Buffer stock scheme

A buffer stock scheme (commonly implemented as intervention storage, the 'ever-normal granary') is an attempt to use commodity storage for the purposes of stabilising prices in an entire economy or an individual (commodity) market. Specifically, commodities are bought when a surplus exists in the economy, stored, and are then sold from these stores when economic shortages in the economy occur. The United States Strategic Petroleum Reserve stores 727 million barrels of crude petroleum, which is sold or lent during shortages. Most buffer stock schemes work along the same rough lines: first, two prices are determined, a floor and a ceiling (minimum and maximum price). When the price drops close to the floor price (after a new rich vein of silver is found, for example), the scheme operator (usually government) will start buying up the stock, ensuring that the price does not fall further. Likewise, when the price rises close to the ceiling, the operator depresses the price by selling off its holdings. In the meantime, it must either store the commodity or otherwise keep it out of the market (for example, by destroying it). If a basket of commodities is stored, their price stabilization can in turn stabilize the overall price level, preventing inflation. This scenario is illustrated on the right. Taking the market for wheat as an example, here, in years with normal harvests (S1) the price is within the allowed range and the operator does not need to act. In bumper years (S3), however, the prices begins to fall, and the government must buy wheat to prevent the price from collapsing; likewise, in years with bad harvests (S2), the government must sell its stock to keep prices down. The result is far less fluctuation in price. Price stability then leads to greater joint welfare (the sum of consumer and producer surplus. As illustrated, the term 'buffer stock scheme' can also refer to a scheme where the floor price and ceiling price are equal; in other words, an intervention in the market to ensure a fixed price. For such stores to be effective, the figure for 'average supply' must be adjusted periodically to keep up with any broad trends toward increased yield. That is, it must truly be an average of probable yield outcomes at that given point in time.