If you’ve ever eaten Indian food, you know that onions are an essential part of most dishes, which is why the skyrocketing price of onions in India—an increase of more than 300% in the past 12 months—is making front page news.
For consumers, prices have hit 85 rupees per kilogram and 100 rupees ($1.50-$1.75 per kg) in some retail markets. Local newspapers speculate about the growing number of onion heists (yes, onion heists) and about the potential political fallout in an election year. Everyone is angling to take short term advantage of the situation.
To attract Indian customers, Groupon is offering deals selling onions at 9 rupees per kilogram and they are selling out in record time. Even the major political parties are getting in on the game, buying onions and selling them at a huge discount to attract voters in the upcoming elections.
By the numbers, India is the second largest producer of onions globally, (China is #1) and the country is usually a net exporter. India produces all three varieties of onion: red, yellow and white. Onions are available in both the winter and rainy seasons and are grown on more than 2.5 million acres (1M HA).
So what has happened in the past few years? Price increases are being driven primarily by shortages, trader manipulation and inefficient infrastructure. A Competitive Commission of India report points to significant market structure issues: “…the minimum role of [onion] farmers in price discovery due to low size of average farm holdings (1.15 to 1.3 acres)” is combined with an oligopoly in the commission driven trading and wholesaler markets. It doesn’t help that the demand for onions is inelastic (e.g. it is a necessary staple with no real substitute).
The Commission makes some good suggestions, but its core recommendation is to encourage “entry of new commission agents and traders… to help in efficient price formation.” In my view, this simply adds more middlemen, which might create competition in the short-term amongst traders but does nothing to empower the small farmer. It is exactly this lack of power that has led to the market structure issues described above, and these can only be circumvented by reducing transaction costs in the system and allowing farmers to engage directly with grocery suppliers. While market price discovery is important to farmers, giving them collective bargaining power will be much more effective.
Combine these changes with higher productivity and you have a shot at creating a long-term solution. Consider this: India is the second largest producer of onions but it has one of the lowest yields per HA, at 14.21 tons according to a 2012 FAO report. The Republic of Korea has the highest onion productivity of 63.84 tons/HA in the world followed, by the United States (55.26 tons/HA). China produces 50% higher yields. According to the government’s Competitive Commission report, “reasons for low productivity in India include poor irrigation facilities, use of local variety seeds, small land holding and poor economic background of farmers, lack of use of improved method of cultivation, less use of chemical fertilizers and pesticide, higher post-harvest losses and absence of good scientific storage facilities.” Dear government: addressing some of these challenges might be a better use of money than buying votes.
This past Sunday, many Indians celebrated the festival of Diwali, which marks the end of the harvest season in most of India. Families give thanks for the bounty of the year gone by and pray for a good harvest next year. This year, they are no doubt praying for lower onion prices too.
Sudhir Rani is the CFO of TerViva, Inc.