Such systems have suffered from some of the same problems that have plagued buffer storage systems, namely problems of maintaining the agreement and converting to substitutes when prices are kept too high. If there is a very good coffee crop, the supply curve will move to the right and the price would fall below the limit. The operators of buffer stock would then intervene to increase demand, to keep the price within the limit. This is shown in Figure 2 below. There are a number of possible problems related to buffer inventory schemes, and these may include: A buffer stock uses a price range. Figure 1 shows the effects of setting up a buffer scheme for coffee. If the market is within the two limits set by the Agency, no action is taken. However, if the market price crosses borders, the operators of buffer shares will intervene. The bumper harvest has the effect of shifting the feeding curve to S1.
The initial result would be that the price falls below the lower limit of OP1. By buying back shares, the Agency is shifting the demand curve to D1 and bringing the price back to OP2 to the upper and lower limits. First, we will consider the operation of buffer storage systems that have existed since the 1920s for a number of raw materials such as wheat, tin, rubber, coffee, sugar and cocoa. All of this ultimately failed for one reason or the other, so there are no important examples to consider. These can take the form of tests aimed at stabilizing prices through the operation of a buffer storage system or by attempts to raise prices by forming a producer cartel and limiting supply through the use of quotas. Buffer storage systems are operated by a central authority and aim to stabilize prices and protect producers from sudden changes in supply and demand (often in the case of agriculture). This is done by “diving in the wind”, i.e. if there is too much supply, which forces the price down, the tampon depositing agency will increase demand by buying back shares. If there is a lack of supply that forces the price upwards, the agency will put shares on the market to force the price down. The supply of primary raw materials is generally completely inelastic in the short term, so the agreement, which requires a reduction in production, would shift the supply curve from S to S1 and increase the price of PO to OP1. A number of reforms have been proposed to the CAP in an attempt to address some of these concerns and the aim is to shift the focus to promoting production through the payment of production by farmers to farmers` wages in order to protect the land they occupy.
For more details on the amendments proposed in June 2003, see the BBC article on EU agricultural reform.