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Volume 11
Issue 2
June 2013
In the upscale restaurants of Delhi and Mumbai, Chefs are eschewing the
onion, saying the price hike is eating up as much as 15 per cent of profits.
Mahendra Khairiya, chef at the upscale Kothi Mem restaurant in Delhi,
raised eyebrows across the city by announcing pumpkin puree would
replace onion gravy on his menu. Onion pickles have been scrapped
entirely.
Stephanie Nolen, 2011
Lasalgaon is angry. over 50 farmers began hurling abuse at the media
for making their lives miserable.
You people are responsible for this situation. Where were you when onion
prices were 500 per quintal? Nobody talked of prices when we were
struggling to recover our costs, they shouted in a mix of Marathi and
Hindi. Everyone is talking of high prices but no one wants to mention that
we have lost over half the crop and even at these high prices we will not
make money, another farmer politely told us.
M. Madhavan, 2011
With onion prices spiraling to 70-80 a kg, Prime Minister Manmohan
Singh Tuesday demanded immediate action to deal with the crisis, but
Agriculture Minister Sharad Pawar warned it would take two three weeks
for the prices to fall
The Bharatiya Janata Party attributed the rising price to the wrong
economic policies and bad governance
Pawar blamed the crisis on heavy rains which he said had destroyed crops,
particularly in Maharashtra
SME Times News Bureau, 2010
Veena Keshav Pailwar is Professor of Economics at the Institute of Management Technology, Nagpur, India.
The author is thankful to Ms. Tinu Agrawal, Mr. Sankalp Negi, Mr. Shailender Chauhan and Mr. Rishi Saluja for useful
comments on the case and the associated teaching notes.
Onion Prices
Supply side of the market
India is the second largest producer of onions in the world (Table 1). Maharashtra state is the
largest producer of onions in the country, accounting for 41% of the area harvested and 38% of
production (Table 2). Within Maharashtra, Nashik district contributes 35 to 40% of the states
production. Lasalgaon in Nashik is the biggest onion market in the country; hence, this market
largely determines the prices in the country. The other major onion-producing states are
Karnataka, Gujarat, Bihar, Madhya Pradesh and Rajasthan.
Table 1: Onion Production, Area and Yield: Top 10 Countries in the World in 2009
Country
Production (tonnes)
Yield (hg/ha)
China
21,046,969
947,611
222,106
India
13,900,000
846,909
164,126
USA
3,400,560
60,120
565,629
Turkey
1,849,580
65,000
284,551
Egypt
1,800,000
54,000
333,333
Pakistan
1,704,100
129,600
131,489
Russian Federation
1,601,550
85,700
186,879
1,512,150
47,450
318,683
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Country
Production (tonnes)
Yield (hg/ha)
Brazil
1,511,850
66,013
229,023
Netherlands
1,269,000
26,000
488,077
Spain
1,263,400
23,600
535,339
Source: FAO. FAOSTAT-Agriculture, as on 23/9/2011 (http://faostat.fao.org/site/567/default.aspx#ancor)
Area
Production
Yield
(000 ha)
54.9
(000 MT)
732.3
(Ton/ha)
13.3
%
4.84
Bihar
54.4
1,138.50
20.9
7.52
Gujarat
57.3
1,394.60
24.3
9.21
Haryana
23.2
476.5
20.5
3.15
Jharkhand
17.2
364.1
21.2
2.41
Karnataka
130
1,756.70
13.6
11.61
Madhya Pradesh
64.1
985.1
15.4
6.51
Maharashtra
387
5,823.50
15.1
38.48
17
340
20
2.25
48.6
900
18.5
5.95
Andhra Pradesh
Others
Rajasthan
Tamil Nadu
37
556.5
15
3.68
Uttar Pradesh
23.6
370.8
15.7
2.45
West Bengal
21.2
297
14
1.96
935
15,135.60
Total
Source: National Horticulture Research and Development
(http://www.nhrdf.com/ContentPage.asp?DataCode=202)
Foundation,
100.00
Database, as on
25/9/2011
There are three main seasons for onion production: kharif (monsoon), late kharif and rabi (winter)
(Table 3). The rabi crop is the major crop, contributing 70% of total onion production. Some of
the rabi varieties have excellent storage quality of about four to six months.
Table 3: Onion Seasons in India
States/Regions
Time of
Time of
Sowing
Transplanting
Maharashtra and
1.Kharif
May-June
July-Aug.
some parts of Gujarat
2.Early Rabi
Aug.-Sept.
Sept.-Oct.
3.Rabi
Oct.-Nov.
Dec.-Jan
Tamilnadu/Karnataka
1.Early Kharif
March-April April-May
and AP
2.Kharif
May-June
July-Aug.
3.Rabi
Sept.-Oct.
Nov.-Dec.
Rajasthan/Haryana/Pu
1.Kharif
May-June
July-Aug.
njab/UP and Bihar
2.Rabi
Oct.-Nov.
Dec.-Jan.
West Bengal & Orissa 1.Kharif
June-July
Aug.-Sept.
2.Late Kharif
Aug.-Sept.
Oct.-Dec.
Hills
1.Rabi
Sept.-Oct.
Oct.-Nov.
2. Summer (long day type)
Nov.-Dec.
Feb.-March
Source: National Horticulture Research and Development Foundation (2011), Database,
(http://www.nhrdf.com/ContentPage.asp?DataCode=202).
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Seasons
Time of
Harvesting
Sept.-Dec.
Jan.-March
April-May
July-Aug.
Oct.-Nov.
March-April
Nov.-Dec.
May-June
Nov.-Dec.
Feb.-March
June-July
Aug.-Oct.
as on 25/9/2011
This document is authorized for use only in Microeconomics by Prof Trupti Mishra, Shailesh J. Mehta School of Management from July 2016 to January 2017.
Onions are a commercial crop. The estimated cost of onion cultivation varies from Rs 79,590 per
ha to Rs 87,900 per ha (Table 4) (for the international equivalence of Indian units of
measurement, see Exhibit 2), which is comparatively smaller than the cost of cultivating other
crops. Apart from the suitability of soil for onion production, the lower cost of cultivation also
attracts many small and medium farmers to this crop.
Table 4: Cost of Production of Onions During 2011-12 in Maharashtra (Cost Rs/ha)
Operations
1. Land
2. Seed Cost
3. Nursery Raising
4. Land Preparation
5. Transplanting
6. Irrigation
7. Manures and
Fertilisers
8. Weeding and
Hoeing
9. Plant Protection
10. Harvesting, Curing,
Sorting, Grading
and Packing
11. Transportation
12. Supervisory Charges
13. Overhead Charges
14. Total (Rs)
15. Bank interest @
10% p.a. for 6
months
16. Total cost (Rs)
17. Average Yield
(Quintal)
18. Cost per Quintal
(Rs)
Kharif
Late Kharif
10000
4800
3500
7000
8000
4000
16000
10000
4800
3500
7000
8000
4000
17500
Rabi
10000
4800
3500
7000
8000
4000
17500
6000
6000
6000
4000
7000
4000
8000
4000
8500
3000
1500
1000
75800
3790
3500
1500
1000
80800
4040
4000
1500
1000
83800
4190
79590
160
84840
245
87990
250
497
346
352
Source: National Horticulture Research and Development Foundation (2012), Market Intelligence System: Baseline
Data for Potato and Onions, April,
(http://www.sfacindia.com/Docs/Onion%20&%20Potato%20Baseline%20Report.pdf)
In spite of India being a major producer of onions, its productivity is one of the lowest amongst
the major growing countries. Apart from lower yield, the crop is also subject to excessive postharvest storage losses in the event of adverse weather conditions, lack of dormancy (inactive
state) in bulbs, and pest and disease infestation, which affect the economic viability of the crop.
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Source: Based on the data available from National Horticulture Research and Development Foundation, Database, as
on 25/09/2011 (http://www.nhrdf.com/ContentPage.asp?ResultCode=301)
This document is authorized for use only in Microeconomics by Prof Trupti Mishra, Shailesh J. Mehta School of Management from July 2016 to January 2017.
Onions also have numerous health benefits and healing properties and are widely used in the
manufacture of medicines for dropsy, kidney, heart, liver, diabetes, tuberculosis, colic, scurvy,
rheumatic pain and other inflammatory diseases.
However, most Indians use onions not because of their inherent health benefits, but because they
are a condiment that adds taste to the food to which they are accustomed. Also, onions are usually
plentiful and inexpensive, even poor people can normally afford them. Though some consumers
substitute onions with grated cabbage or pumpkin puree during periods of scarcity, there are not
many close substitutes for onions. A small change in the price, therefore, does not have a large
effect on the quantity demand. Considered to be almost an essential item, it takes a very big
change in the price to affect the consumption of onions.
Government policies and regulation of the onion market
In India, in general, the government regulates food grains and vegetable markets by fixing
minimum support prices, minimum export prices, tariffs on imports and quantitative restrictions.
As far as the onion market is concerned, the government pursues the following policies:
First, the government provides the minimum support price to farmers to augment the
production and supply of various agricultural products, and to support their income.
However, as onions cannot be stored for long periods and their storage requires a special
type of structure and huge area, it is not possible for the government to purchase, store
and market onions. Therefore, the government does not provide support prices for onions.
The lack of storage facilities results in large fluctuations in the market price of onions.
Second, the government regulates the export of onions by fixing the minimum export
price. India is a major producer of onions; hence, supply from India can influence world
onion prices. In a situation of normal supply, onions are available at a cheap price. If
exported at this price in the world market, they are not very remunerative for Indian
farmers. Therefore, the idea behind fixing the minimum export price is to provide
lucrative prices to the farmers, to encourage the export of onions and to maximize foreign
exchange earnings for the country. Keeping these objectives in mind, in a normal supply
situation, the minimum export price is fixed above the market clearing price in the
domestic market, but below that prevailing in the world market. The minimum export
price, however, affects the supply in the domestic market. An increase in export prices
(above the world market price) makes the exports more expensive in the international
market, thus reducing demand for exported onions in the global market. However, this
helps increase the supply in the domestic market. The reverse holds true when the
minimum export price is lowered. To ensure a smooth domestic supply and to moderate
fluctuations in domestic onion prices, the minimum export price is fine-tuned every
month, taking into account quality, crop prospects, market trends, expenses involved,
freight charges, etc.
Third, India is a major producer of onions in the world. To prevent a glut in the market
and to ensure fair prices to onion farmers, the government tries to restrict the import of
onions by imposing an import duty.
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Fourth, in extreme situations, the government can impose quantitative restrictions and
even completely ban the export and import of onions.
Fifth, in India, the inter-state sale of agricultural products, including onions, is restricted
by various state-level regulations and taxes to ensure food security in the exporting states
and to avoid excessive competition in the importing states. Such restrictions, in spite of
the removal of a ban on the inter-state movement of agricultural commodities, fragment
the markets, result in black marketing and hoarding, boost the commission of middlemen
and make prices highly volatile.
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season in India. Major festivals, such as Christmas, New Years Eve, Makar Sankranti, etc., fall
in these months. Families and friends visit each other during these festivities in India and
celebrate the events with special meals, increasing the demand for onions and other vegetables
during this period.
Was it speculation?
Traders did take advantage of the apparent mismatch of demand and supply. The demand-supply
gap, which would have been minor, was widened by speculative activities and hoarding by
intermediaries. The widening of the gap accentuated the deviation between wholesale and retail
prices (Figure 2) and worsened the situation manifold in the market place.
Figure 2: Wholesale and Retail Onion Prices (in Rs) in December 2009 and 2010
Source: Based on the data available from the Ministry of Consumer Affairs, Food and Public Distribution, Price
Monitoring Cell, 2011, http://fcainfoweb.nic.in/Prices_Application/daily_prices/san_interface_daily.asp.
Expectations also played an important role on the demand front. In anticipation of a further rise in
the price of onions, consumers also tried to safeguard their interest by demanding more onions
than their normal requirement and storing them. Those families that usually used only 2 kg of
onions in a month bought 5 kg in anticipation of additional increases in onion prices, further
accentuating the shortage of onions in the market.
Was it government policy?
The opposition parties as well as analysts blamed the supply shortage on the governments
economic policies. They argued that, in its zeal to promote onion exports (India is the largest
exporter (Table 5)), the government had ignored the rising domestic demand. India used to export
just 106 thousand tonnes of onions 50 years ago. With the emergence of the WTO in 1995, and
after the removal of quantitative restrictions, the export of onions increased rapidly, reaching
1,670 thousand tonnes in 2008 (Figure 3), which accounted for around 12% of total production.
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Table 5: Onion Exports: Quantity and Value: Top 10 Exporters in the World in 2008
Countries
Quantity
Countries
Value ($)
India
1670720
India
422832
Netherlands
1100050
Netherlands
375646
China
545310
Mexico
301007
320773
182507
Mexico
279989
China
133026
Spain
254773
Spain
96878
Turkey
210936
Argentina
77502
Argentina
202597
Poland
66706
Poland
141672
Egypt
41559
Egypt
103321 Italy
40749
Source: FAO, FAOSTAT-TradeSTAT, as on 24/9/2011 (http://faostat.fao.org/site/535/default.aspx#ancor)
Source: Based on the data available from FAO (2011), FAOSTAT-Agriculture, as on 24/9/2011,
http://faostat.fao.org/site/342/default.aspx.
Apart from the removal of quantitative restrictions, the policy on minimum export prices had
promoted export value and volume. The minimum support prices had usually been kept low in
comparison to international prices to make Indian exports competitive and enhance the demand
for exported onions. However, since these prices were higher than those in the domestic market,
the effect of this policy had been to reduce the supply of onions in the domestic market.
The government was also criticized for delayed policy responses. The outbreak of the fatal crop
diseases was reported in the kharif season and it was expected that the yield would be low and
prices would soar. Anticipating this, the minimum export prices should have been sharply
increased as soon as it became apparent that there would be a supply shortage. But the
government response on this front was very late in coming. Critics of the governments policy
argued that the government could have averted the sharp supply shortage by restricting exports
and resorting to imports at a much earlier stage and by building up buffer stocks on the bumper
rabi crop (Mehta, 2011 and John, 2011).
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What Is Needed?
Business analysts questioned whether the government should leave the matter of export and
domestic price fluctuations to the natural forces of demand and supply, and intervene in the
market only in the event of large volatility, by subsidizing onions to consumers. Would the
traders and farmers benefit from such a policy? Or, should the government scale up storage
facilities by investing heavily in infrastructure to provide long-run price stability? Such an
approach would, however, drive up the governments already high deficit, the burden of which
would fall on everyone, including consumers, traders and farmers, in the form of higher inflation.
2013-06-18
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Exhibit 1
Map of India
Source: http://www.mapsofindia.com/maps/cities/india-map-with-cities.html
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Exhibit 2
Indian Units of Measurement and their Equivalence
Indian Units
1 lakh
10 lakh
1 crore
10 crore
100 crore
1 Acre
International Equivalent
100 thousand
1 million
10 million
100 million
1 billion
4,840 sq yard
= 4,046.8 sq meters
= 43,560 sq feet
= 0.4047 hectare
= 20 kanal
1 hectare (h)
2.4711 acre
= 10,000 sq metre
2.20462262185 lb
1,000,000 gms
=1.102 short tons
0.1 kg
1 kilogram (kg)
1 metric ton (mt)
Hectogram (hg)
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