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Buffer Stock Scheme
- a reserve of a particular COMMODITY or product held by some appointed body (often a government agency) which is used as part of a support mechanism to stabilize its price at some agreed level. If current production exceeds current demand, surplus output is bought up and held in reserve (otherwise excess supply would force the price down). Similarly, if current production cannot meet current demand then stock is released onto the market (otherwise excess demand would force prices up). Buffer stocks are used, for example, in connection with the operation of an INTERNATIONAL COMMODITY AGREEMENT.
- see STOCK CONTROL.
buffer stocka stock of a COMMODITY (copper, wheat, etc.) that is held by a trade body or government as a means of regulating the price of that commodity. An ‘official’ price for the commodity is established, and if the open-market price falls below this because there is excess supply at the fixed price, then the authorities will buy the surplus and add it to the buffer stock in order to force the price back up. By contrast, if the open-market price rises above the fixed price because there is an excess demand at the fixed price, then the authorities will sell some of their buffer stock in order to bring the price down. Through this mechanism the price of the commodity can be stabilized over time, avoiding erratic, short-term fluctuations in price.
Thus this mechanism attempts to avoid erratic short-term fluctuations in price. If the official price is set at too high a level, however, this will encourage over-supply in the long term and expensively accumulating stocks; while if the official price is set at too low a level, this will discourage supply in the long term and lead to shortages. See INTERNATIONAL COMMODITY AGREEMENT, PRICE SUPPORT, COMMON AGRICULTURE POLICY.