Definition, Methods, and Examples of Buffer Stock

Buffering stock refers to the excess amount of products kept on hand to deal with market price fluctuations and unforeseeable situations.

What is the standard practice for keeping a buffer stock of important commodities and easy necessities such as grains, pulses, and so on?

The price of a product varies depending on the demand and supply cycle. Extreme caution and the use of buffer stock may not be necessary unless the product crosses a bracket of the projected change in pricing.

Unexpected events emerge in the market from time to time as a result of a variety of variables.

These situations may result in a variety of issues for both providers and buyers in the market.

On the supplier's end, they may have difficulty meeting demand in sufficient quantities while maintaining the product's price around average, and on the customer's end, they may experience stock outs or an exorbitant price increase.

As a result, there are two possible scenarios:

First, the product's availability is limited, causing the price to rise
Second, the product's availability is abundant, causing the price to fall

In the first scenario, the product's buffer stock is released, increasing the product's availability in the market and helping to push down the price so that everyone can afford it.

In the second scenario, where the product's availability is excessive, some of the product can be shifted to stock and preserved as buffer stock, helping to normalize the product's price.

As a result, Buffer Stock works as a buffer, preventing the product's price from fluctuating too much and keeping the demand-supply cycle balanced.

Methods of Buffer Stock Operation in Market

There are essentially two ways in which the buffer stock works. The following are the details:

Dual pricing system

Two prices for a product are determined using this procedure. The first is the lowest price, while the second is the most.

When there is an excess supply of a product, the person or institution in charge of the plan, which is usually the government, begins to buy it to keep it from falling further.

Similarly, when product supply is poor and below average, the government begins to release buffer stock, preventing prices from increasing over average. This prevents price volatility and keeps the demand-supply cycle in balance.

Single pricing method

The single price method, as the name implies, keeps the product's minimum and maximum prices the same. The government, which runs this system, attempts to keep the price stable and does not allow it to vary.

When demand rises, the scheme operator usually steps in to help stabilize the situation, while in other cases, the product's price takes care of itself.

Buffer Stock Side Effects

The basic goal of buffer stock is to maintain a constant pricing and supply-demand balance. It could be combined with other systems to achieve specific goals, such as promoting home industries.

This can be accomplished by selecting a price that is lower than the equilibrium price but higher than the minimum price.

Equilibrium pricing is defined as the point at which the demand and supply curves cross and which is a guarantee that the producers will receive a minimal price.

This encourages producers to produce more, and the success surplus can be used as a buffer stock by government officials. Once the price has stabilized, it may be enticing for market participants to increase supply.

One of the benefits of maintaining a buffer stock is that there is always enough food, which is referred to as food security. The disadvantage of holding stock, on the other hand, is that it may result in the destruction of perishable goods.

This also makes that particular food, which is readily available in the area, prohibitively expensive in other countries. This might be costly for the operator as well.

The main benefit is that when a different type of government intervenes in the market, their mechanism may accomplish their goals directly and fast.

Example of Buffer Stock

To better grasp the notion of buffer stock, consider the example of perishable goods. Onions and other perishable foods are sold on a daily basis.

If the onion crops are lost due to some unforeseen event, such as a natural disaster, the market will experience a sharp price increase as demand for the onion increases.

As a result, the price of one onion, which is usually around $1 per kilo, would rise to around $4 per kilo.

In such instances, the price of an onion would be prohibitively expensive for the average client, and customers would be unlikely to purchase one.

During this period, the onion buffer stock would be released in order to meet some customer demand and lower the onion price.

The price of onions would be reduced to roughly $2.50 per kilo, depending on the buffer stock and demand.

Although not everyone will be able to purchase onions in the quantities required, the sale will be higher than it was at $4 per kilo.

Consider the polar opposite of the circumstance described above. Consider the fact that there is more onion supply than demand on the market.

There would be more suppliers than buyers in this instance, and in order to sell their stock, they would cut their prices to compete.

The client would then prefer the seller with the lowest price, lowering the average price of the goods to, say, $0.5 per kg. The government buys the excess surplus and sets a lid on supply before it drops any more.

This stabilizes onion prices once more, bringing them to roughly $0.85 per kilo. This is dependent on the government's stock purchases.