Buffer Stock Meaning
Buffer stock system can be defined as a government scheme that is used for the purpose of stabilizing prices in a volatile market in which stocks are bought and stored during good harvests in order to disallow prices from falling below the price levels or a target range and stocks are released during harvests for preventing prices to rise above the price levels or a target range.
Below is the buffer stock diagram. In the diagram, it can be observed that in case the price of the stocks decreases from P to P2 (at times of the good harvests), then the stocks will be bought or stored in order to prevent falling of the prices of the goods below a target price range i.e., with this buffer stock mechanism the price will adjust itself to the normal target price range. On the other side, that in case the price of the stocks increases from P to P1 (at times of the bad harvests), then the stocks will be released in order to prevent the rising of prices of the goods above a target price range.
Examples of the Buffer stock
There are several different examples.
#1 – Genesis Wheat Stores
In genesis wheat stores, Joseph stored stock of wheat for at least 7 years of feast, and in this way; it became possible for him to distribute wheat from his stores during the 7 years of famine.
#2 – Ever-Normal Granary
It was established in China in the first century with the aim of stabilizing supply by means of purchasing grains during good years and getting the same distributed to regions that are facing shortages. Henry A. Wallace revived this idea from the history of Chinese culture.
#3 – Eu Cap or Common Agricultural Policy
This policy comprised of minimum prices for multiple foodstuffs. This encouraged oversupply of various foodstuffs. As a result of this phenomenon, the EU was left with no choice other than buying the surplus. The surplus was then stored in huge warehouses. However, this scheme turned out to be a failure since it became highly expensive for the participants to continue purchasing the surplus. Also, there was hardly any shortage. At least, the EU was compelled to implement quotas in order to limit the excess of supplies and common agricultural policy was slowly reformed in order to minimize the overall targeted minimum prices.
Difference Between Buffer Stock and Safety Stock
Buffer stock and safety stock are often used interchangeably. This often creates confusion. The difference that distinguishes buffer stock from safety stock is that Buffer stock system protects the customer from the producer during the time when there is an abrupt change in the demand of a particular product. On the other hand, the safety stock system protects the producers from probabilities like incapability in their upstream processes and their suppliers.
The importance of the buffer stock system is realized during the fixation of procurement targets. Buffers stocks are excess of stocks of food items that are stored in the godowns. This system helps in the even distribution of food items in various parts of a particular country. These food stocks can be taken into use for satisfying the food requirements during the time when there is a fall in production levels on account of diseases in crops, or due to extreme weather conditions such as droughts and floods. It helps in regulating and controlling prices constantly. With this system, sending food supplies to areas in distress on time gets really convenient.
Some of the advantages are given below:
- It helps in the regulation of food supplies and eliminates or minimizes the probabilities of food shortages too.
- This system helps in maintaining price stability which further encourages a higher level of investment in agriculture.
- It helps in eliminating the probabilities of a sudden drop in price levels that have the tendency of putting farmers out of business and even leads to a rise in the unemployment level. It helps the farmers in maintaining their incomes by regulating the price levels.
- Buffer stock scheme allows the government to earn tremendous profits by allowing the same to purchase stocks during a glut and sell off those stocks during a shortage.
Some of the disadvantages are given below:
- This system might require the government to collect higher taxes to cope up with the costs of buying in excess.
- There are certain perishable goods that cannot be stored in a buffer’s stock system such as milk, meat, etc.
- This scheme might generate administration costs.
- Government agencies might not always have the adequate and correct information and therefore, it might tricky to learn whether there is any surplus or not.
- The requirement to pay tariffs upon imports for paying off the bare minimum prices for foodstuffs.
Buffer stock system can be learned as a government scheme that is used for the purpose of stabilizing prices in a volatile market. The scheme aims at stabilizing the prices, ensuring the uninterrupted supply of goods, and preventing farmers and producers from going out of business as a result of an unexpected fall in prices. Genesis wheat stores, ever-normal granary, EU cap, International cocoa Organization (ICCO), and 1970 wool floor price scheme Australia are few examples of a buffer stock scheme.
This has been a guide to buffer stock and its meaning. Here we discuss examples and differences between buffer stock & safety stock along with advantages and disadvantages. You may learn more about financing from the following articles –