Why food prices go up before the elections?

Sudden spike in onion prices for no apparent reason? 

It has come as a rude shock. After the unimaginable drubbing in the State elections, Congress party now realizes the folly it made in not controlling food inflation. Sonia Gandhi has admitted that rising inflation has been instrumental in building peoples’ anger against the ruling party.

They had taken it rather casually. Remember Agriculture Minister Sharad Pawar expressing his helplessness at rising prices. He said he didn’t know why the onion prices were rising. Instead of initiating tough measures, Delhi Chief Minister Sheila Dixit had pleaded with folded hands before hoarders and black marketeers not to raise the prices at the time of elections. Prime Minister Manmohan Singh had very conveniently blamed the global economic for the spirally prices in India. 

Onion prices were on boil. So were the prices of other seasonal vegetables. Ginger and Garlic selling for Rs 100 per kg, Peas at Rs 120/kg, Cauliflower at Rs 80/kg and even spinach sold at Rs 60 per kg. In fact, no other vegetable was available in the market for less than Rs 40/kg. Such high price prevailed when the monsoon rains had been more than bountiful, and there was no shortfall in production, defied all economic logic.

Let us not forget, prior to elections onion prices had remained abnormally high for several months – from July to mid-November, and had started receding just when the election process had begun. The question that needs to be therefore asked is that why inflation invariably spikes before elections? 

In early December, onion prices had crashed. According to a report in Economic Times (Dec 13, 2013) prices had halved to Rs 13/kg in three weeks in western markets. The report says that prices had stubbornly refused to come down before the assembly elections even when the supply was marginally low. If you have followed my earlier blogs, I had been saying that production fell by only 4 per cent whereas prices had gone up by 600 per cent in various markets. 

Well, the answer is not difficult to find. Over the years, the wholesale and retail trade in fruits and vegetables has monopolized the entire supply chain. Right from procuring vegetables from the farmers to making it available at your doorsteps through a network of hawkers is now an organized business. As I have been saying, these traders or arhtiyas have now turned into money bags for the political parties. No wonder, these wholesale and retail traders are affiliated to one political party or the other. For instance, 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.

It is primarily for this reason that the major political parties had opposed bringing the parties under the Right to Information (RTI) Act. It is therefore a matter of convenience for both the political parties as well as the traders association. While the government remains conspicuously indifferent by not initiating any strong action against hoarding and manipulative trade practices, the trade goes for a killing. This understanding helps the political parties to meet a considerable part of the heavy electoral expenses.

Otherwise I see no reason why the vegetable prices should zoom prior to every elections. Onion prices were no exception. An investigation by a newspaper showed how the trade made a neat Rs 150-crore in just four days when prices peaked at Rs 4,500/quintal on Aug 13.  A sting operation by another TV channel exposed traders hoarding huge stocks in Madhya Pradesh. Even when the prices were touching the sky, the Agriculture Produce Marketing Committee (APMC) in Nasik had acknowledged that more than 2.5 lakh tonnes of onion were available with farmers in 66 villages of Lasalgaon. 

Subsequently, another expose by NewsX TV channel had shown that farmers had got as low as 0.50 paise per kg in Maharashtra while the price consumer paid was Rs 100/kg. Who benefited from such a massive manipulation? Your guess is as good as mine. 

Read it's Hindi version in Rajasthan Patrika, Dec 14, 2013.
http://epaper.patrika.com/c/2064129

Onion prices: It's a homemade, artificial crisis

With the assembly elections nearing, the Centre has finally got cracking. It has directed the states to come down on hoarding that is driving up onion prices. This is perhaps the longest season when onion prices have remained abnormally high — from July to mid-September — and is expected to last until the first week of October.

Knowing that simmering anger among consumers can upset poll calculations, the ministry of consumer affairs, food and public distribution has been forced to act. More so, considering the spike in onion prices has spread to all other vegetables, except the potato. While onion prices have hit Rs. 80/kg, no other vegetable is available at less tha Rs. 40/kg even though we had a more-than-bountiful monsoon.

There is more to onion prices than what meets the eye. First of all, let’s be clear that raging food inflation is a reflection of the market economy: prices of all commodities, across sectors, have been steadily rising. Take the case of housing and real estate. The unprecedented rise in land prices and the phenomenal jump in prices of built residential houses/flats too defy any economic rationale. The cartels operate everywhere. Try making an online purchase of an airline ticket. If you click on a particular route more than three times, the ticket price goes up. But we never complain. We have accepted the hikes, and absorbed them. We only scream when food prices go up.

Here is how the government manipulates inflation data. Knowing that it is invariably food prices that pinch the average consumer, the government had, some years back, quietly modified in its calculations the system of according weights to different products. It reduced the weights for food items, and added more weights for consumer products like refrigerators, air-conditioners etc. Even with these highly distorted parameters, food prices in the wholesale price index for August showed an increase. Interestingly, food inflation as measured by the consumer price index showed a decline in the same period.

Now let us look at the trade. Unlike other vegetables, onions have a longer shelf-life. So the trader knows it pays to manipulate the prices. Reports point to how the wholesale traders have bought onion from growers at approximately Rs. 8/kg in April-May and stacked them at numerous places around the Nasik region, the epicentre of onion production in India. A handful of big wholesale traders, who control the supply side, manage to create an artificial shortage. This is exactly what was done in 2010 when prices had shot up unexpectedly. Production exceeded the demand by about 20% , and yet the onion prices had shot through the roof.

This year too, there is no significant shortfall in production. With production falling by a mere 4% there is no justification for retail prices to go up by upward of 400%. An investigation by a newspaper showed how the traders made a neat Rs. 150-crore in just four days when prices peaked at Rs. 4,500/quintal on August 13.  Even the Agriculture Produce Marketing Committee in Nasik has acknowledged that more than 2.5 lakh tonnes of onion were available with farmers in 66 villages of Lasalgaon.

Onion prices have also remained high in the organised retail chains. These chains were supposed to buy directly from farmers, and so the prices should have been lower. Replacing one set of middlemen with a more sophisticated one is not the solution. Both exploit gullible consumers as well as farmers. What the trade needs is a stern deterrent action. But unfortunately, onion is not among the products which come under the Essential Commodity Act. This allows the trade to go for a killing. Moreover, in a market-based economy, markets are supposed to make a correction. This is a wrong assumption. Markets are not like seasons, these are willfully manipulated.

Source: This is a homemade, artificial crisis. Hindustan Times, New Delhi. Sept 20, 2013.

http://www.hindustantimes.com/editorial-views-on/ColumnsOthers/This-is-a-homemade-artificial-crisis/Article1-1124517.aspx

Let's chop the onion cartel

Every time onion prices hit the roof, or for that matter, whenever food inflation inches upwards, it is amusing to see economists invariably pointing to supply-demand constraints and the urgent need, therefore, to modernise the supply chain. And that has always left me wondering why economists can never see beyond the fundamental prescription enshrined in the economic textbooks. It doesn’t always hold true.

The onion crisis is no different. At a time when the electronic media was screaming at the top of its voice, I heard many an economist, who had probably never been to a crop field, repeating ad nauseam what they had been taught in their classrooms.

Onion prices had hit a two-and-a-half year high in August at the back of fears of a drop in production in key areas because of drought last year, and in some areas, the heavy rains turning to be a spoilsport. The emphasis, therefore, was on the need to streamline the supply chain, with some newspapers even suggesting irradiating the vegetables to extend its shelf-life.

From a maximum of Rs 10 per kg in June, onion prices had shot up to Rs 70-80 per kg in a few weeks, finally stabilising at Rs 50-60 when the government announced a slew of measures, including imports and quantitative restrictions on exports. Although Union Agriculture Minister Sharad Pawar had said that prices would remain high until October when the new crop comes in, strangely the wholesale prices began to soften to coincide with the announcement of import-export measures.

This is not the first time the onion trade has played truant. In December 2010, onion prices were on fire. Even prior to that, onion prices had flared up for three years in a row between the months of September to December. And I had always maintained that barring some seasonal variation, there was no reason for onion prices to soar by 400-500 percent. Even this year, the production shortfall has been anticipated at a mere 4 percent and the prices have gone up by as much as 600 percent on an average. How can this stupendous price hike be attributed to supply-demand constraints?

For several years now, I have been saying that the extreme volatility in onion prices (and also that of other vegetables/ fruits) is the handiwork of a cartel that operates in the wholesale trade. A handful of trading families have cornered the entire trading activities, thereby very conveniently manipulating the market. Large-scale hoarding of onions goes on unchecked.

The reason is obvious. No political party wants to ruffle the traders with any stringent action. Traders hold the strings to the political purse, and a crackdown against hoarding and speculation would mean chopping off the financial cord.

It is not that cartelisation operates only in agriculture. Take the case of airlines. You click three times on a flight route on the Internet, and the ticket price goes up. Private airlines have charged as high as Rs 25,000 for a one-way ticket between Mumbai and New Delhi, taking advantage of cancelled flights that day. Now look at the prices of eggs. If supply-demand is the mantra, then how come prices of eggs are almost uniform throughout the country? How come the demand for eggs remains the same in New Delhi and Bathinda, for instance? It is because a handful of people/companies decide the egg price for the day.

I can go on with such illustrations. Often the blame is rested on the Agriculture Produce Market Committee (APMC) Act, which regulates the agricultural markets. But there is no APMC Act for the airline industry. And look how conveniently they have unbundled the prices to even charge for a seat preference.

In agriculture, organised retail players such as Reliance Fresh, Easy Day, Big Bazaar, Spencer’s and others who buy the produce directly from farmers, too, have failed to pass on the price benefit to consumers. Replacing one set of middlemen with another, therefore, is not the answer.

Source: Tehelka Issue 35, Vol 10. Aug 31, 2013

http://www.tehelka.com/lets-chop-the-onion-cartel/

Onion prices: What brings tears to your eyes.

Onions being sold in a typical Indian market

Quoting a study by the National Bank for Agriculture and Rural Development (NABARD), the Hindustan Times has reported that the stupendous price hike in onions was because the trade had manipulated the prices. In a report titled: Farmer sells onions at Rs 8, you buy at Rs 70 (HT, Aug 22, 2013. bit.ly/18LnbB7 ) it states: "You are right to feel ripped off, but spare a thought for the farmer, too. A NABARD report on onion reduction and marketing seen by HT shows that the farmer makes a profit of just Rs 3.60 for every kg he sells. In other words, a farmer would need to sell nearly 20 kg of onion if he, hypothetically, wanted to buy a kg of his own produce in plusher arts of Delhi."

In other words, the middlemen, and that includes the wholesale agents as well as the retailers, have together romped home with a huge profit. According to the NABARD study, "in an ideal situation -- with no hoarding or unfair practices, and wastage at the 'normal' 25% of the 150 million tonne crop -- onions should be available at Rs 14 per kg."

This is not the first time that the trade has been exploitative. Even at the height of the onion crisis in December 2010, when prices had touched Rs 80/kg, I had said there was no shortfall in production, and the unprecedented price hike was on account of hoarding and manipulation of the prices. Of course at that time, the Govt had sided with the hoarders simply because it wanted to justify the need to push in FDI in retail. (See my blog post: Now it can be told. Onion prices were stage managed. Dec 2010, http://devinder-sharma.blogspot.in/2010/12/now-it-can-be-told-onion-crisis-was.html).

Time and again, rising food inflation has been the topic of media discussions. Some magazine/newspapers have trailed the entire supply chain to explain to readers how the prices are jacked up, and at what stage. The general agreement is that it is the middlemen who exploits both the producers and consumers. So if the middleman's role is minimised or done away with, both the farmer as well as the consumers stands to benefit. The solution that is being suggested therefore is to bring in organised retail which will buy directly from the farmers, and therefore make it available relatively cheaper to consumers.

During the present onion crisis, the organised retail chains -- Reliance Fresh, Spencer's, Easy Day, Big Bazaar and the likes -- were charging Rs 60/kg when the open market price was also Rs 60/kg. A day or two later, it brought down the price to Rs 59/kg and eventually settled at Rs 50-55/Kg when wholesale prices were softening after the Govt announced imports. I had made it a point to visit Reliance Fresh store in Mohali (where I stay) just to monitor the prices of onions. Two things I observed. First, there was hardly any price difference. Secondly, the price that is fixed for onions is for A-grade quality, but what sells for most part of the day is very inferior quality produce. In other words, what Reliance Fresh is doing is that it does provide A-grade quality, immediately when the stocks come in for the day at a little less price that is in the open market, but then pushes bulk of its inferior quality produce at the same price throughout the day.