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McKinnon on Futures Markets and Buffer Stocks

In a recent paper McKinnon (1967) has analyzed hedging and buffer stocks within a simple probabilistic model. While the approach is interesting and useful, McKinnon has slipped from income stabilization to cash flow stabilization in his analysis of holding buffer stocks of commodities and has slipped from income stabilization to price stabilization in his analysis of pegging distant futures prices. Correction of these slips substantially alters his conclusions. This note will proceed as follows: in Section 1, following a brief outline of McKinnon's basic model, it is shown that McKinnon's claim that buffer stocks are superior to buffer funds is in error as a result of his failure to allow for changes in the value of buffer stocks. In Section 11 it is shown that McKinnon's argument for governmental stabilization of "distant" futures prices is invalid because price stabilization is not equivalent to income stabilization.