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Onion Price Spike – Reasons behind the Rapid Shoot Up

Onion Price Spike – Reasons behind the Rapid Shoot Up

The ruling government’s attempts for calming the sky-high onion prices seem to be in jeopardy as heavy rains continue to damage the new crop and delay the harvest. Onion prices aren’t only bringing tears to the eyes of the common man, but are also proving to be a tricky problem for the Congress, which is leaving no stone unturned to restrain inflation from flying any further as the 2014 elections loom.

In the last 3-4 months, the onion prices have quadrupled in most parts of the nation and have played a major role in pushing the inflation figures across the danger mark to a 7-month high of 6.46% in September, thereby prompting the RBI to increase the bank rates. Though the onion rates have grounded in the wholesale markets due to the somewhat improved supply of new crop, the retail prices are still not providing any respite to the consumers in several parts of the country. Today, the onion prices continue to rule at uncomfortable levels of Rs. 50-60 per kg in the capital. Moreover, the tomato has also decided to scare the customers and added to their woes by crossing the mark of Rs. 80 per kg.

Indians consume their way through nearly 15 million tonnes of the onion crop every year, using it as the basic ingredient for various traditional Indian dishes like curries, bhaji and biryanis. In the past, the world had witnessed state governments fall while attempting to curb inflation and failing at the end. This is probably the reason why the constantly rising onion prices are not only making a common man cry, but has also made the government take it as a political issue as far as the five year’s assembly elections are concerned.

In the light of making amendments and applying different policies to bring the rates down, no one really focused on the reason behind the soaring prices of the onion.

Concentration of Production

Despite being the mainstay of a majority of Indian dishes, over 45% of the total onion production is concentrated in the Indian states of Maharashtra and Karnataka only. If unfavourable conditions affect even a single harvest in one of these states, the prices tend to touch the roof.

Unseasonal Rains

The period from July to September is considered a lean period for onion cultivation. During these months, the demand for the crop is generally met from the summer stock (Rabi crop). However, the Kharif crop (produced from September to November) has already been damaged by the off-season rains in Maharashtra, due to which the demand of onion in the consuming states couldn’t be matched as the produce didn’t reach the market. Earlier this year, unseasonal rains also damaged the Rabi crop, which accounts for over 50% of the total onion production in India, in the main onion producing states, thereby contributing to the worsening situation.

Less Availability of Cultivation Grounds

To worsen the situation and add to consumers’ woes, the present area under cultivation of onion in Maharashtra is expected to reduce by the end of 2013. This would certainly result in lowering the amount of produce from a state that contributes about 25% of the nation’s onion produce, thereby impacting the rates even more.

Habit of Hoarding

Though the rates have eased down in the past couple of days and the new produce is bringing in a good share of profit (Rs. 5-10 per kg) for the retailers, the retailers are keen on regulating the market prices by hoarding stocks of onion produce for the sake of higher profit margin. The conditions have gone so bad in some markets that the grade-II and grade-III produce is being purchased at higher prices as a result of the habit of stock piling.

Demand and Supply Game

The economic game of demand and supply is being played out badly in the market. After the retailers having enjoyed the mismatch between demand and supply to hoard the onion produce and artificially increase the prices for higher profits, it is now the actual game that is making the situation worse. At present, the supply of onions in many parts of the nation is less than 50% of the total estimated monthly demand of about 10 Lakh tons. Such a shortage of stock during this festive season, when the demand is touching seven skies, has led to a sudden surge in the average rates.

Changing Pattern of Consumption

Shifting of consumption patterns among the Indian consumers is often a reason behind the rising food prices, including the recent hike in the onion rates. As for now, Indians are depending upon lesser cereals, like wheat and pulses, and consume more protein and vitamin rich foods like chicken and onion. This certainly points towards the reason behind the quick rise in the rate of non-grain food items as compared to the others for many years now.

A Ray of Hope

After having dealt with skyrocketing onion prices, it is expected that the consumers might enjoy the benefit of increased supply in terms of somewhat reduced rates during the times to come. Though there is still a huge gap between the retail and wholesale rates, it won’t last quite long as the retailers will be left with no choice but to reduce their price, considering the increased supply of onions. This certainly presents a hope that the prices might stabilise within a month or so.

About the Author

Pankaj Mathpal

Pankaj Mathpal, Founder and Managing Director, Optima Money Managers Pvt. Ltd. has over 22 years of work experience in Marketing, Financial Planning & Education. Read More…