Why onion farmers often end up in tears
Onions present an interesting study. While they are not an essential commodity, last week, the Union government banned onion exports.Updated: Sep 23, 2020, 09:10 IST
With the Rajya Sabha passing amendments to Essential Commodities Act (ECA), food prices will enter a new policy paradigm. The government is claiming that the deregulation -- the new ECA removes restrictions over movement and storage of food items such as onions by private players -- will incentivise creation of better infrastructure and lead to an increase in farm incomes.
Critics maintain that this could actually legalise hoarding. Farmers, starved of capital, often sell their crops when prices are low.
Onions present an interesting study. While they are not an essential commodity, last week, the Union government banned onion exports. HT reported that the government also planned to release its buffer stocks in the market to bring down prices. Inflation has emerged as a serious problem in the past few months. Headline inflation has been above 6%, the upper band of the Reserve Bank of India’s comfort level, for the fifth consecutive month. Food inflation is above 9%.
The government’s move to ban onion exports and release buffer stocks, in this context, is a pre-emptive strike on inflation .
Onion farmers, however, are likely to end up in tears. The recent rally in prices came after a long phase of lower prices . This is not the first time this is happening. Unlike their grain producing brethren, vegetable farmers face a far greater volatility in prices and incomes. This is because there are no Minimum Support Price (MSP) driven price floors and costs do not come down when prices crash.
Also, while the government is pro-active in limiting windfall gains for farmers during times of high prices in the name of fighting inflation, it does not shy away from pursuing inflationary policies for its own gains. For instance, it continues to impose high duties on petrol and diesel, while attacking onion farmers’ incomes to control inflation.
Vegetable prices more volatile than cereals
National Account Statistics (NAS) data gives value of production of major crops in both current and constant prices. While the prices of two major cereals, rice and wheat, have been rising continuously, those of important vegetables, tend to fluctuate a lot. This volatility is not seen in the cost of production. An examination of A2+FL measure of cost – this includes cost of hired and own labour, rent of leased in land and other inputs – for rice, wheat, potatoes and onions proves this. Wildly fluctuating prices, with continuously rising costs, mean that vegetable farmers are vulnerable to a large volatility in incomes.
This also means that unless they are allowed to make windfall gains, they cannot compensate for the windfall losses they suffer when prices crash.
An article by Ila Patnaik and Radhika Pandey, economists at the National Institute for Public Finance and Policy, says that the government has changed export rules for onions at least 17 times between 2104 and 2019. The frequent export bans may suggest that most of India’s onion output is exported. An analysis of trade data shows that this is not the case. Onion exports are usually less than 10% of domestic production, and here too, farmers face a very volatile market.
High prices don’t always lead to higher incomes
Farmers value revenue over prices. Many instances of a spike in onion prices -- this holds true for most horticultural products -- are driven by a shortfall in supply due to weather-related crop destruction. This means that even though prices are high, farm-incomes might not rise commensurately, and, in fact, even fall, as the quantity of crops sold goes down.
The fact that farmers lack the financial wherewithal to store crops, means that they are far less likely to have accumulated inventories to gain from these sudden spikes.
Data on daily turnover of onions at the Lasalgaon market in Nashik district, among the most important onion producing regions in the country, proves this (to be sure, this data is only a proxy for farmer incomes). The data highlights two things. One, there is large scale volatility in monthly turnover of onions, which implies a volatility in incomes of onion farmers.
Two, periods of high inflation need not coincide with periods of high income for onion farmers. For example, in 2019, wholesale price inflation for onions grew at a slower pace in July (7.6%) and August (33%) than in October (119.8%) and November (172.3%). Yet, the turnover in July and August was much higher than in October and November.