Updated revision presentation covering price volatility in commodity markets and the economics of buffer stock "price stabilisation" schemes. designed for unit 1 micro course
9. Problems arising from price volatility
Risk and Uncertainty
• Uncertain incomes and profits
• May limit capital investment by poorer farmers
Risk of extreme poverty and unemployment
• Millions of smaller farmers suffer
• Many do not gain when world prices rise
Macroeconomic effects
• Volatile export revenues affects the trade balance
• High prices can cause inflation and food poverty
10. Problems arising from price volatility
Risk and Uncertainty
• Uncertain incomes and profits
• May limit capital investment by poorer farmers
Risk of extreme poverty and unemployment
• Millions of smaller farmers suffer
• Many do not gain when world prices rise
Macroeconomic effects
• Volatile export revenues affects the trade balance
• High prices can cause inflation and food poverty
11. Problems arising from price volatility
Risk and Uncertainty
• Uncertain incomes and profits
• May limit capital investment by poorer farmers
Risk of extreme poverty and unemployment
• Millions of smaller farmers suffer
• Many do not gain when world prices rise
Macroeconomic effects
• Volatile export revenues affects the trade balance
• High prices can cause inflation and food poverty
14. Cocoa Prices
Describe two significant features of
the data on world cocoa prices
shown in the chart
1/ Prices are volatile – e.g. ranging from $3700 per
tonne to $2100 during 2010 alone
2/ Significant trend rise in prices from 2006-2011 but a
steep decline from the peak of nearly $3750
15. 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
competitive prices to farmers in
times of glut
News reports: 18th October 2013
16. 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
competitive prices to farmers in
times of glut
News reports: 18th October 2013
Key aims:
1. Stabilise food prices
2. Ensure food supplies
3. Prevent farmers / producers
going out of business because
of drop in world prices
19. How might a buffer stock help to
stabilise prices?
Price of
Cocoa
Planned
Supply
Upper
Target
Upper
Target Price
Lower
Target
Lower
Target Price
Market
Demand
A buffer stock scheme is a government
plan to stabilise prices in volatile markets
Quantity
20. How might a buffer stock help to
stabilise prices?
Price of
Cocoa
Protect
consumers
Planned
Supply
Upper
Target
Upper
Target Price
Lower
Target
Lower
Target Price
Market
Demand
A buffer stock scheme is a government
plan to stabilise prices in volatile markets
Quantity
21. How might a buffer stock help to
stabilise prices?
Price of
Cocoa
Planned
Supply
Protect
consumers
Upper
Target
Upper
Target Price
Protect
producers
Lower
Target
Lower
Target Price
Market
Demand
A buffer stock scheme is a government
plan to stabilise prices in volatile markets
Quantity
22. How might a buffer stock help to
stabilise prices?
Price of
Cocoa
Planned
Supply
Market price
free to vary
between the
upper & lower
band
Protect
consumers
Upper
Target
Upper
Target Price
Protect
producers
Lower
Target
Lower
Target Price
Market
Demand
A buffer stock scheme is a government
plan to stabilise prices in volatile markets
Quantity
23. How might a buffer stock help to
stabilise prices?
Price of
Cocoa
Planned
Supply
Market price
free to vary
between the
upper & lower
band
Protect
consumers
Upper
Target
Upper
Target Price
Protect
producers
Lower
Target
Lower
Target Price
Market
Demand
A buffer stock scheme is a government
plan to stabilise prices in volatile markets
Quantity
24. Current market price is at P1
Price of
Cocoa
Actual
Supply
Planned
Supply
Upper
Target
Upper
Target Price
P1
Lower
Target
Lower
Target Price
Market
Demand
Q1
Quantity
25. Consider an unexpected rise in actual
market supply
Price of
Cocoa
Actual
Supply
Planned
Supply
Upper
Target
Upper
Target Price
P1
Lower
Target
Lower
Target Price
Market
Demand
Q1
S1
Quantity
26. A rise in market supply
Price of
Cocoa
Actual
Supply
Planned
Supply
Upper
Target
Upper
Target Price
Lower
Target
Lower
Target Price
Market
Demand
S1
Quantity
27. A rise in market supply
Price of
Cocoa
Actual
Supply
Planned
Supply
Upper
Target
Upper
Target Price
Lower
Target
Lower
Target Price
Excess
supply at
this price
Market
Demand
Q1
S1
Quantity
28. A rise in market supply
Price of
Cocoa
Demand with
purchases
Actual
Supply
Planned
Supply
Upper
Target
Upper
Target Price
Lower
Target
Lower
Target Price
Market
Demand
Q1
S1
Quantity
29. A rise in market supply
Price of
Cocoa
Demand with
purchases
Actual
Supply
Planned
Supply
Upper
Target
Upper
Target Price
Lower
Target
Lower
Target Price
Cost of
buying up
stocks
Market
Demand
Q1
S1
Quantity
31. Could a buffer stock scheme stabilise onion prices?
An eye-watering rise in the price of
onions has contributed to an
unexpected surge in Indian inflation.
Onion prices have more than tripled
over the past year, with the wholesale
price up 245 per cent.
Many Indians use onions in almost
every meal, and some form of bread
with onion is regarded as a basic diet
for the poor
Onion prices in India have been high
since January 2013, with officials
blaming first a water shortage and
then excessive monsoon
rains, although business leaders say
the underlying problems include bad
roads and the country’s poor
infrastructure for storage and
distribution of fresh produce (Source:
FT and BBC News)
32. Problems in using buffer stocks for
commodities such as cocoa
Buffer stock may not be large
enough to change price
High intervention 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 better alternative long
run policies for farmers
33. Problems in using buffer stocks for
commodities such as cocoa
Buffer stock may not be large
enough to change price
High intervention 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 better alternative long
run policies for farmers
34. Problems in using buffer stocks for
commodities such as cocoa
Buffer stock may not be large
enough to change price
High intervention 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 better alternative long
run policies for farmers
35. Problems in using buffer stocks for
commodities such as cocoa
Buffer stock may not be large
enough to change price
High intervention 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 better alternative long
run policies for farmers
36. Problems in using buffer stocks for
commodities such as cocoa
Buffer stock may not be large
enough to change price
High intervention 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 better alternative long
run policies for farmers
37. Alternatives to
buffer stocks
Mobile technology to
help farmers
Encourage processing /
branding by farmers
Improved basic storage
facilities + irrigation
Micro insurance policies
for poorer farmers
38. Alternatives to
buffer stocks
Mobile technology to
help farmers
Encourage processing /
branding by farmers
Improved basic storage
facilities + irrigation
Micro insurance policies
for poorer farmers
39. Alternatives to
buffer stocks
Mobile technology to
help farmers
Encourage processing /
branding by farmers
Improved basic storage
facilities + irrigation
Micro insurance policies
for poorer farmers
40. Alternatives to
buffer stocks
Mobile technology to
help farmers
Encourage processing /
branding by farmers
Improved basic storage
facilities + irrigation
Micro insurance policies
for poorer farmers
41. Alternatives to
buffer stocks
Mobile technology to
help farmers
Encourage processing /
branding by farmers
Improved basic storage
facilities + irrigation
Micro insurance policies
for poorer farmers
42. Alternatives to
buffer stocks
Mobile technology to
help farmers
Encourage processing /
branding by farmers
Improved basic storage
facilities + irrigation
Micro insurance policies
for poorer farmers
Good evaluation always
includes suggesting
alternatives to the policy /
strategy under discussion