The prices of agricultural products such as wheat, cotton, cocoa, tea and coffee tend to fluctuate more than prices of manufactured products and services.
This is largely due to the volatility in the market supply of agricultural products coupled with the fact that demand and supply are price inelastic.
One way to smooth out the fluctuations in prices is to operate price support schemes through the use of buffer stocks. But many of them have had a chequered history.
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.
Advantages of a successful buffer-stock scheme:
Problems with buffer stock schemes
In theory buffer stock schemes should be profit making, since they buy up stocks of the product when the price is low and sell them onto the market when the price is high. However, they do not often work well in practice. Clearly, perishable items cannot be stored for long periods of time and can therefore be immediately ruled out of buffer stock schemes. Other problems are:
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