Buffer Stock§
Definition§
A buffer stock is a reserve of a commodity or goods that is used to mitigate price fluctuations and ensure stability in supply and demand dynamics. In agriculture, buffer stocks are managed by the government or specific organizations. They involve purchasing excess production during periods of high supply and releasing these reserves into the market during periods of low production or high demand. The main objective of buffer stocks is to stabilize the prices of essential commodities, thus protecting both consumers and producers from volatile market conditions.
Examples§
- Wheat and Rice in India: The Food Corporation of India (FCI) manages the buffer stock of grains such as wheat and rice. During harvest seasons when production is high, FCI purchases excess grains from farmers. During periods of scarcity or rising prices, FCI releases these grains into the market.
- Sugar in Brazil: The Brazilian government maintains a buffer stock for sugar to hedge against global price volatility. By controlling the release of sugar into the local and international markets, they help stabilize prices.
Frequently Asked Questions (FAQs)§
Q1: How do buffer stocks stabilize commodity prices?
A1: Buffer stocks help stabilize commodity prices by balancing supply with demand. When there is an oversupply, excess commodities are purchased and stored. When there is an undersupply or prices start to rise, stored commodities are released into the market.
Q2: Who is responsible for managing buffer stocks?
A2: Typically, governments or special agencies are responsible for managing buffer stocks. These entities purchase surplus production, store it, and manage its release during periods of shortage.
Q3: What are the benefits of buffer stocks?
A3: Buffer stocks help stabilize market prices, ensure a steady supply of essential commodities, protect farmers’ incomes, and provide consumers with price stability.
Q4: Are there any drawbacks to using buffer stocks?
A4: Yes, some drawbacks include the cost of purchasing, storing, and maintaining the stocks, the risk of spoilage or wastage of perishable goods, and potential market distortions.
Q5: Is a buffer stock system used globally?
A5: Yes, buffer stock systems are used globally in various countries as a tool for economic and market stability in the agricultural sector.
Related Terms§
- Commodity Market: A market that trades in primary economic sector rather than manufactured products.
- Supply and Demand: The amount of a commodity, product, or service available and the desire of buyers for it, considered as factors regulating its price.
- Price Ceiling: A government-imposed limit on how high a price is charged for a product.
- Subsidy: A form of financial aid or support extended to an economic sector.
Online References§
Suggested Books for Further Studies§
- “The Economics of Agricultural Prices” by John W. Goodwin
- “Agricultural Marketing and Price Analysis” by F. Bailey Norwood and Jayson L. Lusk
- “Agricultural Price Distortions, Inequality, and Poverty” by Kym Anderson, John Cockburn, and Will Martin
Fundamentals of Buffer Stock: Economics Basics Quiz§
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