Onion prices rocket, but retail profit margins low
Onion prices have soared across India since September 2019, but the retail profit margin (the difference between average wholesale and retail prices) was its lowest in four years in November in the national capital, at 51.4%, an indication that retailers don’t make more money off high onion prices.
The average monthly retail profit margin since January 2015 on onions is 104%, which clearly shows that terms of trade in agriculture are strongly skewed in favour of retailers, not farmers.
An earlier HT analysis discovered that prices normally spike due to poor supply, caused by inclement weather, which results in a poor crop.
In November, the average monthly retail onion price in Delhi adjusted for inflation was the highest since September 2015. Onions were retailing at Rs 100 per kg on December 13 in the Capital, according to data from the National Horticulture Board (NHB). Experts have blamed the high prices on acute shortage of supply due to untimely rains in Maharashtra. The state accounted for one third of India’s onion production from 2013-14 to 2017-18, according to the agriculture ministry. An HT analysis of NHB data shows that despite the increase in retail onion prices in Delhi, the profit margin fell to its lowest value since June 2015. The analysis also shows that the profit margin reduces whenever onion prices have risen since 2013, with June 2015 being the exception. The profit margin that month was still relatively low, at 40%, despite low retail prices.
Apart from farmers, the other people who end up on the wrong side of the dynamic are consumers, who do not really benefit from low wholesale prices (at these times retail profit margins tend to rise). However, consumers are forced to pay a higher retail price when wholesale price increases due to a supply disruption — as has happened in recent months. Further analysis shows that there is a disproportionate increase in retail prices when the average daily arrival quantity falls compared to the year before. Consumers do not benefit proportionately when arrival quantities rise. For example, in December 2018, arrival increased by 45% compared to December 2017, but retail prices fell by only 57%. Retail prices increased by 157% in November 2019 compared to November 2018, when arrivals decreased by only 21%.
This suggests that customers in Delhi do not benefit when onion production is good, but bear the brunt of poor production. To be sure, that’s nothing compared to what farmers have to put up with.