This is a situation where the government buys up a surplus, stores it and sells it during the shortage period. The buffer stock involves the government in the physical buying and selling of the commodity. A buffer stock can also be used to stabilize price. This is done in order to stabilise producer's revenue.

The buffer stock operates in the following ways. An inelastic demand curve (DD) and a long-run supply curve (SS) are drawn to determine the equilibrium quantity OQ₀ and equilibrium price OP0 (Figure 2.20]. It is expected that the output OQ₀ will come onto the market and it will be sold at price OP₀. The producer's revenue is expected to be OQ₀ x OP0 = OQ₀R₀P₀. However, agriculture depends on natural factors and therefore the expected output OQ₀ may not come onto the market leading to fluctuations in price and producer's revenue.