Understanding food price inflation

It was in Nov/Dec 2018 that prices of onions had crashed. Prices had come down to such a low level that at many places farmers were forced to throw onions on the streets. Reports of onion farmers getting a price of less than Rs 2 a kilo adorned the local newspapers. Some weary farmers had even acknowledged receiving a price as low as 30 to 50 paise per kg.

While farmers suffered, consumers were visibly happy. And so were the mainline economists, after all food price inflation had come down to an 18 month low. Consumer food price index had come down to minus (-) 2.65 per cent, pulling down the consumer price index to 2.11 per cent.

Strangely there was no hysterical media drawing the nation’s attention to farmer’s plight. Nor did I see any mainline economist, including those with the credit rating agencies and private sector banks raise concern over the declining farm incomes. This was also at a time when Niti Aayog had acknowledged that real farm income growth was ‘near zero’ continuously for two years. In another study, Niti Aayog had found that in five years to 2015-16, real farm incomes had grown by less than half a per cent every year, 0.44 per cent to be exact. Even this had failed to evoke a policy response from the Monetary Policy Committee of RBI which remains obsessed with keeping inflation low. In the process what happens to the livelihoods of millions of farmers and farm workers is not its concern.

A year later in Dec 2019, when consumer price index climbed to 7.35 per cent, essentially with retail food prices soaring to 14.12 per cent, driven mainly by price rise in onions and to a lesser extent in tomato, pulses, meat and milk, the media as expected went hysterical. The same media which conspicuously kept quiet last year when farmers were severely hit with low prices, is now questioning how the poor will be able to afford vegetables at such high prices. Economists, including those with brokering agencies, are debating whether higher food inflation at a time when the economy is expected to expand only by 5 per cent will lead to stagflation. With inflation going beyond the monetary policy band of 6 per cent (4 per cent, plus and minus 2 percent) and fiscal deficit getting out of control, some economists are even calling for a review of the monetary policy questioning whether it is capable of tackling inflation.

How the monetary policy can control rise in prices caused by supply-side constraints remains a puzzle. Agriculture Minister Narendra Singh Tomar told Lok Sabha that a shortfall in onion production by over 15.8 lakh tonnes has led to the spike in onion prices. This was primarily because of unseasonal rains, which lashed parts of southern and central India after the period when monsoon rains normally withdraw, in the month of September. Nearly 64-lakh hectares area was affected by incessant rains, which extended to early November, causing damage to the standing crops. Much of the rain damage was in Maharashtra and Karnataka which produce nearly 50 per cent of the onion output. While Maharashtra received 1.5 times the average rainfall, untimely rains hit 45 per cent of the area under onion production in Karnataka.

Higher food prices, especially that of onion had also raised the wholesale price index (WPI) to a 7-month high of 2.59 per cent in Dec. But whether the benefit of a higher wholesale price went to farmers was perhaps best reflected by a video of a crying farmer from Ahmednagar in Maharashtra, which went viral on social media, who was able to sell onions for only Rs 8 per kg. At a time when onion prices were ruling at a high of Rs 100 per kg, this farmer said he had employed extra labour to pull out the crop during heavy rains and what he got in return was peanuts. This is generally the story of farmers everywhere.

The benefit of high prices that consumers have to pay rarely percolates down to the farmers. In case of onions, traders purchase the crop when prices are low, store them in godowns, and release it into market when prices are favourable. It is known that a strong cartel of middlemen operates in case of onion trade, a nexus that successive governments have failed to break. Nevertheless, several studies have shown how a battery of middlemen and traders walk away with bulk of the food price rise gains. Market prices of pulses last year for instance had on an average prevailed at 10 to 25 per cent lower than the MSP announced. Tomato, onion and potato are the three major vegetable crops that have been hit time and again by volatility of markets. It is primarily because of low price realisation by farmers that the demand of increasing and extending Minimum Support Price (MSP) to all crops remains steadfast. Even if the MSP does not cover the cost of production that farmers incur at least it provides them an assured price.

If only there was an improvement in supply chain management, which can ensure a higher proportion of the consumer price flowing to the farmers, there is certainly a scope for boosting rural incomes. However, what we are seeing is that when food prices increase, the consumer pays a much higher price without an accompanying increase in farmers’ income. Unless middlemen’s share in the food chain gets minimised or eliminated, there is little hope for farm incomes to increase. #

Understanding food price inflation. Network18.com. Jan 17, 2020

https://www.news18.com/news/opinion/understanding-food-price-inflation-when-farmers-grow-onions-but-get-peanuts-2462201.html

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Peeling the layers of Onion crisis

Pic courtesy: Economic Times

With a significant shortfall in onion production this year, the onion price rise has left consumers teary-eyed.

For over two months now, onion prices have been on the boil. While prices crossed the benchmark Rs 100/kg in several parts of the country, touching Rs 150/kg or more in some metropolitan cities on certain days, an over-cautious government had earlier swung into a fire-fighting mode to bring down the prices. It followed the usual pattern -- first, enhancing the minimum export price to $850 per tonne (the rate below which exports are not allowed), and when the prices still continued to climb, clamp a complete ban on exports. This was accompanied by reducing the stock holding limit for wholesalers and retailers, and a strict warning of a crackdown on hoarding. At the same time, a frenzied search was made for onion supplies from countries from where immediate imports could be allowed.  

Placing an order for imports of 6,090 tonnes of onion from Egypt, another 11,000 tonnes from Turkey and finally directing the state-run MMTC to import one lakh tonne of onion, the government had even relaxed the fumigation norms at the time of imports against pests and diseases. While the supplies from Egypt have started to trickle in, most imports are unlikely to materialise before mid-January. Meanwhile, 110 trucks of onions arrived at the Attari border in Punjab from Afghanistan on Monday, and more are likely to follow in the days to come. There is no denying that the imports will certainly bring some psychological relief to the heated market sentiments prevailing, but it isn’t going to make much difference in offsetting the production shortfall. After all, the total imports contracted so far does not exceed 1.5-lakh tonnes, and considering that roughly 50,000 tonnes is the daily requirement, the imports will be enough for only three days consumption. The government had earlier allowed import of 1 million tonne of onions. 

Excessive rains in the two major onion growing states -- Maharashtra and Karnataka – which produce around 50 per cent of the country’s onion requirement resulted in a shortfall in production. After an initial round of dry spell excessive rainfall followed coinciding with the harvest period. A delayed withdrawal of monsoon rains from Maharashtra and Karnataka added to farmers’ woes by affecting harvesting. According to news reports, at the time of harvesting that staggers from early October to early November, Maharashtra alone received 1.5 times the average rainfall. In Karnataka, roughly 45 per cent of the area under onion was hit by untimely rains at the time of harvest.

The unseasonal rains at the time of harvest, which many attribute to climate change, had pulled down the official production estimates by 18-lakh tonnes. This was enough to send the prices spiralling.

But as it normally happens, the trade is more than eager to take advantage of the supply demand gap, thereby driving the market prices up north. As a knee-jerk reaction, the Ministry of Consumer Affairs, Food and Public Distribution had first imposed a stock limit of 50 tonnes for wholesalers and 10 tonnes for the retailers to improve domestic supplies. It subsequently reduced the limit to 25 tonnes for wholesalers and 5 tonnes for retailers. And when the pressure from the retail trade grew, essentially from the organised retail, the stock holding limit for retailers was further reduced to 2 tonnes. The importers however were kept free from these norms for the imported stocks of onions. At the same time, there was a build up in the demand for putting an end to unnecessary harassment of traders. Last week, the Karnataka traders, and earlier Andhra Pradesh traders, had officially conveyed their resentment to the State governments seeking an immediate stop to raids by Vigilance and Enforcement officials.

This year, onion production has seen a drop by a quarter in productions but still this is no justification for prices to spiral out of reach of a common household when the higher prices have not translated into higher prices for farmers. While video of a Maharashtra farmer selling onions at about Rs 8 per kg had gone viral, farmers have remained more or less at the receiving end. In early December, wholesale prices did jump to Rs 60 to Rs 70 per kilo in Solapur APMC market but the benefit was largely reaped by traders who had hoarded the produce. In Karnataka, farmers say the best price they received was Rs 25 to Rs 30 per kg, with most of them getting not more than Rs 18-20 per kg. In Andhra Pradesh, some farmers claim they got a price of Rs 60 per kg for the late harvested crop but a majority ended with a price not exceeding Rs 30 per kg. Generally, the market prices remain low when farmers have something to sell. But when the prices begin to sky rocket, the traders make a windfall, selling onions they had already purchased from growers.

That the consumers finally paid a price three to four times more than the price at which the farmers were able to sell is a clear pointer to the well-oiled cartels that operate. Otherwise I see no reason why onions should cost Rs 120 a kilo when what the farmers received was less than Rs 30 a kilo. The government’s stern warning to wholesale and retail trade notwithstanding, the fact remains that when the going gets tough, politicians as well as industry associations jump in building pressure to go soft on the trade. Even way back in 2010, when retail prices for onions had increased from Rs 35 per kg to Rs 70 per kg, there was no plausible reason behind the price hike except for large scale hoarding. Interestingly, 2010 was a year when the supply was 20 per cent higher with an additional one million tonne high output. There was no supply constraint and yet the prices had ruled high. Subsequently, the spike in onion prices in 2011 and later in 2013 when prices shot up by 400 per cent against a production drop of barely 4 per cent, the unwarranted rise in prices was actually played out well by the onion cartels.

While it has become customary to issue warnings to hoarders, the fact remains successive governments have failed to tame the trade, both wholesale and retail. Instead much of the blame is shifted to the lack of adequate storage at the farm level. If only farmers could hold on to onion harvests for some weeks before the prices begin to rise, the argument is that farmers would not be forced to dispose off their produce at a low price. Like in Nov-Dec last year, farmers received a price as low as 30 paise a kilo and many farmers had dumped onions on the streets. Strangely, there was no hysterical media at that time drawing the nation’s attention to farmer’s plight as if the terrible economic hardship that farmers have to undergo is of no consequence. It is only when prices begin to firm up in the cities that the media begins to howl.

Well, there is no denying that the government needs to provide support to farmers for building more storage capacity, but the problem is much beyond storage. If storage alone was the problem, I see no reason why onion growers in America, who have state-of-art storage facilities, are finding it difficult to sell. In Florida, farmers are not getting more than $ 2.50 for a three-pound bag, which is less than the cost of production. In fact, an American farmer tweeted the other day saying that the price she is getting this year is exactly the same price at which she sold onions 30 years back. No wonder, while it is the trade which exploits gullible onion farmers in India, it is the Supermarkets that fleece farmers in America. Mainline economists want market linked solution to the recurring onion crisis but fail to explain why the markets in America are unable to help onion growers.

Since the markets have failed to provide farmers with the rightful price, there is a dire need to bring in a price stabilisation fund for farmers. At present, there exists a Rs 500-crore price stabilisation fund that is primarily meant to subsidise onion sales for the consumers. In addition to creating a mechanism to meet price fall for the producers, the need is to adopt a cooperative structure for tomato-potato-onion (TOP) production and marketing on the pattern of Amul cooperative. The Milk Man, the late Dr Verghese Kurien, had in fact planned Mother Dairy outlets for vegetables on the lines of milk cooperatives. It is time to reclaim the space, and usher in a cooperative movement for vegetables. That’s the only way to get a respite from the volatility in prices, both for the producers and the consumers. #

Rise in onion prices: A cooperative movement for veggies need of the hour. National Herald. Dec 15, 2019. https://www.nationalheraldindia.com/opinion/rise-in-onion-prices-a-cooperative-movement-for-veggies-need-of-the-hour?fbclid=IwAR069wW5l4R7zTFEipB7L_gSP22EqLpSXivGJ9lFBYiRzw2hdqvvyJC6600

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