Using market forces is not disrupting them

Our plan for managing buffer stocks sees them as being a price stabilisation measure. Price volatility is reduced by releasing grain when prices are too high in order to boost supply, and then buying it to replenish stocks when prices are too low.

There can be some argument over the acceptable price range within which stocks will be managed, but one can see that in principle Pmax ought to be the highest price that consumers can reasonably afford, while Pmin would be the lowest price that will bring an acceptable return to farmers. One can also see that this policy of buying cheap and selling dear should allow the stocks to cover at least some of the costs of maintaining food reserves. In some circumstances, the profits from buying cheap and selling dear could conceivably cover all the costs of the buffer stock.

Now it is clear that this is an approach which simply uses the laws of supply and demand. It does not seek to usurp or interfere with market forces, for instance in the way a legally binding maximum price at which bakers were allowed to sell their bread would represent interference (the frequent cause of bread queues under communism). Why, then, is it so difficult for people to recognise that this is a case of using market forces rather than trying to suspend them?

Surely the main reason is that people do not normally think of the laws of supply and demand as something that they can ‘use’. If I go to a baker’s and ask for a loaf of bread, I don’t think of myself as influencing the price of bread, even though to an infinitesimal degree (by adding to demand) I do just that. Therefore, as soon as someone suggests that the price can be ‘influenced’, I am tempted to suppose that this must mean suspending the mechanism of supply and demand, whereas in the case of our proposal it is simply making use of it.

Farmers are well aware of the way in which prices are affected by their actions on the supply side. They know the paradox that a bumper harvest, if it applies to all the farmers in a particular region, may drive prices down through over-supply, causing them to produce at a loss. They know that it can even be better for them to have a bad harvest, when even though they put less onto the market they receive a higher price for it.

But the ordinary customer in the shop doesn’t see things in those terms. They pay for their bread and don’t consider for a moment that in a very small way they are making use of the laws of supply and demand by adding to demand and therefore shifting the price very slightly upwards. They therefore assume that when people talk about ‘bringing the price down’ (by releasing stocks from a reserve) or pushing it up (by adding to demand by replenishing stocks in the reserve) it must mean doing something different from what they do when they buy their daily bread. But it is no different. Action for Food Reserves is not proposing to ‘interfere with’ market forces, but to use them in just the way that you or I do when we go shopping.