A buffer stock scheme is a method of intervening in a market in order to stabilise price within an agreed range. There is evidence that buffer stocks were used in ancient Egypt during the Middle Kingdom1, some 3000 years ago2, and in ancient China3 as part of a national food reserve system. The aim of such schemes was to ensure that sufficient grains were put into storage at times of surplus production, and then brought out of storage when harvests were poor.
Unlike manufactured goods, food production is subject to factors which are largely beyond human control, including variable weather, natural disasters, and the impact of pests and diseases. While modern production techniques and scientific land management have greatly reduced the impact of such shocks, food production is still prone to changes in weather and natural factors. Buffer stocks are one example of how instability can be managed and controlled.
Assume that buffer stock managers set a target range of prices between A and B in the diagram below, with current equilibrium at e, where demand equals supply (D=S). If supply increases (to S1) as a result of an unusually good harvest, the price would drop below price Pb to P1 - out of the accepted price range. The buffer then ‘clicks in’ so that stocks are bought, shifting demand to D1, and then stored. The effect is that price is driven up to Pb, into the target range, at equilibrium e2. Of course, the buffer stock managers could purchase more, to push the price nearer to centre of the target range.
With a bad harvest supply shifts to S2, causing price to rise out of the target range, at P2 and equilibrium e3. Stocks are then released, which shifts the supply curve to S3, pushing the price down to Pa, with a new equilibrium at e4. Again, the buffer stock managers could release a greater supply, to push price nearer to the centre of the price range.
There are other price stabilisation schemes, including guaranteed prices.
Agricultural and other primary markets face several significant problems, which may require government intervention in the market. Instability results from the particular supply characteristics existing in these markets, including:
If we then assume that demand is relatively slow to adapt to such changes, we can see that the market can become unstable over time. Just a small supply shock can trigger an increasingly volatile reaction.
We can assume that the market starts at equilibrium at P and Q.
A small shock will reduce short run supply to S1. The effect of this is to push up price to P1. At P1, farmers plan to increase output to S2, but the effect of this increased output is to push down price in the following year, to P2.
At this lower price, farmers plan to cut back on production to S3. The impact of this is that prices move up and down to create instability. The interaction of demand, short-run and long-run supply forms the basis of the so-called cobweb theorem, first discussed by American Economist, Mordecai Ezekiel, in the 1930s.
This instability can cause the following problems:
Buffer stocks provide one solution to the problem.
Buffer stocks can be criticised in a number of ways, including:
1. Middle Kingdom is a period of ancient Egypt covering the period from approximately 2030 to 1650 B.C. (Dynasty 11 to Dynasty 13)
2. Ezzame, M, 2002, Accounting and redistribution: The palace and mortuary cult in the Middle Kingdom, ancient Egypt, Accounting Historians Journal, Volume 29, June 2002, viewed 21 February 2021 <https://core.ac.uk/download/pdf/288025206.pdf>
3. Zhang, Y,Fan, G, Whalley, J, Economic Cycles in Ancient China, Working Paper 21672, NATIONAL BUREAU OF ECONOMIC RESEARCH, 1050 Massachusetts Avenue, Cambridge, MA 02138, October 2015, viewed 20 February, 2021 <https://www.nber.org/system/files/working_papers/w21672/w21672.pdf>