Can buffer stock schemes help to promote economic growth and development in low income countries?
- A-Level, IB
- AQA, Edexcel, OCR, IB, Eduqas, WJEC
Last updated 2 Mar 2023
Buffer stock schemes are programmes designed to stabilize prices of commodities by buying and selling to maintain a target price range. These schemes involve the creation of a stockpile of a commodity that is bought when the price is low and sold when the price is high.
The aim of buffer stock schemes is to stabilise market prices and ensure that producers receive a fair price for their commodities, while also ensuring that consumers can access essential commodities at a reasonable price.
Real-world examples of buffer stock schemes include:
- The Food Corporation of India: This government-owned corporation maintains a buffer stock of grains such as rice and wheat to ensure food security in India. The corporation purchases grains from farmers when the price is low and sells them when the price is high to stabilize the price of food in the country.
- The Cocoa Marketing Board of Ghana: This board maintains a buffer stock of cocoa beans to stabilize the price of cocoa on the international market. The board purchases cocoa beans from farmers when the price is low and sells them when the price is high to maintain a stable price range.
The use of buffer stocks to stabilise commodity prices is a controversial issue, and there are arguments both for and against their use. Here are some of the main arguments:
Arguments for the use of buffer stocks:
- Price stability: Buffer stocks can help to stabilize commodity prices, ensuring that producers receive a fair price for their products and consumers have access to the products at a reasonable price. This can help to reduce price volatility and uncertainty in the market.
- Income stability for farmers: Buffer stocks can provide income stability for farmers, especially small-scale farmers who are vulnerable to price fluctuations. By buying their products when the price is low, buffer stocks can ensure that farmers receive a minimum price for their products.
- Food security: Buffer stocks can help to ensure food security by maintaining a stockpile of food in case of crop failure or other emergencies. This can help to prevent food shortages and price spikes during times of scarcity after an external shock for example.
Arguments against the use of buffer stocks:
- Cost: Maintaining buffer stocks can be expensive, as it requires a significant investment in storage and management. This cost can be passed on to consumers, leading to higher prices.
- Inefficiency: Buffer stocks can be inefficient, as they require constant monitoring and management to ensure that they are maintained at the appropriate level. In addition, the storage and transportation of the commodities can be costly and logistically challenging.
- Distortion of markets: Buffer stocks can distort markets by creating artificial demand and supply. This can lead to inefficient allocation of resources and discourage private investment and innovation.
- Corruption and inefficiency: In some cases, buffer stock schemes have been associated with corruption and inefficiency. There have been instances of stocks being sold or misused, leading to losses and waste.
Overall, the effectiveness of buffer stock schemes depends on careful consideration of the specific context and needs of each country and industry, as well as effective monitoring and evaluation to ensure that they are achieving their intended goals.
There are several alternatives to buffer stocks that can help to stabilise and grow farm incomes. Here are some of the main alternatives:
- Crop insurance: Crop insurance can help to protect farmers against the financial risks of crop failure or other disasters. This can provide income stability for farmers and reduce their vulnerability to price fluctuations.
- Contract farming: Contract farming involves agreements between farmers and buyers, where the buyers commit to purchasing the farmers' products at a predetermined price. This can provide income stability for farmers and encourage investment in production and quality improvements.
- Market information systems: Providing farmers with market information can help them to make informed decisions about what to produce and when to sell. This can help to reduce price volatility and improve the efficiency of the market.
- Market-based incentives: Market-based incentives, such as certification schemes or premiums for high-quality products, can encourage investment in production and quality improvements. These incentives can help to increase farmers' income and competitiveness in the market.