Commodity Price Volatility and Buffer Stocks AS Micro – November 2013

Price Volatility

Why are prices volatile in the markets for many commodities? Low Ped (<1) Low Pes (<1) Volatile Supply Market Specula -tors

Using analysis diagrams Price Quantity Price Quantity

Using analysis diagrams Price Quantity Price Quantity S1 D1

Using analysis diagrams Price Quantity Price Quantity S1 D1D2 P1 P2

Using analysis diagrams Price Quantity Price Quantity S1 D1D2 P1 P2 S1 D1

Using analysis diagrams Price Quantity Price Quantity S1 D1D2 P1 P2 S1 D1 S2 P1 P2

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

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

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

Buffer Stocks – Do They Work?

Cocoa Prices Describe two significant features of the data on world cocoa prices shown in the chart

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 but a steep decline from the peak of nearly $3750 1/ Prices are volatile – e.g. ranging from $3700 per tonne to $2100 during 2010 alone 2/ Significant trend rise in prices from but a steep decline from the peak of nearly $3750

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: 18 th October 2013 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: 18 th October 2013

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: 18 th October 2013 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: 18 th 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

Ghana – Primary Product Dependence

Ghana Imports

How might a buffer stock help to stabilise prices? Price of Cocoa Quantity Market Demand Planned Supply Upper Target Upper Target Price Lower Target Lower Target Price A buffer stock scheme is a government plan to stabilise prices in volatile markets

How might a buffer stock help to stabilise prices? Price of Cocoa Quantity Market Demand Planned 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 volatile markets

How might a buffer stock help to stabilise prices? Price of Cocoa Quantity Market Demand Planned 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 volatile markets

How might a buffer stock help to stabilise prices? Price of Cocoa Quantity Market Demand Planned 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 volatile markets

How might a buffer stock help to stabilise prices? Price of Cocoa Quantity Market Demand Planned 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 volatile markets

Current market price is at P1 Price of Cocoa Quantity Market Demand Planned Supply Upper Target Upper Target Price Lower Target Lower Target Price Actual Supply P1 Q1

P1 Q1 Consider an unexpected rise in actual market supply Price of Cocoa Quantity Market Demand Planned Supply Upper Target Upper Target Price Lower Target Lower Target Price Actual Supply S1

A rise in market supply Price of Cocoa Quantity Market Demand Planned Supply Upper Target Upper Target Price Lower Target Lower Target Price Actual Supply S1

A rise in market supply Price of Cocoa Quantity Market Demand Planned Supply Upper Target Upper Target Price Lower Target Lower Target Price Actual Supply S1 Q1 Excess supply at this price

A rise in market supply Price of Cocoa Quantity Market Demand Planned Supply Upper Target Upper Target Price Lower Target Lower Target Price Actual Supply S1 Demand with purchases Q1

A rise in market supply Price of Cocoa Quantity Market Demand Planned Supply Upper Target Upper Target Price Lower Target Lower Target Price Actual Supply S1 Demand with purchases Q1 Cost of buying up stocks

Do Buffer Stock Schemes Work?

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) 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)

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

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

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

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

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

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

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

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

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

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

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

Buffer stock multiple choice question

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