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January 09, 2020 Thursday 03:50:14 PM IST

When Onion Brings Only Tears

Finance

Onion is a perishable food article that burns one’s eyes but enhances taste once its price is normal. It burns the mind of the consumer offsetting taste if price is scaled up. An attempt is made here to sketch out the theoretical and practical determinants for the 700 per cent rise in price of onion in India within a span of six months in the second half of 2019.

Theoretical Underpinnings

Suppliers of perishable goods like onion have to go for decrement of their inventory within a limited time frame. They will normally follow a pricing strategy called dynamic pricing which implies variations in price based on size of stock and time available. An additional factor would be available technology. Stock of agricultural crops partly depends on climatic variability. In the case of seasonable crops like vegetables, farmers respond to prices of crops. If there is an unfavourable monsoon, the supply of many seasonable crops will come down.  When there is a mismatch between supply and demand (Supply < Demand), prices will shoot up. This is an incentive for farmers to switch to extensive or more intensive method of cultivation. The former method intends to bring more land under cultivation while the latter method focuses on technology intensive cultivation. Either of the method or their combination can lead normally to oversupply in the next season. In other words, current period supply of a crop depends on the price in the previous period. This is formally known as Cobb-Web Theorem.

 The behaviour of sellers during scarcity is also very important in determining current price. Compared to the extent of information available to the consumers, sellers have not only better information but also strategic ability to manage information tactfully.  Sellers having ware house facility may store such crops more which is expected to be scarce during the ensuing period. Thus, insufficient supply of crops due to adverse monsoon is further aggravated by the extra storing tendency of profiteering sellers. This would result in skyrocketing of prices of perishable goods.

Expectations of consumers also contribute towards unexpected rise in the prices of perishable goods. Constraints in supply like monsoon failure and profiteering provide signals to consumers in the form of rising prices. Educated and affordable consumers rush to the market to procure available items expecting further rise in price. Normally price and quantity demanded are inversely demanded but this relationship would be reversing once demand becomes a cause. This is a major reason for rising prices of perishable goods within a short period.


Price is also influenced by the elasticity of demand. Elasticity of demand is defined as the percent change in quantity demanded due to a per cent change in price. If the ratio between the two is one, it is known as unitary elastic. If it is more than one, it is named as elastic demand. It becomes inelastic once the obtained value is less than one. If a food crop is essential in daily life, it has an inelastic demand.  Inelastic demand coupled with supply constraints due to climatic variability and profiteering would result in sometimes rocketing of prices. An essential food item like onion falls under this category.

Price Determinants in Indian Market

Market structure in India is not dominated by normal market forces. A normal market is operated under the forces of supply and demand in a free environment. Normally these forces play equal roles in the determination of price. Traders are dominant in the onion market in India rather than producers (farmers). The insignificant role of the farmers in determining price of onion emanates from the small size holdings, climate variability and price risk. Onion trade is dominated by commission agents and traders (Chart 1). The latter procure small quantities of onion from local markets and amass such quantities at their packing centres for classification or grading. The graded materials are sent to various centres in India. Farmers are incapable to handle in this way due to inexperience in trading, market information asymmetry and absence of risk bearing capacity.

Information is a strong determinant in onion trading. Farmers get information from a narrow range of local market while traders obtain it from national and global sources. The strength of information plus the logistical support enable traders to direct onion to areas where prices are high. Thus, traders acquire extra profit which is not shared among farmers. Existing traders are very vigilant so that new traders will not be allowed in this sector. This enhances the price of onion during slack season. The onion farmers’ associations or similar institutions are not strong enough to meet the uncertainties which require year long experience. Traders have a strong network with intermediaries so that hoarding and price likes become usual whenever a shortage is expected.

For example, there was a 150 per cent increase in onion price across India in December 2010 in the case of expected shortage of onion at that time. Price of one kilogram of onion was Rs 15 in August 2019 which doubled in the next month. It touched as high as 170 rupees in local markets implying a growth of 1133%  

One study by ISEC, Bengaluru showed that there was nexus between certain farmers, commission agents so that commission agents procure onion from the farmers. Due to the credit received, the wholesalers would determine the price according to their interest who normally raise the price at times of scarcity. This happened this time too. Collusion between traders and bidders is also observered in Maharashtra and Karnataka. Farmers in Wasi, Maharashtra consider that onion trade takes place through secret bidding.


Public sector institutions like market co-operatives do not have sufficient infrastructure facilities to store available onions especially in the context of excess rainfall that occurred during the last September and October. Here, wholesalers step in and store the materials, who have the ability to control prices through oligopoly behaviour (Chart 2). It may be noted that oligopoly (domination of a few sellers) situation is anti-competitive and leads to hike in price in a short span of time.

Remedial Measures

 

There are both short and long term measures to tackle the sudden hike in onion price. The short terms measures consist of release of onion from the stock of the public warehouses, ban on export, anti-profiteering activity, import of onion, distribution through civil supplies outlets etc. Government of India released 16,000 tonnes of onion via NAFED and NCCFI in October itself. This was expected to release via government supported outlets and others. Government also banned export of onion by the end of September 2019 but there is a difference of contention about it.

That is, the credibility of exporters would affect in the international market. However, a government has to give priority to the need of the belly of the domestic people. Govt. has ordered that retail and wholesale sellers should not store more than 100kgs and 500kgs respectively. The stock limit needs to be checked by the state government but a dubious situation. The continuous price hike is also due to the failure of the state machinery to check the stock limit. It is recommended that govt. must impose penalty on speculators and deny license to such traders.


There is a need for introducing more traders into the supply chain so as to enhance competitive element in the onion market. Import is a strong measure to control price any essential commodity in such a way that it can provide signals to speculators that storing would be costly. Because, import would enhance supply position. Central Cabinet decided to import 1.2 lakh tonnes of onion to ease supply position by the middle of November, 2019. In fact, this should have taken place two weeks before that.

Certain long-term measures are also necessary to meet climate related exigencies in future. Producers’ organisations of onion farmers’ need to be strengthened on a long-term basis. More technology oriented public warehouses have to be constructed. This would improve the inventory capacity so that profiteering practices of traders can be weakened. Centralised air conditioned ware houses are good for increasing the shelf life of perishable goods including onion. More integrated approach among depts. of civil supplies, agriculture and meteorology can give early warnings of heavy rainfall. This can enable farmers to go for early harvesting which did not take place this time.  Local bodies have a special role to play to build up grass root level ware houses for perishable goods.


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