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A buffer stock scheme (commonly implemented as intervention storage, the "ever-normal granary") is a price stabilization scheme in which surplus commodities are bought and stored for later sale during shortages, usually for an individual commodity market or an entire economy. [1]
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.[ citation needed ] Price stability then leads to greater joint welfare (the sum of consumer and producer surplus. [2] )
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.
The diagram shows the supply and demand for a grain market. S3 and S2 show the supply of grain in high- and low-yield years, respectively, and S1 shows the average supply. The government buys grain during high-yield years and sells grain during low-yield years. The price is thus stabilized to P3, rather than fluctuating between P1 and P2, as it did before.
The primary action of buffer stocks, creating price stability, is often combined with other mechanisms to meet other goals such as the promotion of domestic industry. That is achieved by setting a minimum price for a certain product above the equilibrium price, the point at which the supply and demand curves cross, which guarantees a minimum price to producers, encouraging them to produce more, thus creating a surplus ready to be used as a buffer stock. The price stability itself may also tempt firms into the market, further boosting supply.
The upside is security of supply (such as food security); the downside is huge stockpiles, or in other cases, destruction of commodities. The scheme also makes domestic food more expensive for other countries to purchase and operation of such a scheme can be costly to the operator.[ citation needed ]
Their main advantage, when compared to other forms of government intervention in markets, is that they are a mechanism that achieves its objectives "quickly and directly". [3]
Many agricultural schemes have been implemented over the years, although many have collapsed. Rubber and timber schemes have also been created to guarantee prices for the producers.
The "ever-normal granary" form of buffer stock has been instituted in the Middle East since at least Biblical times; reference to such granaries is found in the Old Testament. In Genesis, the Egyptians used an ever-normal granary to stabilize their food market during the seven years of high yields and the subsequent seven years of famine.
Building on simpler predecessors and concepts, the first actual ever-normal granary was built in 54 BC. Its name was "Chang-ping can", and its translation provides the English name. It was promoted by Wang Anshi during the Northern Song period and thereafter. [4] Another example of ever-normal granaries is during the Sui dynasty in China (seventh century AD). [5] The system was used in the Han, Jin, Sui and Tang dynasties. When the system collapsed during the An Lushan Rebellion, massive famine and cannibalism broke out. Although not the first to implement this concept, nowhere else in the world was such a system practiced at such a large scale and long span of time. [6] In the Qing dynasty (1644-1911) the government established a nation-wide state granary system, which involved a total of 2.2-3.3 million tonnes of grain, the largest such system in the world. Over 100 million lives were saved by the grain distribution scheme. In the 1850s Taiping Rebellion the granary system was destroyed and never fully restored. [7]
Storage of agricultural products for price stabilization has been used in modern times in many countries, including the United States. The term "ever-normal granary" was adopted from a Columbia University dissertation on Confucian economic practice that was read by future US Secretary of Agriculture Henry A. Wallace circa 1926, before he came into office. [4] Wallace brought the term into the mainstream of American agropolitical thinking after the 1934 drought. [8] One example of this idea was presented by Benjamin Graham in his book, Storage and Stability, written in 1937 during the Great Depression. Graham suggested that much like years of high agricultural yields, the years of overproduction of commodities in general could be neutralized by storing commodities until periods of underproduction. The idea was in response to overproduction of goods during the depression, as well as the desire to preserve jobs and to stabilize prices. [5]
The creation of the EU's Common Agricultural Policy was the trigger for the creation of modern Europe's large-scale intervention storage. In an attempt to stabilize markets, and set prices across the EU member states, the Common Agricultural Policy allowed the states to place huge reserves of produce into intervention storage in an attempt to flatten the natural supply and demand curves.
During the 1980s, especially in Britain, the farming community received large monetary incentives to reduce production of certain crops. The establishment of milk quotas was one mechanism employed to enforce production limits on farmers. A particularly good run of summers during the period 1985–86 saw a large surfeit of produce coming onto the market and the first intervention stores.
One such store run by "High Post Grain Silos" leased 18 unused aircraft hangars at the former Bitteswell airfield and filled them with over 250,000 tonnes of feed wheat. The storage solution was simple, the grain was shipped into the hangars directly from the farm, having first passed a testing criterion. The stored grain was cooled by forcing air through the grain stack, a process which temporarily preserved the grain.
Some intervention storage is still being conducted in the EU, although not to the scale of the 1980s.
Some economists, particularly of the Modern Monetary Theory school, favor creating a buffer stock of unskilled labor in the form of a government-funded job guarantee. Any individual who was ready, willing, and able to work would be employed at a set nominal wage. By employing and stabilizing the price of unskilled labor, a job guarantee is claimed to impart price stability to the economy as a whole, bring the unemployment rate to zero permanently, and create an effective minimum wage. [9]
A cereal is a grass cultivated for its edible grain. Cereals are the world's largest crops, and are therefore staple foods. They include rice, wheat, rye, oats, barley, millet, and maize. Edible grains from other plant families, such as buckwheat and quinoa, are pseudocereals. Most cereals are annuals, producing one crop from each planting, though rice is sometimes grown as a perennial. Winter varieties are hardy enough to be planted in the autumn, becoming dormant in the winter, and harvested in spring or early summer; spring varieties are planted in spring and harvested in late summer. The term cereal is derived from the name of the Roman goddess of grain crops and fertility, Ceres.
A commodity market is a market that trades in the primary economic sector rather than manufactured products, such as cocoa, fruit and sugar. Hard commodities are mined, such as gold and oil. Futures contracts are the oldest way of investing in commodities. Commodity markets can include physical trading and derivatives trading using spot prices, forwards, futures, and options on futures. Farmers have used a simple form of derivative trading in the commodities market for centuries for price risk management.
Contango is a situation in which the futures price of a commodity is higher than the expected spot price of the contract at maturity. In a contango situation, arbitrageurs or speculators are "willing to pay more [now] for a commodity [to be received] at some point in the future than the actual expected price of the commodity [at that future point]. This may be due to people's desire to pay a premium to have the commodity in the future rather than paying the costs of storage and carry costs of buying the commodity today." On the other side of the trade, hedgers are happy to sell futures contracts and accept the higher-than-expected returns. A contango market is also known as a normal market or carrying-cost market.
In finance, speculation is the purchase of an asset with the hope that it will become more valuable shortly. It can also refer to short sales in which the speculator hopes for a decline in value.
In finance, a futures contract is a standardized legal contract to buy or sell something at a predetermined price for delivery at a specified time in the future, between parties not yet known to each other. The asset transacted is usually a commodity or financial instrument. The predetermined price of the contract is known as the forward price or delivery price. The specified time in the future when delivery and payment occur is known as the delivery date. Because it derives its value from the value of the underlying asset, a futures contract is a derivative.
A hedge is an investment position intended to offset potential losses or gains that may be incurred by a companion investment. A hedge can be constructed from many types of financial instruments, including stocks, exchange-traded funds, insurance, forward contracts, swaps, options, gambles, many types of over-the-counter and derivative products, and futures contracts.
The Ministry of Agriculture, Fisheries and Food (MAFF) was a United Kingdom government department created by the Board of Agriculture Act 1889 and at that time called the Board of Agriculture, and then from 1903 the Board of Agriculture and Fisheries, and from 1919 the Ministry of Agriculture and Fisheries. It attained its final name in 1955 with the addition of responsibilities for the British food industry to the existing responsibilities for agriculture and the fishing industry, a name that lasted until the Ministry was dissolved in 2002, at which point its responsibilities had been merged into the Department for Environment, Food and Rural Affairs (Defra).
Crop insurance is insurance purchased by agricultural producers and subsidized by a country's government to protect against either the loss of their crops due to natural disasters, such as hail, drought, and floods ("crop-yield insurance", or the loss of revenue due to declines in the prices of agricultural commodities.
Price controls are restrictions set in place and enforced by governments, on the prices that can be charged for goods and services in a market. The intent behind implementing such controls can stem from the desire to maintain affordability of goods even during shortages, and to slow inflation, or, alternatively, to ensure a minimum income for providers of certain goods or to try to achieve a living wage. There are two primary forms of price control: a price ceiling, the maximum price that can be charged; and a price floor, the minimum price that can be charged. A well-known example of a price ceiling is rent control, which limits the increases that a landlord is permitted by government to charge for rent. A widely used price floor is minimum wage. Historically, price controls have often been imposed as part of a larger incomes policy package also employing wage controls and other regulatory elements.
In economics, a price support may be either a subsidy, a production quota, or a price floor, each with the intended effect of keeping the market price of a good higher than the competitive equilibrium level.
The Commodity Credit Corporation (CCC) is a wholly owned United States government corporation that was created in 1933 to "stabilize, support, and protect farm income and prices". The CCC is authorized to buy, sell, lend, make payments, and engage in other activities for the purpose of increasing production, stabilizing prices, assuring adequate supplies, and facilitating the efficient marketing of agricultural commodities.
The grain trade refers to the local and international trade in cereals such as wheat, barley, maize, and rice, and other food grains. Grain is an important trade item because it is easily stored and transported with limited spoilage, unlike other agricultural products. Healthy grain supply and trade is important to many societies, providing a caloric base for most food systems as well as important role in animal feed for animal agriculture.
A strategic reserve is the reserve of a commodity or items that is held back from normal use by governments, organisations, or businesses in pursuance of a particular strategy or to cope with unexpected events.
A grain is a small, hard, dry fruit (caryopsis) – with or without an attached hull layer – harvested for human or animal consumption. A grain crop is a grain-producing plant. The two main types of commercial grain crops are cereals and legumes.
The Wheat Price Guarantee Act was a 1919 bill passed by Congress that gave the government the power to regulate the price of wheat.
Inflation rate in India was 4.83% as of April 2024, as per the Indian Ministry of Statistics and Programme Implementation. This represents a modest reduction from the previous figure of 5.69% for December 2023. CPI for the months of January, February and March 2024 are 5.10, 5.09 and 4.85 respectively. Inflation rates in India are usually quoted as changes in the Consumer Price Index (CPI), for all commodities.
Agriculture in India is highly susceptible to risks like droughts and floods. It is necessary to protect the farmers from natural calamities and ensure their credit eligibility for the next season. For this purpose, the Government of India introduced many agricultural social insurances throughout the country, the most important one of them being Pradhan Mantri Fasal Bima Yojana.
The Jute Corporation of India Limited (JCI) is central public sector undertaking under the ownership of Ministry of Textiles, Government of India. It is incorporated by the Government Of India in 1971 as a price support agency with a clear mandate for the procurement of raw jute / mesta without any quantitative limit from the growers at the minimum Support price (MSP) declared in each year by the Government Of India based on the recommendations made by Commission for Agricultural Cost & Prices (CACP). This protects the jute growers from exploitations in the hands of the middle men. The basic objective is not profit making but a social cause to protect the interest of about 4.00 million families engaged in farming of jute, most of whom are small / marginal farmers. Therefore, the presence of JCI in the market provide stability in the raw jute prices.
In the early 14th century, the Delhi Sultanate ruler Alauddin Khalji instituted price controls and related reforms in his empire. He fixed the prices for a wide range of goods, including grains, cloth, slaves and animals. He banned hoarding and regrating, appointed supervisors and spies to ensure compliance with the regulations, and severely punished the violators. The reforms were implemented in the capital Delhi, and possibly, other areas of the Sultanate.
The minimum support price (MSP) is the minimum price for select crops raised in kharif and rabi seasons that the Government of India considers as remunerative for farmers and hence deserves support. This is different from procurement price and issue price. It is generally announced before the sowing/planting season. It is approved by the government and aims to safeguard the farmer to a minimum profit for the harvest while at the same time increasing food security in the country. MSP was initially an incentive for farmers to adopt technology with an aim of increasing the productivity of agricultural land in the 1960s, however in the 2000s it is seen as a market intervention and farmer income scheme. The effectiveness of such a price policy has varied widely between states and commodities. Awareness among farmers of the existence of an MSP is poor at 23%, while awareness of MSP procurement agencies is also poor with only about 20–25% of wheat and paddy produce being sold at MSP.