Buffer Stocks and Price Stabilization: The Case of Cocoa, Lecture notes of Technology

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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   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  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   @BSERVATORY EXPLORE PROFILES ATLAS RANKINGS ABOUT En | OF ECONOMIC COMPLEXITY Products xported by Ghana (2012 Total Country Trade: $16.5B » # Cocoa Beans Cor COUNTRY Exports > PRODUCTS xporter mporte BILATERAL Exports To Destinatior i a. * BHABBaAan | BANS S EE 8) (oI (oven Cocoa: world's top producers by value 2012 Leading producers of cocoa beans in 2012, by production value ($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   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   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  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   Good  evalua/on  always   includes  sugges/ng   alterna/ves  to  the  policy  /   strategy  under  discussion