Buffer Stocks

Question 1

Define a Buffer Stocks scheme.

Answer 1

Is a government plan to stabilise prices in volatile(unpredictable) markets. This requires intervention buying and selling.

Question 2

Why are agricultural products volatile?

Answer 2

• Supply can vary due to the weather. • Demand is inelastic • Supply is fixed in the short term

Question 3

What do Buffer Stock schemes aim to do?

Answer 3

• Stabilise prices • Ensure supply of food • Prevent farmers/producers going out of business because of a drop in prices.

Question 4

Diagram of Buffer Stocks Scheme

Answer 4

Question 5

Buffer Stock Shortage Diagram

Answer 5

Question 6

What does the government do to reduce prices?

Answer 6

• Sell goods from the buffer stock and effectively increase supply.

Question 7

What does the government do to increase price?

Answer 7

• Government buys the surplus stock and stores it, reducing supply so increasing demand.

Question 8

Advantages of Buffer Stocks

Answer 8

• Stable prices help maintain farmers incomes. A rapid drop in prices can make farmers go out of business, which leads to structural unemployment.
• Price stability encourages more investment in agriculture.
• Farming can have positive externalities e.g. helps rural communities. A drop in price could cause a negative multiplier effect within rural areas.

Question 9

Disadvantages of Buffer Stocks

Answer 9

• Cost of buying excess supply could become quite high for the government and may require higher taxes.
• Minimum prices and buffer stocks could encourage oversupply as farmers know any surplus will be bought. It could even encourage excess use of chemicals to maximise yields because farmers know any excess supply can be sold – even if the market doesn’t want it.
• Government subsidy to farmers may encourage inefficiency amongst farmers. There may be less incentive to cut costs and respond to market pressures.
• Some goods cannot be stored in buffer stocks, e.g. fresh milk, meat e.t.c.

Question 10

Give 2 examples of a Buffer Stock scheme.

Answer 10

• EU Common Agricultural policy
• International Cocoa Organization (ICCO)