Buffer Stocks; A Simple Guide For A` Level Students (diagrams Excluded)

Raw materials and basic foodstuffs are traded on a worldwide scale. These are commodities. In most of these industries farmers, growers and quite often countries have got together to try to find a way of stabilizing prices in the interest of both producers and consumers. The reasons for this are as follows:

1.Prices can fluctuate wildly due to weather conditions, the harvest and sometimes political developments. 2.Demand is inelastic meaning a fall in prices leads to a fall in producer's incomes. 3.Millions of farmers, miners and their families depend on the production of these products. A fall in prices can cause extreme poverty in certain countries. 4.Consumers of these products, in particular the food and metal processing industries costs can be dramatically affected by changes in price, price uncertainty is bad for these companies when planning investments and production.

How they work; The Buffer Stock scheme

Some of the largest producers try to persuade the other smaller producers to work together by joining a Producers association and making a commodity agreement. This means agreeing to in restrict supply to a certain amount in order to keep prices high.

If however too much is produced then the Producers association will buy up the surplus and put it into storage - or Buffer stock. When there are times of demand exceeding supply the Producers Association can sell from the Buffer stock at a higher price than they bought it. The profit made effectively can finance the costs of storage and administration. In practice though it costs more and producers need to pay a subscri ption towards membership of the association.

The problem with these agreements is that all producing countries want to get the best deal for their farmers or growers. They will want to each produce as much as possible. However by doing this price will end up falling defeating the object!! Discipline needs to be exercised by imposing quotas on all member countries and fining them if they exceed these.

A number of commodity agreements, such as the International Cocoa Agreement and International Tin Council have been disbanded due to conflicts between member countries. In the case of the latter, worldwide substitution of aluminium for tin caused lower demand and a fall in the market price of tin. It became impossible to use buffer stocks to maintain high prices - this was the last straw for tin producers most of whom went out of business! More recently however, strong demand from China and India have persuaded a number of countries to reopen tin mines as price rises make it more profitable.