Buffer stock schemes seek to stabilize the market price of agricultural products by buying up supplies of the product when harvests are plentiful and selling stocks of the product onto the market when supplies are low. An example of a buffer stock scheme is the international coffee agreement. The international coffee agreement is an international commodity agreement, which aims to achieve a reasonable balance between the supply and demand of coffee at a higher price than would otherwise be the case. Price
An advantage of buffer stocks is market stabilization. Governments may vary the amount of produce they buy; this enables supply to remain unchanged from year to year. If demand stays the same, the price is also likely to neither rise nor fall. By releasing buffer stocks for sale when supply is low, governments help to moderate prices that unmet demand might otherwise drive up. This allows farmers to plan ahead and predict income based on production and market prices with greater accuracy. Buffer stocks can serve as a form of government subsidy for farmers. A subsidy is a sum of money granted by the government to assist an industry or business so that the price of a commodity may remain low or competitive. Rather than being forced to sell a large quantity of produce at a reduced price, farmers can sell to the government, which can afford to buy large quantities of agricultural produce at one time. This helps keep farmers and agricultural conglomerates profitable and able to remain in business for the next season.
Another advantage of a buffer stock is that without them, some farmers might be discouraged from producing large crops. This can happen when farmers attempt to keep supply low to force a higher price from buyers on the open market. By purchasing the surplus stock, governments encourage farmers to be as...