Warehouse Management System (WMS)

What Is Buffer Stock: Example And Advantages

Ngoc Lee
What Is Buffer Stock: Example And Advantages
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Food price volatility creates significant dangers, affecting everyone from producers to consumers, particularly in developing nations. It remains a critical policy priority since its destructive consequences on sustainable farming and food security, especially for the poor. That is the reason why governments have used various ways to keep domestic food prices stable, involving publicly maintained buffer stock, import and export levies, and production subsidies. 

What is buffer stock
What is buffer stock

What Is Buffer Stock?

A buffer stock system or buffer stock scheme is a government scheme that is used to maintain price stability in a highly competitive market. 

During excellent harvests, stocks are purchased and kept to avoid costs from dropping below-market prices or a goal range, and supplies are discharged during harvests to stop prices from increasing over price levels or a target range. 

Agricultural commodity prices are frequently fluctuating for the following reasons: weather, inelastic demand, and fixed supply in the near future.

Buffer Stock Scheme Illustration Diagram 

You can see the stock diagram below.

Buffer stock scheme diagram
Buffer stock scheme diagram

The graphic indicates that the stock price declines from P to P2, with P2 being known as times of good harvests. It is because the stocks will be purchased or held to avoid the prices of the items dropping below a target price range. 

In other words, the price will adjust itself to the typical target price range with this buffer stock mechanism. However, if the price of the stocks rises from P to P1, due to poor harvests, the stocks will be removed to prevent the growing prices of the items from exceeding a target price range. 

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Lack Of Buffer Stock

You can see that supply is decreasing in this instance. This price would grow to P2 in a free market just above the target price. To bring prices back to target, the government must sell items from buffer stock, bringing supply back up to S1. 

Buffer stock with shortage diagram
Buffer stock with shortage diagram

Benefits That Buffer Stocks Bring To Us

Along with the biggest benefit of buffer stock which is to ensure the supply of foodstuffs and keep stable prices, buffer stocks also have some benefits that you can see below. 

What are buffer stock’s advantages
What are buffer stock’s advantages
  • Stable pricing help farmers keep their revenue. A sharp reduction in costs can force farmers out of businesses, causing structural jobless.
  • Price stability supports more agricultural investment.
  • Farming may have beneficial externalities, such as assisting rural residents. A price decrease might have a detrimental multiplier impact in rural regions.
  • Target pricing helps customers avoid overpriced items and assist to limit food inflation. It might be significant for low-income households struggling to afford high expenditures during times of shortage.
  • It aids in the preservation of food supply and the avoidance of lack.
  • A buffer stock approach might be beneficial to the government. It can earn a profit if it purchases during a surplus and sells at a scarcity.

Drawbacks Of Buffer Stock That We Can Face

Besides its advantages, buffer stocks still have some disadvantages that you should know. 

What are buffer stock’s disadvantages
What are buffer stock’s disadvantages
  • This method may need the government to collect greater taxes to cover the expenses of over-purchasing.
  • Certain perishable items, like milk and meat, cannot be held in a buffer stock system.
  • This plan may incur administrative charges.
  • Government agencies may not always have appropriate and precise information, making it difficult to determine if there was a surplus or not.
  • Tariffs on imports may be required in order to pay the basic minimum pricing for foodstuffs.

Issues Caused By Buffer Stocks 

Buffer stock’s problems
Buffer stock’s problems
  • The government may demand more taxes since the expense of obtaining more goods may become too expensive.
  • Since farmers know that any surplus would be purchased, buffer stocks and minimum prices may promote overstock. It may even incentivize farmers to overuse pesticides in order to maximize yields since they know any extra supply can be traded, even when the market does not want it.
  • Farmers may become inefficient as a result of government subsidies. There can be less motivation to minimize expenses and adapt to market demands.
  • Some items, such as fresh milk and meat, cannot be held in buffer stockpiles.
  • Government entities may lack information, such as determining the price and the amount to acquire. Is there a true surplus? In reality, it might be hard to determine if a surplus exists till later in the year.
  • The cost for the administration of the system.
  • The lowest food costs may need import levies.
  • Agricultural production is a globally interconnected sector. If some nations organize a buffer stock program and purchase extra supplies, other countries may “free ride” on their attempts to maintain profits high and undercut them.
  • Agricultural buffer reserves are frequently designed to provide farmers with the lowest possible prices and revenues.

Examples In Reality For Buffer Stocks 

Here are a few examples that you can consider to understand more about buffer stocks.

European Union Common Agricultural Policy

Many goods have minimum pricing specified in the CAP. Therefore, it fueled oversupply. The EU was compelled to purchase the surplus. This overstock was kept in massive warehouses and barns, which are also referred to as buttery mountains, grain mountains, and wine lakes.

The EU Common Agricultural Policies
The EU Common Agricultural Policies

The initiative was mainly a failure since it became prohibitively expensive to continue purchasing overstock. There has never been a true scarcity. Finally, the EU was forced to establish quotas to manage surplus supplies. CAP was gradually changed to lower the targeted lowest prices.

International Cocoa Organization (ICCO)

In 2017, the Ivory Coast and Ghana intended to restart a cocoa buffer stock arrangement. The Ivory Coast and Ghana control more than 60% of the global supply. They faced a worldwide excess of 371,000 tonnes, which would result in lower pricing and fewer export earnings. 

The Ivory Coast intends to construct warehouses capable of storing 250,000 tonnes of cocoa. According to one analysis, periods of buffer stock intervention were relatively successful in stabilizing agricultural earnings. 

International Cocoa Organization’s logo
International Cocoa Organization’s logo

1970 Wool Floor Price Scheme Australia

Keeping the wool price-stable was their goal. Wool has the advantage of being simple to store. During years of abundant production, the government may purchase and stockpile extra wool. During times of scarcity, the government will discharge wool from storage. 

The project was abandoned because it became mostly about the government purchasing wool. During a period of diminishing demand, the system just incentivized farmers to continue producing wool instead of responding to shifting market signals.

Ever-normal Granary

China was founded in the first century BC. The goal was to stabilize supply by purchasing grain in strong years and transferring it to places experiencing shortages. Henry A. Wallace who was a future adviser to President Roosevelt renewed the concept. he borrowed the concept from Chinese history and gave it this name. The United States began using agricultural intervention in 1929. Government assistance for agriculture grew as a result of these 1930s policies and has been tough to remove.

Genesis Wheat Stores

In Genesis wheat storage, Joseph saved wheat stock for at least 7 years of feast, allowing him to distribute wheat from his stockpiles during the 7 years of famine. 

Genesis Wheat Stores’ product
Genesis Wheat Stores’ product

The Value Of Buffer Stock

The relevance of the buffer stock system is evident throughout the procurement target-setting process. Buffer stocks are extra food stocks held in godowns. This strategy aids in the equitable distribution of food across a country. These food reserves can be utilized to meet food requirements when agricultural production rates decline due to illnesses or harsh weather events like droughts and floods. 

Furthermore, it aids in the ongoing regulation and management of prices. Sending food supplies to communities in need becomes more convenient using this technique. 

The importance of buffer stock
The importance of buffer stock

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A buffer stock scheme is a government plan designed to stabilize prices in a competitive market. Its goal is to maintain price stability, provide an ongoing supply of commodities, and save farmers and manufacturers from closing down their businesses as a result of an expected price drop. A buffer stock program includes the EU cap, the International Cocoa Organization, the 1960 wool floor pricing scheme in Australia, the ever-normal granary, and the Genesis wheat storage. Hope you have a good time with EFEX - eCommerce Fulfillment & Express.

Ngoc LeeNgoc Lee is an Content Creator Manager at EFEX. She wields her long-term expertise in Logistics and Supply Chain, harnessing her top-notch writing and research skills to bring incredibly valuable content. Whether you're a small startup or a well-established enterprise, Ngoc Lee is here to equip you with the essential knowledge of e-commerce, fulfillment, and all things business-related.