Buffer Stock Meaning Example Diagram Of Buffer Stock Scheme

Buffer Stock Meaning

The buffer stock scheme holds significance at the time of heavy harvests, which makes individuals buy and store commodities during good harvests to disallow costs from falling below the normal price levels.In addition, the supplies are released during harvests, preventing the prices from rising above the price levels.

Explanation

Below is the buffer stock diagram. The chart shows that the price of the stocks decreases from P to P2 (at times of the good harvests). This is because the stocks will be bought or stored to prevent the falling of the prices of the goods below a target price range, i.e., with this buffer stock mechanism, the price will adjust itself to the normal target price range. On the other hand, if the price of the stocks increases from P to P1 (at times of the bad harvests), the stocks will be released to prevent the rising prices of the goods above a target price range.

Key Takeaways

Buffer stock refers to keeping aside a chunk of a particular commodity that is traded in the market to offset price fluctuations when they occur.Safety stock, on the other hand, is a slightly different concept. Buffer stocks help maintain and control the prices of commodities that go out of hand; however, safety stocks protect producers from suppliers upstream.The advantages of buffer stocks are that they maintain price stability, minimize food shortages, and prevent sudden drops in prices.

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Examples of the Buffer stock

There are several different examples.

#1 – Genesis Wheat Stores

In genesis wheat stores, Joseph stored stock of wheat for at least 7 years of feast, and in this way; it became possible for him to distribute wheat from his stores during the 7 years of famine.

#2 – Ever-Normal Granary

In the first century, China established it to stabilize supply using purchasing grains during good years and distributed the same to regions facing shortages. Henry A. Wallace revived this idea from the history of Chinese culture.

#3 – Eu Cap or Common Agricultural Policy

This policy consisted of minimum prices for multiple foodstuffs, which encouraged oversupply. As a result of this phenomenon, the EU was left with no choice other than to buy the surplus. The surplus was then stored in huge warehouses. However, this scheme turned out to fail since it became highly expensive for the participants to continue purchasing the surplus. Also, there was hardly any shortage. At least, this compelled the EU to implement quotas to limit the excess of supplies and slowly reform common agricultural policy to minimize the overall targeted minimum prices.

Difference Between Buffer Stock and Safety Stock

Buffer stock and safety stock are often used interchangeably. However, this often creates confusion. Buffer stock distinguishes it from safety stock because it protects the customer from the producer when there is an abrupt change in the demand for a particular product. On the other hand, the safety stock system protects the producers from probabilities like incapability in their upstream processes and suppliers.t

Importance

The importance of the buffer stock system is realized during the fixation of procurement targets. Buffer stocks are excess stocks of food items stored in the godowns. This system helps evenly distribute food items to various parts of a country. These food stocks can be used to satisfy the food requirements when there is a fall in production levels due to diseases in crops or extreme weather conditions such as droughts and floods. Moreover, it helps in regulating and controlling prices constantly. With this system, sending food supplies to areas in distress on time gets convenient.

Advantages

Some of the advantages are given below:

It helps regulate food supplies and eliminates or minimizes the probabilities of food shortages.This system helps maintain price stability, further encouraging higher agriculture investment.It helps eliminate the probability of a sudden drop in price levels that tend to put farmers out of business and even leads to a rise in unemployment. It allows farmers to maintain their incomes by regulating the price levels.Buffer stock scheme allows the government to earn tremendous profits by purchasing stocks during a glut and selling off those stocks during a shortage.

Disadvantages

Some of the disadvantages are given below:

This system might require the government to collect higher taxes from coping with the costs of excess buying.Certain perishable goods cannot be stored in a buffer stock system, such as milk, meat, etc.This scheme might generate administration costs.Government agencies might not always have adequate and correct information, and therefore, it might be tricky to learn whether there is any surplus or not.There can be a requirement to pay tariffsTariffsA tariff is levied by a government on the import of goods or services from another country. The charges increase government revenue, restrict trade with other countries, and protect domestic manufacturers from stiff competition.read more on imports for paying off the bare minimum prices for foodstuffs.

Conclusion

Buffer stock system can be comprehended as a government scheme used to stabilize prices in a volatile market. The scheme aims to stabilize the prices, ensure an uninterrupted supply of goods, and prevent farmers and producers from going out of business due to an unexpected fall in prices. Genesis wheat stores, ever-normal granary, EU cap, International Cocoa Organization (ICCO), and 1970 wool floor price scheme in Australia are a few examples of a buffer stock scheme.