price volatility and buffer stocks
DESCRIPTION
Updated revision presentation covering price volatility in commodity markets and the economics of buffer stock "price stabilisation" schemes. designed for unit 1 micro courseTRANSCRIPT
Commodity Price
Volatility and Buffer
Stocks
AS Micro – November
2013
Price VolatilityIndex of Prices 2000=100
The Economist Commodity Price Index
Commodity Price Index Food Commodity Price Index All Items
Source: Economist Commodity Price Index
06 07 08 09 10 11 12
100
125
150
175
200
225
250
Ind
ex
100
125
150
175
200
225
250
Industrial Metals
All Commodities
Index of Global Food Prices
Why are prices volatile in the markets for many commodities?
Low Ped (<1)
Low Pes (<1)
Volatile Supply
Market Specula
-tors
Using analysis diagramsPrice
Quantity
Price
Quantity
Using analysis diagramsPrice
Quantity
Price
Quantity
S1
D1
RISE IN MARKET DEMAND
Using analysis diagramsPrice
Quantity
Price
Quantity
S1
D1 D2
P1
P2
RISE IN MARKET DEMAND
Using analysis diagramsPrice
Quantity
Price
Quantity
S1
D1 D2
P1
P2S1
D1
RISE IN MARKET DEMAND RISE IN MARKET SUPPLY
Using analysis diagramsPrice
Quantity
Price
Quantity
S1
D1 D2
P1
P2S1
D1
S2
P1
P2
RISE IN MARKET SUPPLYRISE IN MARKET DEMAND
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 PricesUS dollars per tonne, Daily price
Volatility in World Cocoa Prices
Source: Reuters EcoWin
06 07 08 09 10 11 12
US
do
llars
pe
r to
nne
(m
etric
)
1250
1500
1750
2000
2250
2500
2750
3000
3250
3500
3750
US
do
llars
pe
r to
nn
e (
me
tric
)
1250
1500
1750
2000
2250
2500
2750
3000
3250
3500
3750
Describe two significant features of the data on world cocoa prices shown in the chart
Cocoa PricesUS dollars per tonne, Daily price
Volatility in World Cocoa Prices
Source: Reuters EcoWin
06 07 08 09 10 11 12
US
do
llars
pe
r to
nne
(m
etric
)
1250
1500
1750
2000
2250
2500
2750
3000
3250
3500
3750
US
do
llars
pe
r to
nn
e (
me
tric
)
1250
1500
1750
2000
2250
2500
2750
3000
3250
3500
3750
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 alone2/ Significant trend rise in prices from 2006-2011 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: 18th 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: 18th October 2013
Key aims: 1. Stabilise food prices2. 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 P1Price 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 supplyPrice of
Cocoa
Quantity
Market Demand
Planned Supply
Upper Target
Upper Target Price
Lower Target
Lower Target Price
Actual Supply
S1
A rise in market supplyPrice of
Cocoa
Quantity
Market Demand
Planned Supply
Upper Target
Upper Target Price
Lower Target
Lower Target Price
Actual Supply
S1Q1
Excess supply at this price
A rise in market supplyPrice 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 supplyPrice 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)
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 stocksMobile technology to help farmers
Encourage processing / branding by farmers
Improved basic storage facilities + irrigation
Micro insurance policies for poorer farmers
Alternatives to buffer stocksMobile technology to help farmers
Encourage processing / branding by farmers
Improved basic storage facilities + irrigation
Micro insurance policies for poorer farmers
Alternatives to buffer stocksMobile technology to help farmers
Encourage processing / branding by farmers
Improved basic storage facilities + irrigation
Micro insurance policies for poorer farmers
Alternatives to buffer stocksMobile technology to help farmers
Encourage processing / branding by farmers
Improved basic storage facilities + irrigation
Micro insurance policies for poorer farmers
Alternatives to buffer stocksMobile technology to help farmers
Encourage processing / branding by farmers
Improved basic storage facilities + irrigation
Micro insurance policies for poorer farmers
Alternatives to buffer stocksMobile 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
Buffer stock multiple choice question
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