Buffer Stocks

A buffer stock scheme is a form of government intervention designed to stabilize price. Governments apply buffer stock schemes to unstable markets, such as agriculture and commodities, where the ability and willingness of producers to produce fluctuates sharply. A buffer stock scheme stabilizes the price of a good by setting a ceiling/maximum and floor/minimum price for a good, e.g. rice. (Fig. 1).

Price Band for Rice (Fig. 1) P

S

pmax

Price Band

pmin

D

0. Q

If there are good conditions for growing rice one year, supply will increase. This will lower the price of rice, and possibly causing a surplus, where producers produce more than consumers are willing and able to purchase, i.e. supply > demand. When this is the case, there is a ‘bumper crop’, and the administrators of the buffer stock scheme will purchase the surplus. In the case of global rice, supply shocks in the form of typhoons have led to a bad year for rice production (Fig. 2). Furthermore, the Philippines has limited ability to ‘boost production’, due to limitations on some factors of production. The Philippines have little arable land left, and thus cannot increase the number of rice plantations. This inability to boost supply, coupled with a growing population, mean that supply per person is decreasing. This inability contributes to the supply shock experienced by the Philippines.

Decrease in Supply for Rice in buffer stock scheme (Fig. 2)

P S1

S P*

Price Band

D

0 qs1 q* qd Q
The graph above depicts the situation outlined in the article, showing the effect of the supply shocks both with and with a buffer stock scheme. Q*P* is the equilibrium point in the free market. However, as P* is