Buffer stocks
Buffer stocks: holdings usually established under some international commodity agreements to influence and stabilize the price of commodities. Buffer stocks are sold when the price moves above a defined price band. They are accumulated when the price moves below a band reflecting current market prices. Buffer stocks can work when price fluctuations are short-term, and when high prices more or less cancel out low prices within a reasonable period. The price range covered by the agreement normally is structured so that the buffer stock manager must buy when the price is in the lowest band, assuming funds are left to do so. Then follows a band in which the manager may buy. That decision is based on the commercial outlook, available funds, the size of the existing buffer stock, etc. At yet a higher price level, the manager may sell. Once the commodity price enters the highest price band set out in the agreement, the manager must sell, assuming that there are stocks. Buffer stocks are intended to be self-financing. The maximum size of the stock and the method of financing it are usually contentious. Proponents of such mechanisms hold that a large buffer stock operation compared to the size of the market and endowed with strong financial resources can much more easily deal with market fluctuations than a smaller one. It also would be much more expensive to
Source: http://ctrc.sice.oas.org/trc/WTO/Documents/Dictionary%20of%20trade%20%20policy%20terms.pdf
Web site to visit: http://ctrc.sice.oas.org
Author of the text: W. Goode
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