Buffer stock scheme
Encyclopedia
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. Specifically, commodities are bought when there is a surplus
in the economy, stored, and are then sold from these stores when there are economic shortage
s in the economy. Their usefulness is debated by economists.
.
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.
(the point at which the supply and demand curves cross), which guarantees a minimum price to producers, encouraging them to produce more, 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 of this is security of supply (e.g. 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".
and timber schemes have also been created in order to guarantee prices for the producers.
in China (7th century).
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 for 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
. 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.
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 & 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 quota
s 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 18 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 criteria. 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.
Economic surplus
In mainstream economics, economic surplus refers to two related quantities. Consumer surplus or consumers' surplus is the monetary gain obtained by consumers because they are able to purchase a product for a price that is less than the highest price that they would be willing to pay...
in the economy, stored, and are then sold from these stores when there are economic shortage
Economic shortage
Economic shortage is a term describing a disparity between the amount demanded for a product or service and the amount supplied in a market. Specifically, a shortage occurs when there is excess demand; therefore, it is the opposite of a surplus....
s in the economy. Their usefulness is debated by economists.
Two-price 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 surplusEconomic surplus
In mainstream economics, economic surplus refers to two related quantities. Consumer surplus or consumers' surplus is the monetary gain obtained by consumers because they are able to purchase a product for a price that is less than the highest price that they would be willing to pay...
.
Single price scheme
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 in order to meet other goals, for example, the promotion of domestic industry. This is achieved by setting a minimum price for a certain product above the equilibrium priceEconomic equilibrium
In economics, economic equilibrium is a state of the world where economic forces are balanced and in the absence of external influences the values of economic variables will not change. It is the point at which quantity demanded and quantity supplied are equal...
(the point at which the supply and demand curves cross), which guarantees a minimum price to producers, encouraging them to produce more, 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 of this is security of supply (e.g. food security
Food security
Food security refers to the availability of food and one's access to it. A household is considered food-secure when its occupants do not live in hunger or fear of starvation. According to the World Resources Institute, global per capita food production has been increasing substantially for the past...
), 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".
History
Many agricultural schemes have been implemented over the years although many have collapsed. RubberRubber
Natural rubber, also called India rubber or caoutchouc, is an elastomer that was originally derived from latex, a milky colloid produced by some plants. The plants would be ‘tapped’, that is, an incision made into the bark of the tree and the sticky, milk colored latex sap collected and refined...
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 dynastySui Dynasty
The Sui Dynasty was a powerful, but short-lived Imperial Chinese dynasty. Preceded by the Southern and Northern Dynasties, it ended nearly four centuries of division between rival regimes. It was followed by the Tang Dynasty....
in China (7th century).
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 for Agriculture Henry A. Wallace
Henry A. Wallace
Henry Agard Wallace was the 33rd Vice President of the United States , the Secretary of Agriculture , and the Secretary of Commerce . In the 1948 presidential election, Wallace was the nominee of the Progressive Party.-Early life:Henry A...
around 1926 (some time before he came into office) and brought into the mainstream of American agro-political thinking after the 1934 drought
Drought in the United States
Drought in the United States is similar to that of other portions of the globe. Below normal precipitation leads to drought, which is caused by an above average persistence of high pressure over the drought area...
. One example of this idea is presented by Benjamin Graham
Benjamin Graham
Benjamin Graham was an American economist and professional investor. Graham is considered the first proponent of value investing, an investment approach he began teaching at Columbia Business School in 1928 and subsequently refined with David Dodd through various editions of their famous book...
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.
EU intervention storage
The creation of the EU's Common Agricultural PolicyCommon Agricultural Policy
The Common Agricultural Policy is a system of European Union agricultural subsidies and programmes. It represents 48% of the EU's budget, €49.8 billion in 2006 ....
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 & demand
Supply and demand
Supply and demand is an economic model of price determination in a market. It concludes that in a competitive market, the unit price for a particular good will vary until it settles at a point where the quantity demanded by consumers will equal the quantity supplied by producers , resulting in an...
curves.
During the 1980s, especially in Britain, the farming community received large monetary incentives to reduce production of certain crops. The establishment of milk quota
Production quota
A production quota is a goal for the production of a good. It is typically set by a government or an organization, and can be applied to an individual worker, firm, industry or country. Quotas can be set high to encourage production, or can be used to limit production to control the supply of goods...
s 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 18 unused aircraft hangars at the former Bitteswell
Bitteswell
Bitteswell is a small village and civil parish in the Harborough district of Leicestershire in England. It is close to Lutterworth, and situated just to the north of that town, and in the 2001 census had a population of 454. It was recorded in the Domesday Book as Betmeswelle.It was the site of...
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 criteria. 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.