Buffer stock scheme

The "buffer stock scheme" is an economic term, referring to the use of commodity storage for economic stabilization. Specifically, commodities are bought and stored when there is a surplus in the economy and they are sold from these stores when there are shortages in the economy. The institutional buying, storing and selling of commodities by a large player (e.g. a government) can take place for one commodity or a "basket of commodities". The stock of commodities stored act as a buffer against price volatility. If a basket of commodities is stored, their price stabilization can in turn stabilize the overall price level.

The graph to the right shows a buffer stock scheme, in the scenario a large organisation (such as government or group of companies) have set a minimum price for a certain product above equilibrium (point at which the supply and demand curves cross), which guarantees a minimum price to producers - encouraging them to produce more, thus creating the surplus. This surplus is stored to ensure the price of the product doesn't fluctuate.

Why does it stop price fluctuation?The surplus is stored until it is needed, if demand for the product rises (usually increasing the price of the product due to market forces) the surplus is put into the market, stopping (or lessening) the effect of demand - ultimately keeping the price stable.

History

First implemented in China under the Song Dynasty.
N.B Many agriculurual schemes have been implemented over the years although many have collapsed. Rubber and timber schemes have also been created in order to guarantee prices for the producers.