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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Onion price crash: It's a bloodbath

Pic: LiveMint

Shreyas Aabhale is a young farmer from Sangamner in Ahmednagar district in Gujarat. This 21-year-old farmer was aghast when he found that he had earned only Rs 6 after selling 53.14 quintals of onions. In frustration, he sent a cheque of Rs 6 to Chief Minister Devendra Fadnavis. A few days later, another farmer, Chandrakant Bhikan Deshmukh, from Andarsul in Yeola tehsil in Maharashtra was able to sell onions at a price of 51 paise per kg. As a mark of protest, he also sent a money order of Rs 216 to Chief Minister Devendra Fadnavis. This is what he had earned after deducting mandi charges, and the transportation cost.

Both of them were probably inspired by Sanjay Sathe from Nashik in Maharashtra who had earlier sent a money order of Rs 1,066 to the Prime Minister’s Disaster Relief Fund. This is all he had earned, after deducting the expenses he had incurred, selling 750 kgs of onions. He received another shock when the Prime Minister’s Office returned the money order he sent, probably unable to accept the contribution in view of the shock waves the news had already created.

As onion prices are tumbling, a real bloodbath is being enacted on the farms. In Lasalgaon mandi, the biggest trading centre for onions in the country, prices had crashed to Rs 100 to Rs 300 per quintal. On an average, farmers were getting not more than 15 per cent of the cost they had incurred in cultivation. Unable to bear the shock, two farmers in Nashik district had reportedly committed suicide.  

In Neemuch mandi in Madhya Pradesh, onion prices had crashed to 50 paise per kg. In several other instances, irate farmers had thrown onion on the streets and some had heaped onions on the roadside giving it free to people passing by. The same is the story for garlic. Last year, the farmers of Hadoti, which comprises four districts of Kota, Bundi, Baran and Jhalawar in Rajasthan, shifted to garlic, a lucrative crop. In March when the crop was harvested, a glut in the market saw prices crash to Rs 1 per kg, making it unviable to even transport the crop to the mandi. Newspaper reports say the abysmally low garlic prices forced five farmers to commit suicide in the same belt.

Subsequently, garlic prices crashed in Madhya Pradesh mandis too forcing farmers to dump the produce in frustration. Some even emptied their bags in wells and ponds.

The plight of onion or garlic growers is no exception. A few months earlier, 65 per cent drop in wholesale prices of tomato in Nashik market forced a number of farmers to dump tomatoes on the roads. This pattern of price crash is nothing new. For past three years in a row, reports of angry farmers throwing onion, potato, tomato and other vegetables like peas, cabbage, cauliflower etc on the streets have appeared regularly. In fact, a video of an angry farmer sitting on a roadside and breaking pomegranate in exasperation one after another for not getting a price that covers up his cost of cultivation has already gone viral. It shows how severe and widespread is the malaise of price crash after a bountiful harvest ruining in the process tens of hundreds of farm livelihoods.     

What do you expect farmers to do when open market prices fall to considerably less than the Minimum Support Price? In the month of November alone, prices for farmers across the board dropped between 15 to 25 per cent approximately. Even in the case of paddy, where the government steps in to procure surplus paddy at the Minimum Support Price (MSP), prices dropped by 20 per cent. Some studies have shown that out of the 23 agricultural commodities for which the MSP is announced every year, excess production of 21 crops actually lead to an unmanageable surplus as a result of which the prices crashed.

Attracted by higher prices and favourable weather conditions, farmers put in their best to achieve record production. But their excitement is short-lived. Price crash across the country over the last few years, for instance has left farmers in the lurch. While it is perfectly alright to blame the ad hoc export import policy for the failure to find a stable market for exports, the promise of a Market Intervention Scheme (MIS) has failed to rescues loss making farmers. In fact, the assurance of launching Operation Green – on the lines of Operation Flood – aimed at market intervention for the TOP crops – an acronym for tomato, onion and potato -- at time of a price drop still remains on paper. It is time to think that if an effective cooperative system could be evolved for the highly perishable commodity – milk – there is no reason why India cannot envision a similar strategy for other perishables.  

In the US, when private markets fail to rescue farmers from a price crash, the US Department of Agriculture (USDA) had time and again moved in to manage the surplus. In 2016, when there was a crash in market prices, the USDA procured 11 million tonnes of cheese worth $20 million from farmers. “This commodity purchase is part of a robust, comprehensive safety net that will help reduce a cheese surplus that is at a 30-year high, while moving high-protein food to the tables of those most in need,” the then Agriculture Secretary Tom Vilsack had said

Earlier too, the USDA purchased 10 million pounds of strawberries, and directed the procurement to schools as well as to the needy. It purchased $6 million of fresh tomatoes in 2011 to help growers faced with oversupply. I wonder why India’s Ministry of Food and Civil Supplies is unable to buy in bulk tomato, onion and potato from farmers in a similar manner. Why can't the perishables be immediately moved to areas which are food insecure? After all, how can one explain food being thrown on streets at a time when 200 million people go to be hungry every night.

Not that US has been able to address the price sump every time a glut takes place but since 2002, the US Farm Bill provides for income support to farmers under what is called ‘price-loss coverage’ system. In 2014, the income support helped peanut growers emerge out of the crisis emanating from a price crash. Unlike the Market Intervention System in India, which is essentially aimed at consumers when food inflation soars, the US has instead put in a strong safety-net mechanism for farmers. #

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