Creating a Buffer Stock of Essential Food Items to Stabilise Prices

The government should consider building a buffer stock of essential food items beyond just rice and wheat, including pulses, oilseeds, sugar, skimmed milk powder (SMP), and staple vegetables, to address the increasing volatility and unpredictability of food prices.

Buffer Stock

• About: A buffer stock is an excess stock of goods or commodities than what is required for a specific purpose. 
• Introduced in: The concept of buffer stock was first introduced during the 4th  Five Year Plan (1969-74).

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• Operational Mechanism: Governments use the buffer stock scheme where they buy commodities and goods during times of surplus and then sell those goods at times of economic shortage. 
  • During times of shortages, prices go up, but if reserves from the buffer stock are released then due to the increased availability of goods the prices begin to drop again.
• Motive of Maintaining Buffer Stock: 
  • Price Stabilisation: To keep prices of goods and commodities stable.
  • Economic Stability: To prevent economic shocks as a result of shortages.
    • The objective is not to set prices or replace the market.
• Responsible Body: Food Corporation of India (FCI) is responsible for procuring, storing, and distributing food grains and other essential commodities.

Buffer Stock Norms

• About Buffer Stock Norms: Buffer norms refer to the minimum quantity of food grains that the Centre must maintain in the Central pool at the start of each quarter to fulfil the requirements of the public distribution system and other welfare initiatives.
• Buffer Stock Norms set by: The Cabinet Committee on Economic Affairs sets minimum buffer norms quarterly for each financial year.
• Status of Buffer Stock as on 2023: As of April 1, 2023, the central pool is expected to hold around 113 LMT of wheat and 237 LMT of rice, surpassing the buffer norms of 75 LMT for wheat and 136 LMT for rice (PIB Data).
  • Central pool includes operational stocks and strategic reserves. 
    • Operational stocks are meant to meet the monthly requirements under Targeted Public Distribution System (TPDS).
    • Strategic reserves/food security stocks are meant to meet any shortfalls in future procurement.

Reasons for Buffer Stock Maintenance

• Distribution of Foodgrains in Deficit Areas: The purpose of creating a buffer stock is to distribute food grains in deficit areas and among the poorer sections of society at a price lower than the market price (also known as Issue Price) during adverse conditions or calamities.
• Climate Change:
  • Fewer rainy days and extended dry spells.
  • Intense precipitation events.
  • Shorter winters and more frequent heat waves.
  • Poor yields of crops:  Adverse climate effects have resulted in poor yields for rabi pulses, tomato, potato, and wheat in central India.
• Price Volatility: Supply shocks, driven by climate change, war, or pandemics, cause significant price spikes.
  • Increasing volatility and unpredictability in food prices primarily due to climate change.
  • Farmers respond to price spikes by significantly increasing production, leading to steep price declines.
    • Example: Last year, dairies paid Rs 37-38 per litre for cow milk. Current prices have dropped to Rs 26-27 per litre due to falling Skimmed Milk Powder (SMP) realisations (Rs 200-210 per kg from Rs 315-320).
• Prevent Shortages and Inflation: Maintaining a buffer stock can help prevent shortages and curb inflation by stabilising prices. 
  • When low prices discourage production, buffer stocks can be released to ensure supply meets demand, avoiding severe price spikes and inflation.
  • This ensures consistent availability of essential food items, benefiting both consumers and producers.
• Continuation of Welfare Schemes: Buffer stocks are also necessary so that the Government can meet the requirements of the National Food Security Act (NFSA) and other welfare schemes such as  the Pradhan Mantri Garib Kalyan Anna Yojana (PMGKAY). 

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Benefits of Creating a Buffer Stock of Essential Food Items

• Procurement and Distribution: Procure from farmers/processors during surplus years and offload during crop failures.
• Evening Out Price Fluctuations: Helps stabilise extreme price fluctuations.
• Low Fiscal Cost: Stocked commodities, such as potato, onion, and tomato (which can be stored in dehydrated forms like flakes, paste, and puree), are disposed of at near-market rates during scarcity/inflationary periods.
  • Historical Success: Government’s open market sales of wheat and chana from accumulated stocks have previously helped moderate cereal and pulses inflation.
• Eliminates Need for Regressive Measures: Reduces the necessity for anti-farmer measures like banning exports or imposing stock limits on private traders and processors.

Issues Associated with the Management of Buffer Stocks

• Damaged Stock: According to a CAG report, 1.06 lakh metric tonnes of foodgrains worth Rs 121.93 crore were damaged due to FCI’s failure to adhere to the first-in-first-out principle from 2006-07 to 2011-12.
• Operational Oversight and Lack of Fiscal Discipline: FCI incurred an additional Rs 376 crore in unwanted expenditure over the same period, indicating a lack of fiscal discipline and operational oversight.
• Rising Operational Costs: Mandi fees, MSP hikes, bonuses, and administrative expenses swell the Food Corporation of India’s (FCI) economic cost of food grain management. 
  • The costs are about 40% higher than procurement prices, affecting overall efficiency.
• Pest Infestation and Spoilage: Due to poor storage conditions, significant quantities of grains are lost to pest infestations. 
  • In 2019, FCI reported a loss of around 62,000 metric tonnes of wheat due to pests.
• Quality Degradation: Reports from the Commission for Agricultural Costs and Prices (CACP) have pointed out the degradation of the nutritional quality in the grains due to prolonged storage, impacting market value and consumer health.
• Corruption and Diversion: Instances like the 2012 Bihar food grain scam reveal the vulnerability of buffer stocks to diversion and corruption.
• Natural Calamities and Climate Change: Climate change impacts, like unexpected flooding, have affected buffer stock quality, as seen in the 2018 Kerala floods, which damaged stored grains.

Measures to Optimise Management of Buffer Stocks

• Storage Optimisation:
  • Decentralised Procurement: As per the Shanta Kumar Committee’s recommendations– States with a surplus produce can directly contribute to the central pool, reducing transit time and storage pressure on FCI.
  • Involving Private Sector: Incorporating the Private Entrepreneur Guarantee (PEG) scheme and private entities in stocking operations alongside Central Warehousing Corporation (CWC) and State Warehousing Corporation (SWC) can optimise storage with improved infrastructure and reduced overhead costs.
  • Negotiable Warehouse Receipt (NWR) System: Promoting the NWR system allows farmers to store produce in certified warehouses, enhancing systematic storage and easing pressure on FCI godowns.
• Efficient Storage Management
  • Transparent Liquidation Policy: Implement automated surplus stock liquidation to prevent grain spoilage. Surplus can be sold in the open market or exported to prevent wastage.
  • Improved Infrastructure: Upgrade storage facilities with better ventilation, moisture control, and rodent-proofing to significantly reduce current loss percentages due to poor conditions.
  • Robust Monitoring Systems: Use sensors and Internet of Things (IoT) devices for real-time monitoring to maintain grain quality, providing alerts on environmental changes that could lead to wastage.
    • Regular checks and dynamic maintenance practices detect spoilage risks early, enabling timely interventions to reduce wastage.
• Efficient and Effective Distribution: 
  • Outsourcing Last-Mile Distribution: Utilise Self-help groups (SHG’s) and Farmer Producer Organizations (FPOs) to ensure efficient food aid delivery to remote areas.
  • Direct Benefit Transfer (DBT): Implement DBT to streamline subsidies, reduce pilferage, and ensure timely delivery of benefits to intended beneficiaries.
  • Restructuring FCI’s Role: FCI should focus on need-based procurement, especially from states lacking procurement infrastructure like eastern and north-eastern states, facilitating efficient grain distribution from surplus to deficit regions.

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Conclusion

Buffer stocking can serve as a tool to curb excessive volatility in food prices, much like how the RBI’s foreign exchange reserves stabilise the currency market. 

• The rising climate-driven price volatility, which benefits neither consumers nor producers, further supports the need for a food buffer policy.