India is only second to China when it comes to production of vegetables in the world, yet the country experiences seasonal price spikes in agricultural commodities, especially in essential foods like onions. What is even more ironic in the situation of price spikes is that the producer – farmers – do not actually benefit from the rise in prices of agricultural goods. Let us now examine how the prices spikes are not because of weather shocks, but manmade factors.
Like the price of any other commodity, agricultural price is also a market outcome and demand and supply in the market play an important role in the determination of price. The market imperfection can create distortion in the functioning of the market and influence price by controlling supply. A typical agricultural marketing channel is: Farmer – Local assembler – Central wholesaler – Retailer – Consumer. The retail prices are determined nearly in a perfectly competitive market situation. However, a few traders dominate in the wholesale market both as buyers and sellers. They act as both oligopolists and oligopsonists at the bottleneck of the marketing process (sciencedirect.com).
Cartelisation In India
Country's onion market, dictated by traders, has clear imperfections including cartelisation and hoarding that impacts price of the agricultural commodity, a Competition Commission study has said. (thehindubusinessline.com)
In December 2010, when prices peaked during the last major spike, a probe by the country's statutory anti-monopoly body, the Competition Commission of India (CCI), revealed that one firm accounted for nearly a fifth of the total trading for that month. (hindustantimes.com)
A 2012 report by the National Council of Applied Economic Research also identified "collusion" as a major hurdle in fair trade, with a handful of traders pocketing a major share of trade in almost all big markets. There are "clear imperfections in the onion markets and presence of interested cartels", CCI said in its report. Bangalore-based Institute for Social and Economic Change (ISEC) conducted the study for fair trade regulator – Competition Commission of India (CCI). The report, which looked at competitiveness in major onion markets of Maharashtra and Karnataka, was submitted to the regulator in December. (thehindubusinessline.com)
The ISEC probe surveyed 11 markets, covering farmers, retailers and wholesale traders and other market players. (hindustantimes.com)
"Results of seasonal indices, correlations, daily, monthly arrivals their prices etc, indicated existence of anti-competitive elements in the onion markets. (thehindubusinessline.com)
"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," said the findings. (thehindubusinessline.com)
According to the report, market structure of onion is unilaterally dictated by the traders, not farmers. Minimal role of farmers in price discovery due to low size of average farm holdings – 1.15 to 1.3 acre, unfavourable weather conditions and price risk are cited as major reasons for the situation. (thehindubusinessline.com)
"Most of trading is in the hands of commission agents and traders. Lack of trading expertise, market knowledge and risk bearing capacity has prevented most of the farmers to make any dent in onion trading," it noted. (thehindubusinessline.com)
The report stressed that changes in onion prices have a huge impact on the food security, farmer and consumer welfare.
The government usually responds to a crisis with copybook measures: Curbing exports or importing onions to improve supplies. These eventually work, but not before spooking household food budgets. (hindustantimes.com)
The ISEC had provided several recommendations and prime among them was its stress on setting up Agriculture Produce Market Committees or APMCs across the country.
"To avoid collusion between traders, involvement of Agriculture Produce Market Committee (APMC) officials in the auctioning process should be mandatory. Besides, co-operative marketing societies must be encouraged so as to prevent collusion amongst traders," the ISEC recommendations said.
APMCs were originally established with a view to prevent exploitation of farmers by intermediaries, who compelled them to dispose of their produce at the farm gate at very low prices. By mandating all farm produce to be brought to regulated market yards and sold through auctions, the APMC mechanism was meant to ensure fair prices to farmers. But in many cases, these bodies have themselves become dens for cartelisation by traders, who control prices and charge hefty commission fees on produce transactions. (http://indianexpress.com)
Case In Point
Despite setting up of the recommended APMC in Maharashtra to counter cartelisation and artificial price spikes, here is a look at who really benefits from this.
An extreme case that surfaced recently was of Devidas Maruti Parbhane. This farmer from Vadgaon Rasai, a village in Pune district's Shirur taluka, supplied one tonne of onions early this month at the local market yard under the Pune APMC's jurisdiction. The price he got — a little more than Rs 1.5 per kg — was itself very low. But adding insult to injury was the various "cuts" imposed on top of this. (indianexpress.com)
A scrutiny of Parbhane's patti (trade slip) by The Indian Express revealed his total revenues from the sale of one tonne of onions at Rs 1,523.20. The total cuts even on this meager amount added up to Rs 1,522.20. That included commission fees of Rs 91.30, hamali or labour charges of Rs 59, bharai or filling-in-bags charges of Rs 18.55, tolai or loading charges of Rs 33.30, and transport charges of Rs 1,320 (as the kutcha patti issued in Shirur was billed for delivery at Pune). Parbhane, at the end of it, was left with a net earning of Re 1: "When after the auction, the trader handed me a Re 1 coin, I was flabbergasted. Maybe, he should not have taken the trouble to pay me even that!"(indianexpress.com)
Onion Cartel Modus Operandi
Now the Onion crop in India is typified by three produces. The two large produces come in December and April and a small crop comes in October. Now the way the cartel operates is as follows. (alphaideas.in)
The December crop is the time when prices normally fall and consumers have a good time with low onion prices. The cartel keeps a low profile during this time frame where they let the entire December crop flow into the market, thus creating a scenario of low prices and consumer happiness. They wait for the next crop in April. The important thing to note post April is that there is no crop likely till October and the October crop is also a small one. (alphaideas.in)
The Cartel starts mopping up all the supplies that are coming into the markets in the month of April and early May. Farmers get their typical Rs 6-10 per kg as the middleman network keeps the prices down till the time the supply from the farmers is exhausted. On an average the cost to the cartel comes to Rs 8-10 per kg. (alphaideas.in)
Subsequently, the aim of the cartel is to hold on to the produce in their warehouses and cold storages for a period of 3-4 months. The cost of storage comes to around Rs 2-3 per kg and they also account for a 30% wastage in storage. The reason is that the Onion crop degrades very fast as it takes time for the crop to be stored post-harvest. (alphaideas.in)
Taking all of this into account the effective cost to the Cartel for the Onions they have bought comes to Rs 13-16 per kg. The supplies are restricted so much that prices start shooting up by early June. (alphaideas.in)
The cartel makes full use of technology in order to track the stocks position and to estimate the kind of levels to which prices can be ramped up by August/September. By this time prices are up by at least 100% over their buying price. It is already evident this year where prices have shot up at the retail level from Rs 15 per kg to Rs 25-30 per kg over the last 4 weeks. By August the cartel starts to offload their stocks into the markets. (alphaideas.in)
They have already made a killing and made a mockery of Stock Market Operators with the sophistication and ease with which they have made money. Typically prices would have peaked out by October which is the time when the small crop comes in. (alphaideas.in)
Not A Supply Issue
"Onion is one of the most market sensitive commodities that creates ripples in the trade as also political circles. Its significant position in the diets across all income groups and an important ingredient in many Indian recipe causes wide ranging effects of any significant price change," the report said.(thehindubusinessline.com)
Price volatility of onions is not unusual, but a sharp October-November increase is unusual.
The rise in onion prices does not appear to be linked to supply disruptions. Arrivals at wholesale markets have stayed steady through 2017 and there was no dip even in the traditional lean months of June to August.
Rather, larger stocks arrived in the wholesale markets than they had in the corresponding period of 2016. October arrivals were, however, 17 per cent lower than the corresponding period last year, according to National Horticulture Board data. But supply was much higher in September 2017. Therefore, the October-November 2017 surge cannot be attributed to shortfalls in arrivals.
Data show arrivals and prices climbing from August. It could be a case of cartels becoming active again.
The recent surge onion prices has also been accompanied by widening of the difference between retail and wholesale prices in absolute terms.
The difference in the retail and wholesale price of onions has widened with the rise in prices after July. Since August, it has been about ₹6 a kg on an average at the all India level as opposed to ₹4 a kg when prices are moderate. However, as a proportion of wholesale price, the difference is about 25-29 per cent as against 33-39 per cent when prices are lower. (thehindubusinessline.com)
Onion, an inelastic commodity, price shocks are hitting India frequently and they are getting severe. It is ironical that sharp price spikes are experienced almost every third year despite impressive growth in onion production in the country which has risen from below 5.5 million tonne till 2002-03 to above 19 million tonne in the recent years. The country experienced annual growth rate of above 13% in onion production during the last 13 years since 2000-01. No other food crop in India shows this type of spectacular growth in the recent years. However, domestic and overseas demand for onion seems to be outpacing growth in supply. Per capita availability of onion has increased from 4.0 Kg in year 2002-03 to more than 13 Kg in recent years, showing an increase of 12 per cent every year. This growth in per capita demand for onion reflects mind boggling change in preference of Indian consumers for onion. It also implies that the effect of spikes in onion price on household budget is getting heavier. It looks strange that increased availability is associated with increase in price volatility rather than providing flexibility to absorb small shocks in supply. (niti.gov.in, Prof. Ramesh Chand, Member Niti Aayog, Dealing with Onion Price Spikes)
Despite a very sharp increase in per capita availability of onion, its real price has been moving on a rising, though fluctuating, trend. (niti.gov.in, Prof. Ramesh Chand, Member Niti Aayog, Dealing with Onion Price Spikes)
Till recently, any abnormal rise in onion price was attributed to unfavourable weather and exploitation of situation by traders and so called cartelization, hoarding etc. and it was forgotten when prices rolled back to normal. Absence of effective response to onion price shocks in the past indicates that such shocks were treated as inevitable rather than seeking a solution to avoid their recurrence. (niti.gov.in, Prof. Ramesh Chand, Member Niti Aayog, Dealing with Onion Price Spikes)
Past price trends show a clear pattern in price spikes and high prices rule only for a few months. This implies that excessive volatility in prices can be managed through appropriate mechanisms. Any such mechanism that check steep rise in onion prices will be of great relief to the consumers. (niti.gov.in, Prof. Ramesh Chand, Member Niti Aayog, Dealing with Onion Price Spikes)
Studies show that this situation is aggravated by further exploitation by a section of traders and middlemen through stocking and market manipulations. Discussion with various experts and stakeholders reveals that multi-pronged strategy involving technology, extension, public stocks, and market intelligence is needed to address excessive volatility in onion prices. (niti.gov.in, Prof. Ramesh Chand, Member Niti Aayog, Dealing with Onion Price Spikes)
Public agency like Directorate of Economics and Statistics in Ministry of Agriculture and farmers Welfare should constantly monitor crop area, condition and prices to know about the undercurrent and evolving market changes. It should also develop reliable price forecast model and come with early warning system to enable government to take appropriate measures in advance like procurement, regulating export, arranging imports and putting check on hoardings. (niti.gov.in, Prof. Ramesh Chand, Member Niti Aayog, Dealing with Onion Price Spikes)
Where We Might Be Heading
Between 2000 and 2011, prices for most globally traded commodities more than doubled. Since cresting in early 2011, however, oil and industrial metals prices have halved. As the saying goes, however: What's that got to do with the price of eggs? Not much. Unlike other commodities, global food prices have followed a different trajectory. Although down from near-historic highs in 2007-2008 and 2011, they are still higher than at any point in the previous three decades. The economic effects of higher food prices are clear: Since 2007, higher prices have put a brake on two decades of steady process in reducing world hunger. But the spikes in food prices over the past decade have also thrust food issues back onto the security agenda, particularly after the events of the Arab Spring. High food prices were one of the factors pushing people into the streets during the region-wide political turmoil that began in late 2010. Similar dynamics were at play in 2007-2008, when near-record prices led to food-related protests and riots in 48 countries. (washingtonpost.com)
Poverty isn't the whole story, however. Food is an inherently political commodity and has been recognized as so for millennia. Nearly 2,000 ago, the Roman poet Juvenal noted that providing bread and circuses was an effective means of securing urban stability. (washingtonpost.com)
Before things reach an extreme situation where India begins to witness food-related protests, or worse, riots, the government needs to pro-actively check these elements who create artificial price spikes. The government also needs to protect farmers from being exploited by the middlemen and commission agents. India must adopt more stringent laws and develops mechanisms whereby the farmer who is the producer is sole beneficiary from the increased demand of an agricultural commodity.