an attempt to iron flat the natural supply and demand curves.

During the 1980s, especially in Britain, the farming community received large monetary incentives to reduce production of certain crops. The establishment of milk quotas was one mechanism employed to enforce production limits on farmers. A particularly good run of summers during the period 1985–86 saw a large surfeit of produce coming onto the market and the first intervention stores.

One such store run by "High Post Grain Silos" leased eighteen unused aircraft hangars at the former Bitteswell airfield and filled them with over 250,000 tonnes of feed wheat. The storage solution was simple, the grain was shipped into the hangars directly from the farm, having first passed a testing criterion. The stored grain was cooled by forcing air through the grain stack, a process which temporarily preserved the grain.

There is still some intervention storage being conducted in the EU, although it is not to the scale of the 1980s. Some people consider the storage as an essential part of securing the food supply in the event of a poor harvest.

References

  1. 1 2 Morrow, Daniel T. (1980). The economics of the international stockholding of wheat. International Food Policy Research Institute. ISBN 978-0-89629-019-8. Retrieved 23 April 2010.
  2. ↑ Edwards, R.; Hallwood, C. P. (February 1980). "The Determination of Optimum Buffer Stock Intervention Rules". The Quarterly Journal of Economics 94 (1): 151–166. doi:10.2307/1884609. JSTOR 1884609.
  3. ↑ Bosworth, Barry; Lawrence, Robert Z. (1982). Commodity prices and the new inflation. Brookings Institution Press. pp. 152–155. ISBN 978-0-8157-1033-2. Retrieved 23 April 2010.
  4. 1 2 Introduction to Commodity Buffer Stocks
  5. ↑ Davies, Joseph S. (February 1938). "The Economics of the Ever-Normal Granary". Journal of Farm Economics 20 (1): 8–21. JSTOR 1231507.
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