Buffer Stocks

Buffer stocks in Global Commerce Policy

In this regard, buffer stocks is: holdings usually established under some international commodity agreements to influence and stabilize the price of commodities. Buffer stocks are sold when the price moves above a defined price band. They are accumulated when the price moves below a band reflecting current market prices. Buffer stocks can work when price fluctuations are short-term, and when high prices more or less cancel out low prices within a reasonable period. The price range covered by the agreement normally is structured so that the buffer stock manager must buy when the price is in the lowest band, assuming funds are left to do so. Then follows a band in which the manager may buy. That decision is based on the commercial outlook, available funds, the size of the existing buffer stock, etc. The entries on trade policy are here. At yet a higher price level, the manager may sell. The entries on trade policy in the Encyclopedia are here. Once the commodity price enters the highest price band set out in the agreement, the manager must sell, assuming that there are stocks. Buffer stocks are intended to be self-financing. The maximum size of the stock and the method of financing it are usually contentious. Proponents of such mechanisms hold that a large buffer stock operation compared to the size of the market and endowed with strong financial resources can much more easily deal with market fluctuations than a smaller one. The entries on trade policy are here. It also would be much more expensive to run. The entries on trade policy are here. In the case of secular changes to demand and supply, large buffer stocks may hinder production adjustments. The success of buffer stock arrangements tends to be temporary because they are often not flexible enough to deal with longer-term market moves. Problems arise from long- term low prices if producers are not at the same time encouraged to restrain production. The obligation to continue buying may then send buffer stocks out of business. The entries on trade policy are here. If the price band for triggering buffer stock purchases or sales is too wide, the effectiveness of international commodity agreement as a tool for market intervention is greatly diminished. The entries on trade policy in the Encyclopedia are here. On the whole the record of buffer stocks has been disappointing. The IMF maintains a Buffer Stock Financing Facility to assist the financing of member contributions to approved international buffer stocks, but it has not been used since 1984. See also commodity policy, Common Fund for Commodities and Integrated Programme for Commodities.[1]

Buffer stocksin the wold Encyclopedia

For an introductory overview on international trade policy, see this entry.

Resources

Notes and References

1. Dictionary of Trade Policy, “Buffer stocks” entry (OAS)

See Also