Upload
cj7chuah
View
217
Download
0
Embed Size (px)
Citation preview
8/12/2019 Market Price 6 Buffer Stocks Scheme
http://slidepdf.com/reader/full/market-price-6-buffer-stocks-scheme 1/27
8/12/2019 Market Price 6 Buffer Stocks Scheme
http://slidepdf.com/reader/full/market-price-6-buffer-stocks-scheme 2/27
BUFFER STOCKS SCHEME
• Students should be able to apply the conceptof government intervention in the form of
buffer stocks that seeks to stabilise prices and
incomes in agricultural markets
Any exam Q on price
stability requires this
theory
8/12/2019 Market Price 6 Buffer Stocks Scheme
http://slidepdf.com/reader/full/market-price-6-buffer-stocks-scheme 3/27
What is a buffer stock?
• Many farmers of primary commodities face theproblems of volatile prices and incomes
• Buffer stock schemes seek to stabilise the
market price of agricultural products by buyingup supplies of the product when harvests are
plentiful and selling stocks of the product onto
the market when supplies are low
8/12/2019 Market Price 6 Buffer Stocks Scheme
http://slidepdf.com/reader/full/market-price-6-buffer-stocks-scheme 4/27
8/12/2019 Market Price 6 Buffer Stocks Scheme
http://slidepdf.com/reader/full/market-price-6-buffer-stocks-scheme 5/27
Price volatility: Copper
Spot price each day on the London Metal Exchange
World Price of Copper
Source: Reuters EcoWin
Jan
03
Mar May Jul Sep Nov Jan
04
Mar May Jul Sep Nov Jan
05
Mar May Jul Sep Nov Jan
06
Mar May Jul
U S d
o l l a r s p e r t o n n e
o f c o p p
e r
1000
2000
3000
4000
5000
6000
7000
8000
9000
Describe the changein price over the 4
year period
What has beenthe % change?
Is this a stableor unstable
market?
8/12/2019 Market Price 6 Buffer Stocks Scheme
http://slidepdf.com/reader/full/market-price-6-buffer-stocks-scheme 6/27
Price volatility: Rubber
Daily closing price in the New York Exchanges, US cents per lb
World Rubber Price
Source: Reuters EcoWin
00 01 02 03 04 05 06
U S c / l b s
20
30
40
50
60
70
80
90
100
110
120
130
140
Describe the changein price over the 6
year period
What has beenthe % change?
Is this a stableor unstable
market?
8/12/2019 Market Price 6 Buffer Stocks Scheme
http://slidepdf.com/reader/full/market-price-6-buffer-stocks-scheme 7/27
Commodities prices…
•Producing commodities such as coffee, cotton ortobacco for the international markets is a hazardousbusiness.
• Commodity markets are characterised by instabilityand uncertainty.
• This uncertainty may arise due to
fluctuations in the market prices due to market conditionschanging
changes in prices due to changes in exchange rates
changes in foreign government protectionist measures
8/12/2019 Market Price 6 Buffer Stocks Scheme
http://slidepdf.com/reader/full/market-price-6-buffer-stocks-scheme 8/27
Examples of buffer stock schemes
• Cotton Price Stabilization
Board
• International Coffee
Agreement
• International Tin Council
Coffee beans!
8/12/2019 Market Price 6 Buffer Stocks Scheme
http://slidepdf.com/reader/full/market-price-6-buffer-stocks-scheme 9/27
Draw a Demand and Supply diagramfor coffee commodity rather than starbucks!
• Show a ‘shock’ to the market – what would happen ifthere was a coffee ‘mite’?
• Show the immediate reaction?
• How would ‘business’ consumers react?
• How would the supplier react to this?
• So what do you think might happen in the nextseason?
8/12/2019 Market Price 6 Buffer Stocks Scheme
http://slidepdf.com/reader/full/market-price-6-buffer-stocks-scheme 10/27
Buffer Zone
in diagrams
8/12/2019 Market Price 6 Buffer Stocks Scheme
http://slidepdf.com/reader/full/market-price-6-buffer-stocks-scheme 11/27
Price support in a buffer stock
Price
Quantity
Demand
Supply
P min
Q1
Pe
Price Floor
(Guaranteed)
Q2
• Thegovernmentoffers aguaranteedminimum price(P min) to
farmers ofwheat.
• The price floor
is set abovethe normalfree marketequilibriumprice.
8/12/2019 Market Price 6 Buffer Stocks Scheme
http://slidepdf.com/reader/full/market-price-6-buffer-stocks-scheme 12/27
Price support in a buffer stock
Price
Quantity
Demand
Supply
P min
Q1
Pe
Price Floor
(Guaranteed)
Q2
•
If thegovernment is
to maintain the
guaranteed
price at P min,
then it mustbuy up the
excess supply
(Q2-Q1) and
put these
purchases intointervention
storage.
8/12/2019 Market Price 6 Buffer Stocks Scheme
http://slidepdf.com/reader/full/market-price-6-buffer-stocks-scheme 13/27
Price support in a buffer stock
Price
Quantity
Demand
Supply
P min
Q1
Pe
Price Floor
(Guaranteed)
Q2
Intervention
purchases required
to keep the price atPmin
8/12/2019 Market Price 6 Buffer Stocks Scheme
http://slidepdf.com/reader/full/market-price-6-buffer-stocks-scheme 14/27
Price support in a buffer stock
Price
Quantity
Demand
Supply
P min
Q1
Pe
Price Floor
(Guaranteed)
Q2
Total spending on
intervention by the
buffer stock = Pmin
x (Q2-Q1)
8/12/2019 Market Price 6 Buffer Stocks Scheme
http://slidepdf.com/reader/full/market-price-6-buffer-stocks-scheme 15/27
Question W02:
• Q16 • The diagram shows the
market supply and demand
curves for a particular
agricultural product. The
government allows the market
price paid by consumers to be
freely determined by demand
and supply, but guarantees
producers a price of OP2.
• Which area in the diagram
represents the total subsidy
payments made by the
government to producers?A w + y + z
B y + z
C x
D x + y +z
Answer: D
8/12/2019 Market Price 6 Buffer Stocks Scheme
http://slidepdf.com/reader/full/market-price-6-buffer-stocks-scheme 16/27
8/12/2019 Market Price 6 Buffer Stocks Scheme
http://slidepdf.com/reader/full/market-price-6-buffer-stocks-scheme 17/27
Rising supply – more intervention
Price
Quantity
Demand
Supply
P min
Q1
Pe
Price Floor
(Guaranteed)
Q3Q2
S2
P2
Q4
How muchwould the‘market
buy?
How muchwould Govt
buy?
8/12/2019 Market Price 6 Buffer Stocks Scheme
http://slidepdf.com/reader/full/market-price-6-buffer-stocks-scheme 18/27
Does it really work?
8/12/2019 Market Price 6 Buffer Stocks Scheme
http://slidepdf.com/reader/full/market-price-6-buffer-stocks-scheme 19/27
Consider this diagram
Max
Min
8/12/2019 Market Price 6 Buffer Stocks Scheme
http://slidepdf.com/reader/full/market-price-6-buffer-stocks-scheme 20/27
Your Q’s….
• What would happen is supply curve shiftsbetween S2, S3 and S4?
• What would happen if there was a supply
shock to cause S5?
• What would happen if there was a supply
shock to cause S1?
8/12/2019 Market Price 6 Buffer Stocks Scheme
http://slidepdf.com/reader/full/market-price-6-buffer-stocks-scheme 21/27
Consider this diagram
Max
Min
8/12/2019 Market Price 6 Buffer Stocks Scheme
http://slidepdf.com/reader/full/market-price-6-buffer-stocks-scheme 22/27
The answers!
•In the diagram shifts in the supply curve between S2,S3 and S4 will only result in the price changingbetween the acceptable price band.
• If a supply shock causes the supply curve to shift to
the right to S5 then the buffer stock authority willintervene and purchase the surplus Q4-Q5 thuspreventing the market clearing by itself through alowering of the equilibrium market price to P1.
• If the supply curve shifted to the left then the bufferstock authority would release stocks equal to Q1-Q2 on to the market thus preventing the price risingto P4.
8/12/2019 Market Price 6 Buffer Stocks Scheme
http://slidepdf.com/reader/full/market-price-6-buffer-stocks-scheme 23/27
Question S03:
18 In the diagram, S1S1 andDD represent the original
supply and demand curves for
an agricultural product.
• Bad weather then reduces
supply to S2S2. The
government does not allowthe price to rise above OP1.
• How much of the product will
the government have to
supply from a buffer stock if
demand is to be met?
A OQ1
B Q1Q3C Q1Q2
D Q2Q3 Answer: B. At P1, there is a
shortage of Q1Q3.
8/12/2019 Market Price 6 Buffer Stocks Scheme
http://slidepdf.com/reader/full/market-price-6-buffer-stocks-scheme 24/27
What can you do with surplus stock?
• In the case where the surplus is bought thereare number of options that can happen to the
stock
• It can be stored
• It can be destroyed
• It can be sold to other countries
• It can be given as overseas assistance.
What are the
implicationsof each of
these?
8/12/2019 Market Price 6 Buffer Stocks Scheme
http://slidepdf.com/reader/full/market-price-6-buffer-stocks-scheme 25/27
Implications of stock surplus…
• Storage is expensive and involves an opportunitycosts of the storage facilities.
• Destroying surpluses especially if the surplus is a
food is morally questionable in a world devastated by
poverty and hunger.
• Selling to other countries at low prices or dumping
can undermine domestic producers in the countries
where the goods are sold.• Giving the food as aid could, it is argued, lead to a
dependency culture.
8/12/2019 Market Price 6 Buffer Stocks Scheme
http://slidepdf.com/reader/full/market-price-6-buffer-stocks-scheme 26/27
Problems with buffer stocks
• Setting up a buffer stock scheme requires asignificant amount of start up capital, since
money is needed to buy up the product when
prices are low. There are also high administrative
and storage costs to be considered.
• The success of a buffer stock scheme however
ultimately depends on the ability of those
managing a scheme to correctly estimate theaverage price of the product over a period of
time
8/12/2019 Market Price 6 Buffer Stocks Scheme
http://slidepdf.com/reader/full/market-price-6-buffer-stocks-scheme 27/27
Problems with buffer stocks
• If the target price is significantly above thecorrect average price then the organization
will find itself buying more produce than it is
selling and it will eventually run out of money
• Conversely if the target price is too low then
the organization will often find the price rising
above the boundary, it will end up selling
more than it is buying and will eventually run
out of stocks