Friday, December 20, 2013

Onion hoarding and profiteering cycle playing out once more

In a recent article in India Together, I had used an episode from 2010 to illustrate the typical hoarding - profiteering cycle in vegetables like onion, thus:

"A vegetable like onion that can be stored throws up another aspect of this supply chain. The winter rabi crop harvested in April - May, accounts for 60% of onion production. Part of the crop must be stored to last the lean months, typically September to January till kharif harvests arrive.  Onion growers, mostly small farmers do not have the capacity to store; storage capacity is mostly with the large traders in the supply chain. Traders build up their stocks from the rabi crop and then release them at higher prices in the retail market in the lean months when demand is inelastic because of major festivals and the marriage season. This appears to be the normal seasonal cycle in the onion market.

What happens when mandi middlemen anticipate a shortfall in production? The natural response is hoarding and tightening of supplies all along the chain. The consequent price spike is typically followed by a price collapse coinciding with the next harvest. By then, the traders have already made a killing while the farmers stare at ruin.

An episode from a few years back illustrates this pattern. Onion prices climbed steeply in the months of Dec 2010 and Jan 2011 before collapsing as suddenly as seen in the graphic below. The sharply higher retail margins during the spike point to hoarding at the terminal markets.

The trigger for this episode was untimely rain which was expected to affect the late kharif crop in Karnataka, Gujarat and Maharashtra. As it turned out, onion production that year reached 15.1 million MT, the highest annual crop seen till then! Exports too at 1.3 million MT were lower that year compared to preceding and subsequent years. It appears that this is the pattern Sharad Pawar had in mind when he spoke about the current onion crisis and predicted that price would come back to normal in a few weeks.

During the next year (May-11 to April-12) average wholesale prices at Lasalgaon, the largest onion procuring mandi in India remained in the range Rs 3.90/kg – Rs 11/kg. There were reports of onion farmers in the Nasik area attempting suicide as they could not get even Rs 2/kg. This gives a lie to claims that farmers benefit from price spikes"

The same cycle is being repeated again in 2013. Onion prices have fallen to Rs 7/kg in the wholesale markets in Nasik at a time when farmers are bringing in the new crop. ( They had touched RS 100/kg in retail sales in several cities in October/November). There are news reports of farmers protesting by blocking the Mumbai Agra National Highway. The government has cut the minimum export price of onion from $1150/tonne to $350/tonne (~Rs 22/kg). Here we see the hoarding/profiteering cycle repeating again to ruin the farmers.

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