Onion

It’s the politics, stupid. Why onion prices will continue to cross Rs 100 per kg

Onion_on_WhiteVivek Kaul 

A recent report in The Economic Times said that onion prices may touch Rs 100 per kg by October 2014. The report pointed out that “hailstorms and unseasonal rain in the past, along with the weak start of the monsoon season has created scarcity and strong inflationary pressures.” For the week between June 12-18, 2014, the rainfall had been 45% below the normal.
If this trend continues, chances are that vegetable prices in general and onion prices in particular may rise in the months to come because a lack of sufficient rainfall will lead to a fall in production. Nevertheless, vegetable prices have risen over the last few years, despite a steady increase in production.
A standard explanation for the inflation in vegetable prices over the last few years has been that the demand for vegetables has far exceeded their supply. Data provided by the National Horticultural Board tells us that India produced 129.07 million tonnes of vegetables in 2008-2009. This number had gone up to 170.2 million tonnes in 2013-2014.
This meant an absolute increase in production of around 32% over a period of five years or an increase at the rate of 4.67% per year. This is a reasonable rate of increase though not a fantastic one. During the same period the vegetable prices more than doubled. Given this, there might be some truth in the argument that demand for vegetables might have outstripped their supply.
But this is clearly not true at least in the case of onions. The onion production in the country has gone up at a rapid rate over the last few years. In 2007-2008, it stood at 9.14 million tonnes. This more than doubled to 19.3 million tonnes in 2013-2014.
Hence, Indian farmers are clearly producing enough onions. Also, it is safe to assume that demand for onions couldn’t have suddenly doubled over a period of five years. So, what explains the fact that onion prices have crossed Rs 100 per kg several times over the last few years and in the months to come the same scenario might play out again? The simple answer is hoarding. While most vegetables cannot be hoarded given that they rot quickly, onions last easily up to six months. This leads to their hoarding by traders in Nashik, Navi Mumbai and the Azadpur (in New Delhi) mandis.
As the report titled Competitive Assessment of Onion Markets in Indiawhich was commissioned by the Competition Commission of India points out “A few big traders having well connected networks with market intermediaries in other markets seem to play a major role in hoarding for expected high prices.”
These traders typically start hoarding onion in the post harvest season. By doing this they manage to tighten supply in the lean season. “The lean season also happens to coincide with start of major festivals and ceremonies like marriages in India. This clearly manifests itself during months of September to January, in which the supply from onion producing regions is minimal and festivals like Dasera, Dipawali, Eid, Chrismas and marriages and other ceremonies put higher pressure on the demand of onion,” the report points out.
It is not difficult for the government of the day to identify who these traders are. But most of these traders are close to political parties. Take the case of the traders operating at out Nasik and Navi Mumbai. These traders are known to be close to Sharad Pawar’s Nationalist Congress Party. Given this, it was not surprising that when Pawar was the agriculture minister he regularly made statements that drove up onion prices. (You can sample a couple of statements here and here)
Economist Devinder Sharma in a blog written in December 2013 points out “The Azadpur mandi traders association in Delhi is aligned to the ruling Congress party. In Punjab, on the other hand the traders associations predominantly back the ruling SAD-BJP combine.”
This explains to a large extent why politicians tend to look the other way when onion prices are rising, and they even go ahead and make insensitive statements. Take the case of Kapil Sibal, who when asked about the rise in onion price in September, 2013 had said “Ask the traders this? The government does not sell onions.”
Given this, it is not difficult for the government to control the price of onion, if it wants to. All it needs is a few basic steps. As the report commissioned by the Competition Commission of India points out “For these, measures such as cancelling license for a temporary period; putting fines and penalties, and monitoring closely the behaviours of traders for any intentional hoarding, could be taken.” Of these measures, monitoring the behaviour of traders for any intentional hoarding is the most important.
Having said that, the onion production may have seasonal variations and that may drive up the price of onion. But that still does not explain the astonishing rise to Rs 100 per kg several times over the last few years. As Shreekant Sambrani writes in the Business Standard “ A five per cent reduction in its supply supposedly causes a 50 per cent increase in its price. While its per capita availability trebled in the last decade (faster than the per capita income, which doubled), its price rose fourfold in the same period.” Hoarding is the only possible explanation.
Potato, is another vegetable, which like onions, doesn’t rot immediately, and hence can be hoarded. Potato production has grown at the rate of 6.2% per year between 2008-2009 to 2013-2014 to 46.4 million tonnes. Between 2012-2013 and 2013-2014, the production grew by only 2.3% but the prices over the last one year have shot up by more than 30%. Hoarding is a major reason for the same.
Given this, the government needs to ensure that the prices of onion and potato are decided on true market demand and supply, and not because of hoarding. The inflation that the people faced during the second term of the Congress led UPA government was a major reason why the Narendra Modi led BJP was elected to power.
Hence, it is important for Modi and his government to do all that they can do on the inflation front. If they don’t, there will be trouble ahead. As Sambrani puts it “Inflation is a two-edged sword. Hurt in the pocketbook, the aam aurat could start venting her wrath on the new government. Onions don’t respect ideology while bringing tears.”
The article originally appeared on www.firstbiz.com on June 26, 2014.

(Vivek Kaul is a writer. He tweets @kaul_vivek) 

With onion touching Rs 100 per kg, food security is a joke

Onion_on_WhiteVivek Kaul 
Rahul Gandhi, aspiring politician and vice-president of the Congress Party, recently said that his mother cried when she couldn’t cast her vote on the Food Security Bill. Of course, the tears of a mother are precious to any son. But what about the tears in the eyes of the aam aadmi as onion prices touch Rs 100 per kg, in some parts of the country?
As per the recently released wholesale price inflation numbers, the price of onion has risen by 323% in the last one year. Vegetable prices during the same period went up by 89.37%. Fruits were up at 13.54%. And all in all food prices were up by 18.4% in comparison to the same period last year.
So why have onion prices been rising at such a rapid rate? Research Analysts Neelkanth Mishra and Ravi Shankar have some sort of an answer in a report titled Agri 101: Fruits & vegetables—Cost inflation dated October 7, 2013. A few states dominate the production of vegetables. “In particular, Maharashtra dominates the onion trade (45% of national production by value), while West Bengal produces 38% of India’s potatoes, 49% of India’s cauliflower and 27% of India’s aubergines (brinjals),” write Mishra and Shankar.
And it is this concentration that creates problems. As the Credit Suisse analysts point out “This concentration creates problems in generating a nationwide supply response in case a particular geography sees bad weather or any other disruption (e.g., onions in Maharashtra). This also drives significant variation in prices across the country.” Rains had damaged the rabi crop of onions, which is produced between March and May. The kharif crop of onions has also been damaged by unseasonal rains. This crop starts coming into the market by the end of September.
But has this led to a shortage of onions in the country? R P Gupta, director of National Horticulture Research & Development Foundation told the Week magazine recently that “I have been saying since July that there is no shortage of onion in the country..Official figures show that 27.5 lakh metric tonnes of onion were stored during February and May. Monthly consumption of the country is only 7-8 lakh tonnes per month…. So, where was was the problem of shortage?”
The only possible explanation is hoarding by traders in the key onion producing state of Maharashtra. As is well known the Agricultural Produce Marketing Committee (APMC), which runs the onion trade in Maharashtra, is largely said to be controlled by Sharad Pawar’s Nationalist Congress Party.
As the Week article points out in the context of the Lasalgaon mandi in Nashik, Asia’s largest wholesale market for onions “Powerful traders…manipulate the market. They book stocks from farmers at low prices, much in advance. Thousands of tonnes of onions are hoarded to create a short-supply. And as the prices spiral up, the hoarded stocks are released. It was such an artificial scarcity that allegedly spiked onion prices to record highs. “Traders in Lasalgaon Agricultural Produce Market Committee alone earned more than Rs.150 crore in just four days (August 12-15) this year,” says Dr Giridhar Patil, a farmer-activist.” This explains to a large extent why onion prices have been high all through the year.
The supply chain for the onion to move from the farmer to the end consumer remains very weak. As a recent Wall Street Journal article pointed out “A cultivated crop by a farmer in a far-flung village goes through as many as four intermediaries before reaching the local vegetable market in a semi-urban or urban area. These middlemen, wholesalers, traders and commission agents, usually charge fees and analysts estimate that by the time the vegetables make it to the stands in a retail market, their price has increased by almost six times.” This explains to a large extent why at times there is no link between the wholesale price of onions and the final price at which you and me buy it at. s
The Times of India reports that on October 22, 2013, the average wholesale price of the new onion crop at Lasalgaon was Rs 3,900 a quintal. This was 37% cheaper than in the summer. Despite this, prices at the retail level have not dropped.
NCP boss Sharad Pawar, who also happens to be Union Minister of Agriculture, had said on September 17, 2013 that “There is a lot of talk about the rise in onion prices; however, when prices fall no one shows any concern for the farmers. When farmers are getting more money for their produce we should not complain.”
Now if onion is coming in at Lasalgoan mandi in Nashik at Rs 3900 per quintal or Rs 39 per kg, and selling in Delhi at Rs 100 per kg, how is the farmer gaining? As explained above, it is the middlemen who are making the bulk of the money.
In fact, a study commissioned by the Competition Commission of India(CCI) in 2012, came to a similar result. The study titled Competitive Assessment of Onion Markets in India found that “onion trade is unilaterally dictated by the traders and not farmers for the reasons: (i) Average farm size of onion growers is quite low. Unfavorable weather conditions and price risk for these small farmers resulted for a minimal role in price formation; (ii) Traders buy small lots from the market yards and pool the produce for sorting or grading at their packing houses and market different grades to different markets all over India. Lack of trading expertise, market knowledge and risk bearing capacity has prevented most of the farmers to make any dent in onion trading. Therefore, most of the trading is in private hands; (iii) Farmers generally take reference of the local markets‟ rates, while traders compare rates of all markets, including major distant and export market and then decide where to send their produce of a particular grades. This brings greater profits to them…(vi) Lack of capacity to conduct multiple roles (wholesaler and commission agent) prevents farmers and their organizations to compete with traders.”
Also, most farmers, unlike traders do not have storage facilities. So they end up selling onions as soon as they produce it. The Week report cited earlier points out “This year, however, almost 80 per cent of the rabi crop was bought by traders (in the Lasalgaon mandi) at Rs.800 to Rs.1,200 a quintal by February-March. So, only a maximum of 20 per cent of the total crop was left with farmers who had storage facility.”
In fact, these traders even collude to drive up prices. As the CCI study found out “Collusion was observed among traders in selected markets in Maharashtra and Karnataka, For instance, a visit to Ahmednagar APMC revealed that there was collusion amongst traders. While bidding on certain lots was taking place, traders started with about Rs 300 per quintal and kept bidding higher prices till one trader quoted Rs 400 per quintal and another bid at Rs 405 per quintal. The commission agent stopped the auction and produce was shared between two wholesalers. It should also be pointed out that in Vashi market about 60 per cent of farmers reported that sales were undertaken through secret bidding.” The APMC markets referred to above are controlled by the NCP.
So farmers are not the ones benefiting from an increase in onion price, even if Pawar wants us to believe that is the case. Also, even if one believes that the farmers in Maharashtra are benefiting what about farmers in other states of India? Aren’t they paying a significantly higher price for onions? The last that I checked Sharad Pawar was the agriculture minister of India and not Western Maharashtra.
The reaction of the government to this rise in onion prices has been very high handed. The telecom minister Kapil Sibal, when he was asked on September 17, if onion prices will rise further, had said “Why don’t you ask the traders this? The government is not the one selling onions,”.
This was the last thing one expected a senior minister in the UPA government, which has been very committed to the idea of food security, to say. Onion is an essential ingredient in almost all curry that Indians make, whether it is to cook vegetables or meat. And given that, it is an important part of food security.
Onion prices have rise at the rate of 323% per year. The vegetable prices have risen at the rate of 89% per year. The food security of the aam aadmi is in danger as the government sits around doing nothing as usual. Half of the expenditure of an average household in India is on food. In case of the poor it is 60% (NSSO 2011).
Rahul Gandhi in a recent speech in Madhya Pradesh had said “They don’t understand that one can’t talk of development when the stomach is empty.” He had also said that “we understand your hunger.” Does he?
Or does the government want to supply rice at Rs 3 per kg and wheat at Rs 2 per kg, to two thirds of the country, so that people can buy onions at Rs 100 per kg? The joke as usual is on us.
The article originally appeared on www.firstpost.com on October 23, 2013
(Vivek Kaul is a writer. He tweets @kaul_vivek)