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AS Micro: Price Vola/lity in Markets and Buffer Stock Schemes
Why are prices vola/le in markets for many commodi/es?
Low Ped (<1) Low Pes (<1)
Vola/le Supply “Supply Shocks”
Market Speculators
Using analysis diagrams Price
Quan/ty
Price
Quan/ty
Using analysis diagrams Price
Quan/ty
Price
Quan/ty
S1
D1
Using analysis diagrams Price
Quan/ty
Price
Quan/ty
S1
D1 D2
P1
P2
Using analysis diagrams Price
Quan/ty
Price
Quan/ty
S1
D1 D2
P1
P2 S1
D1
Using analysis diagrams Price
Quan/ty
Price
Quan/ty
S1
D1 D2
P1
P2 S1
D1
S2
P1
P2
Key problems arising from price vola/lity
Risk and Uncertainty • Uncertain incomes and profits for growers • May limit capital investment by poorer farmers which then harms produc/vity and real wages
Risk of extreme poverty and unemployment • Millions of smaller farmers suffer -‐ least resilient • Many do not gain when world prices eventually rise
Macroeconomic effects • Vola/le export revenues affects na/on’s trade balance • Especially the case where primary product dependence is high • Higher prices can cause infla/on and extreme food poverty
Key problems arising from price vola/lity
Risk and Uncertainty • Uncertain incomes and profits for growers • May limit capital investment by poorer farmers which then harms produc/vity and real wages in the long run
Risk of extreme poverty and unemployment • Millions of smaller farmers suffer -‐ least resilient • Many do not gain when world prices eventually rise
Macroeconomic effects • Vola/le export revenues affects na/on’s trade balance • Especially the case where primary product dependence is high • Higher prices can cause infla/on and extreme food poverty
Key problems arising from price vola/lity
Risk and Uncertainty • Uncertain incomes and profits for growers • May limit capital investment by poorer farmers which then harms produc/vity and real wages in the long run
Risk of extreme poverty and unemployment • Millions of smaller farmers suffer -‐ least resilient • Many do not gain when world prices eventually rise
Macroeconomic effects • Vola/le export revenues affects na/on’s trade balance • Especially the case where primary product dependence is high • Higher prices can cause infla/on and extreme food poverty
Key problems arising from price vola/lity
Risk and Uncertainty • Uncertain incomes and profits for growers • May limit capital investment by poorer farmers which then harms produc/vity and real wages in the long run
Risk of extreme poverty and unemployment • Millions of smaller farmers suffer -‐ least resilient • Many do not gain when world prices eventually rise
Macroeconomic effects • Vola/le export revenues affects na/on’s trade balance • Especially the case where primary product dependence is high • Higher prices can cause infla/on and extreme food poverty
Ghana – Primary Product Dependence
Ghana to establish Buffer Stock
The government in Ghana is to establish a Buffer Stock
Management Agency as a long term measure to ensure food security.
Such an Agency would have the dual responsibility of holding food security buffer stocks and
intervening in markets to ensure compe//ve prices to farmers in
/mes of glut
News reports: 18th October 2013
Key aims of buffer stock: 1. Stabilise food prices 2. Ensure food supplies
3. Prevent farmers / producers going out of business because
of drop in world prices
Cocoa: world's top producers by value 2012
Leading producers of cocoa beans in 2012, by production value ($bn)
1,713,505
972,336
913,192
397,740
265,852
262,956
138,454
86,194
75,004
60,162
51,414
40,189
35,827
20,769
18,692
0 200000 400000 600000 800000 1000000 1200000 1400000 1600000 1800000
Côte d'Ivoire
Indonesia
Ghana
Nigeria
Cameroon
Brazil
Ecuador
Mexico
Dominican Republic
Peru
Colombia
Papua New Guinea
Togo
Venezuela
Sierra Leone
Produc/on value in thousand U.S. dollars
How might a buffer stock help to stabilise prices?
Price of Cocoa
Quan/ty
Market Demand
Producer Supply
Upper Target
Upper Target Price
Lower Target
Lower Target Price
A buffer stock scheme is a government plan to stabilise prices in vola/le markets
How might a buffer stock help to stabilise prices?
Price of Cocoa
Quan/ty
Market Demand
Producer Supply
Upper Target
Upper Target Price
Lower Target
Lower Target Price
Protect consumers
A buffer stock scheme is a government plan to stabilise prices in vola/le markets
How might a buffer stock help to stabilise prices?
Price of Cocoa
Quan/ty
Market Demand
Producer Supply
Upper Target
Upper Target Price
Lower Target
Lower Target Price
Protect consumers
Protect producers
A buffer stock scheme is a government plan to stabilise prices in vola/le markets
How might a buffer stock help to stabilise prices?
Price of Cocoa
Quan/ty
Market Demand
Producer Supply
Upper Target
Upper Target Price
Lower Target
Lower Target Price
Protect consumers
Protect producers
Market price free to vary between the upper & lower band
A buffer stock scheme is a government plan to stabilise prices in vola/le markets
How might a buffer stock help to stabilise prices?
Price of Cocoa
Quan/ty
Market Demand
Producer Supply
Upper Target
Upper Target Price
Lower Target
Lower Target Price
Protect consumers
Protect producers
Market price free to vary between the upper & lower band
A buffer stock scheme is a government plan to stabilise prices in vola/le markets
Current market price is at P1 Price of Cocoa
Quan/ty
Market Demand
Producer supply
Upper Target
Lower Target
P1
Q1
P1
Q1
Consider an unexpected rise in market supply
Price of Cocoa
Quan/ty
Market Demand
Producer Supply
Upper Target
Lower Target
S2
P1
Q1
Consider an unexpected rise in market supply
Price of Cocoa
Quan/ty
Market Demand
Planned Supply
Upper Target
Lower Target
S2
Q2
P1
Q1
Consider an unexpected rise in market supply
Price of Cocoa
Quan/ty
Market Demand
Planned Supply
Upper Target
Lower Target
S2
Q2
D2
Q3
Do Buffer Stock Schemes Work?
Problems in using buffer stocks for commodi/es such as cocoa
Buffer stock may not be large enough to change price
High interven/on price leads to rising producer surpluses
Expensive to buy up the surpluses – might cause big losses
Costs of storage and falling quality of product
Might be befer alterna/ve long run policies for farmers
Problems in using buffer stocks for commodi/es such as cocoa
Buffer stock may not be large enough to change market price
High interven/on price leads to rising producer surpluses
Expensive to buy up the surpluses – might cause big losses
Costs of storage and falling quality of product
Might be befer alterna/ve long run policies for farmers
Problems in using buffer stocks for commodi/es such as cocoa
Buffer stock may not be large enough to change market price
High interven/on price leads to rising producer surpluses
Expensive to buy up the surpluses – might cause big losses
Costs of storage and falling quality of product
Might be befer alterna/ve long run policies for farmers
Problems in using buffer stocks for commodi/es such as cocoa
Buffer stock may not be large enough to change market price
High interven/on price leads to rising supply surpluses
Expensive to buy up the surpluses – might cause big losses
Costs of storage and falling quality of product
Might be befer alterna/ve long run policies for farmers
Problems in using buffer stocks for commodi/es such as cocoa
Buffer stock may not be large enough to change market price
High interven/on price leads to rising supply surpluses
Expensive to buy up the surpluses – might cause big losses
Costs of storage and falling quality of product
Might be befer alterna/ve long run policies for farmers
Problems in using buffer stocks for commodi/es such as cocoa
Buffer stock may not be large enough to change market price
High interven/on price leads to rising supply surpluses
Expensive to buy up the surpluses – might cause big losses
Costs of storage and falling quality of product
Might be beTer alterna/ve long run policies for farmers
Alterna/ves to buffer stocks Mobile technology to help farmers
Encourage processing / branding by farmers
Improved basic storage facili/es + irriga/on
Micro insurance policies for poorer farmers
Alterna/ves to buffer stocks Mobile technology to help farmers
Encourage processing / branding by farmers
Improved basic storage facili/es + irriga/on
Micro insurance policies for poorer farmers
Alterna/ves to buffer stocks Mobile technology to help farmers
Encourage processing / branding by farmers
Improved basic storage facili/es + irriga/on
Micro insurance policies for poorer farmers
Alterna/ves to buffer stocks Mobile technology to help farmers
Encourage processing / branding by farmers
Improved basic storage facili/es + irriga/on
Micro insurance policies for poorer farmers
Alterna/ves to buffer stocks Mobile technology to help farmers
Encourage processing / branding by farmers
Improved basic storage facili/es + irriga/on
Micro insurance policies for poorer farmers
Alterna/ves to buffer stocks Mobile technology to help farmers
Encourage processing / branding by farmers
Improved basic storage facili/es + irriga/on
Micro insurance policies for poorer farmers
Good evalua/on always includes sugges/ng alterna/ves to the policy / strategy under discussion
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AS Micro: Price Vola/lity in Markets and Buffer Stock Schemes
