Buffer Stocks Held

Buffer Stocks Held

Buffer Stocks, held to reduce fluctuations in the prices of 'primary' products. Prices tend to move frequently and sharply because (a) the output of agricultural products fluctuates widely with weather conditions, diseases and pests, (b) the demand for them (particularly for raw materials) fluctuates with changes in the level of economic activity in the industrial countries which buy them, (c) there are technical difficulties and time lags in trying to increase or decrease the output of primary products, which is thus inelastic e.g. rubber trees produce rubber seven years after planting. The purpose of the buffer stock is to adapt the supply of commodities coming on to the market to the current demand for them in order to narrow the movement in prices. Usually a 'ceiling' and a 'floor' price are chosen and the authority operating the scheme is required to sell from stock when prices reach the ceiling and to buy when they drop to the floor. When demands seem high the supply in the market is increased by running down the stock, and when supply seems excessive the authority buys.

The success of such schemes depends on the size of their funds and stocks, the width of the gap between the buying and selling prices, and most important the correct prediction of the long-run trends in demand and supply. If the authority running the scheme wrongly estimates the long-run average price for the commodity and sets its price range too high, its buffer stock will grow very large. If it then moves its price range down to a more realistic level it can unload the stock at a loss. It will also have encouraged over-production. Producers who would have been discouraged by lower prices will have maintained production: new producers will have been attracted into the industry. The inevitable readjustment may prove more difficult and painful when it is ultimately made than it would have been if made earlier in the absence of the scheme.

These failings are common in producer-run schemes. They tend to be too optimistic about the trend in demand for theft product; or they may take the short-sighted view that by using the stockpile to reduce the supply reaching the market they can raise their incomes, ignoring the effect of high prices in stimulating new producers to enter the field and perhaps other producers to offer synthetic substitutes, both of which reduce demand for their output in the long run. Partly for this reason the United Nations has recommended that consuming nations should be represented on such schemes.

The need for the commodity to be suitable for storing cheaply and with little risk of deterioration sets narrow limits to the range of products for which buffer stock schemes can be used. The principal example of a buffer stock scheme in operation in recent times is in tin.

These weaknesses are common to all buffer stock schemes, but especially in those run by, and for the sole benefit of, producers. The larger schemes set up under international agreement now usually provide for consumer representation; but the tin agreement suggests that this is not sufficient to ensure success.

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