List down various disadvantage of having high level of buffer stock
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Buffer stocks are excess supplies of foodstuffs bought and stored by the government, usually for the purpose of stabilizing commodity prices. For example, a government might buy up hundreds of thousands of bushels of corn when the price is falling to shore up demand. Then, if the corn supply suddenly falls, it can sell its buffer stocks to keep prices from rising too sharply. This system has some important disadvantages.
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Buffer stocks are excess supplies of foodstuffs bought and stored by the government, usually for the purpose of stabilizing commodity prices. For example, a government might buy up hundreds of thousands of bushels of corn when the price is falling to shore up demand. Then, if the corn supply suddenly falls, it can sell its buffer stocks to keep prices from rising too sharply. This system has some important advantages, but it's contentious
Advantages and Disadvantages of Buffer Stocks
by Nick Robinson ; Updated September 26, 2017
Buffer stocks are excess supplies of foodstuffs bought and stored by the government, usually for the purpose of stabilizing commodity prices. For example, a government might buy up hundreds of thousands of bushels of corn when the price is falling to shore up demand. Then, if the corn supply suddenly falls, it can sell its buffer stocks to keep prices from rising too sharply. This system has some important advantages, but it's contentious.
Pro: Stabilizes Prices
The big advantage of buffer stocks is their ability to smooth out price fluctuations and maintain what former Secretary of Agriculture Henry Wallace termed the "ever-normal granary." When the government has a large stockpile of corn, for example, it can release some of that corn onto the market in the event of a price spike. The extra supply should bring prices back to normal. The mere existence of a buffer stock can stabilize prices even if the government never releases any supply, since the possibility of increased supply discourages speculation.
Stable prices are helpful to both consumers and farmers. Farmers can invest in new equipment or land with confidence, knowing they'll receive a decent price for their crop. Consumers, meanwhile, don't have to worry about the price of Sunday dinner skyrocketing overnight.
Con: Distorts Markets
The big downside to buffer stocks is that they provide a subsidy to agricultural markets, causing market distortions and possibly impairing efficiency. In a normal, unsubsidized corn market, for example, farmers would stop planting corn and switch to something else if the market became glutted. In a buffer stock system, however, farmers may keep growing extra corn because they know the government will buy up excess supply and maintain the price. In other words, the scheme can encourage wasteful overproduction of food.
By the same token, price stability schemes can allow consumers to keep buying food at artificially low prices. If a drought wipes out 90 percent of the corn crop, it's probably a good thing for corn prices to rise, since that helps to conserve the remaining supply. Buffer stocks eliminate that helpful market force on prices.
Pro: Assures Food Supply
The original purpose of buffer stocks, making sure that a society would always have enough food to eat, is still a big advantage of the system today. Thanks to stockpiles, governments can feed the population even in the event of major catastrophes like severe droughts, blights, or wars.
Con: Potentially High Costs
Buying and storing millions of tons of food can be a costly endeavor. First, the government has to buy up excess corn, wheat or other crops at above-market rates to build the stockpile. Then it has to sell those stockpiles at below-market prices to help the system stabilize. That means the government usually loses money on both ends of the transaction. Building huge warehouses and silos to store food isn't cheap either.
The big downside to buffer stocks is that they provide a subsidy to agricultural markets, causing market distortions and possibly impairing efficiency
Advantages and Disadvantages of Buffer Stocks
by Nick Robinson ; Updated September 26, 2017
Buffer stocks are excess supplies of foodstuffs bought and stored by the government, usually for the purpose of stabilizing commodity prices. For example, a government might buy up hundreds of thousands of bushels of corn when the price is falling to shore up demand. Then, if the corn supply suddenly falls, it can sell its buffer stocks to keep prices from rising too sharply. This system has some important advantages, but it's contentious.
Pro: Stabilizes Prices
The big advantage of buffer stocks is their ability to smooth out price fluctuations and maintain what former Secretary of Agriculture Henry Wallace termed the "ever-normal granary." When the government has a large stockpile of corn, for example, it can release some of that corn onto the market in the event of a price spike. The extra supply should bring prices back to normal. The mere existence of a buffer stock can stabilize prices even if the government never releases any supply, since the possibility of increased supply discourages speculation.
Stable prices are helpful to both consumers and farmers. Farmers can invest in new equipment or land with confidence, knowing they'll receive a decent price for their crop. Consumers, meanwhile, don't have to worry about the price of Sunday dinner skyrocketing overnight.
Con: Distorts Markets
The big downside to buffer stocks is that they provide a subsidy to agricultural markets, causing market distortions and possibly impairing efficiency. In a normal, unsubsidized corn market, for example, farmers would stop planting corn and switch to something else if the market became glutted. In a buffer stock system, however, farmers may keep growing extra corn because they know the government will buy up excess supply and maintain the price. In other words, the scheme can encourage wasteful overproduction of food.
By the same token, price stability schemes can allow consumers to keep buying food at artificially low prices. If a drought wipes out 90 percent of the corn crop, it's probably a good thing for corn prices to rise, since that helps to conserve the remaining supply. Buffer stocks eliminate that helpful market force on prices.
Pro: Assures Food Supply
The original purpose of buffer stocks, making sure that a society would always have enough food to eat, is still a big advantage of the system today. Thanks to stockpiles, governments can feed the population even in the event of major catastrophes like severe droughts, blights, or wars.
Con: Potentially High Costs
Buying and storing millions of tons of food can be a costly endeavor. First, the government has to buy up excess corn, wheat or other crops at above-market rates to build the stockpile. Then it has to sell those stockpiles at below-market prices to help the system stabilize. That means the government usually loses money on both ends of the transaction. Building huge warehouses and silos to store food isn't cheap either.
The big downside to buffer stocks is that they provide a subsidy to agricultural markets, causing market distortions and possibly impairing efficiency
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