Why the onion trade is in hands of traders not farmers?

Why the onion trade (for that matter any agri commodity) is in hands of traders not farmers? ‘Direct Marketing’ to those uninitiated souls who are yet to navigate agricultural marketing Indian jungle called APMC. A case study with Maharashtra as an example.

Non-availability of economic loads at farm location – Availability of onion is widely scattered in Maharashtra for instance. Land holding of onion growers is very less. Most of the farmers own less land and due to unfavorable weather conditions and need to spread price risk over a period after harvest even one vehicle of 16 MT is not available with a single farmer field at a given time. Non-availability of full truck load of onions at a farm has led to concentration of onion trading at market yards. Ready availability of desirable onion lots at a market yard in case of a shortfall to make a truck load, is another big plus point. Secondly, procurement cost of small lots in a scattered environment works out to be very steep. So market yards and traders help in pooling of produce and provide infrastructure for standardized sorting / grading at one central location.

Marketing produce as per grade necessity of a particular market. Each market has its own grade requirement for Maharashtra onions. While eastern India / Bangladesh / Bhutan / Nepal markets prefer small sized onions, North and West Indian markets prefer bigger sized onions. Traders buy small lots from the market yards and pool the produce for sorting / grading at their pack houses and sends different grades to different markets all over India depending upon the grade requirements and price at a particular market. Onion trading involves huge risk and in depth knowledge of distant markets. Lack of trading expertise, market knowledge and risk bearing capacity has prevented most of growers or their organizations to make a significant dent in onion trading. So, most of the trading is in private hands.

Local markets (16 presently in Nasik District) act as a reference market to small growers. Since Maharashtra onions have an almost year round pan Indian and export clientele, no market is big enough to act as a price leader. Farmers generally take reference of the local markets’ rates, while traders compare rates of all markets, including major distant and export market and then decide where to send their produce of a particular grade. Significantly, most of the growers Coops handling onions are located in Market yards where their members bring produce for auction under supervision of local APMC’s. These Coops at best act as a commission agent operating from market yards and are meaningless presently as no trade is happening through them. Even in case they can have tie ups with organizations like Mother Dairy or Reliance Retail they buy produce from market yards from arrivals of their own members or from arrivals at other commission agents. However, their inability to market (read sell) rejections / small size grades through organized retailers (because of reason # 2) or at distant markets has resulted in their losses and eventual discontinuation of supplies. Due to this reason, retailers have been relying on its onion supplies from traders since so many years.

Non-sustainability of exclusive onion Coops / Associations. Because of various agro-climatic reasons, onion belt in Maharashtra is actually a scattered chunk of large number of smaller sub belts, crisscrossing a distance of almost 1000 Kms plus. It starts with Karnataka border on one side and continues till MP / Gujarat border on the other end. It almost covers all western Maharashtra and Marathwada region. For a particular distant market, for example Delhi or Bangalore, most of these sub belts are active for a short period as far as fresh onion flows are concerned. Active period in some cases is only a fortnight or a month. Because of this reason, exclusive onion coops / associations have not been successful as short period of business can’t sustain their yearlong expenses. Many coops were organized for the purpose of purchasing / selling onions but over a period these coops have taken other businesses (credit and inputs) and onion trade because of above said reasons have been relegated to the back ground leaving field open only to private traders. In our view, multi F & V items would have succeeded as unlike onions, revenue could be expected to flow round the year.

Concentration of large storage capacities with traders. For historical and market reasons, large storage capacities for onions has remained with private traders and that too in Nasik belt. State Govt. and Central agencies have promoted small sized storage structures at farms which are not conducive to standardized sorting / grading at central locations by trained labor. Usually growers do sorting / grading on their own, using family and farm hands and are prone not only to errors but smaller throughput. Traders can buy the whole stored lots and provide sorted / graded produce to retailers or buyers as per their requirement at their risk and cost. Finance for establishing such facilities, working capital and risk bearing capacity of Coops will have to be taken care off.

Non-availability of sorting / grading facilities with Co-Ops at farm locations. Farmers have small storage capacity based on their individual needs. Generally traders purchase un-graded produce from Markets, then they do sorting and grading. So to ensure quality and standard packing, material has to be arranged from the traders.

Vertical Integration of various market functions by onion traders. At Pimpalgaon, a major onion market near Nasik, like practically all across Indian onion markets, traders wear many hats by bending (not breaking) the APMA rules and bye laws. Rather the law and rules look silent on this competition aspect. Big onion traders are commission agent cum wholesalers, order suppliers, forwarders cum store owners and some are even transport or railway agent also. They have different firms with or without licenses to handle same function, let’s say ‘being a commission agent”. Odd it may look, but this multiple roles by a firm some time are instrumental in stabilizing the trade. For example: If the prices of a lot on a particular day are going very low that a commission agent feels the risk of losing a good and regular supplier than as a wholesaler or forwarder he may buy the lot himself (though his group firm with or without license) and pays an inflated price to supplier. Similarly, as a railway agent he fills the minimum railway quota if other traders are not forthcoming with supplies. This way he earns good will of railways by taking additional risk. Having explained the benefits of this integration, there are obvious pitfalls also. Such multiple roles by select few big traders have brought inequality between traders. So big have become very big which has created monopolistic conditions.  This lack of capacity to conduct multiple roles prevents farmers, their organizations to compete with traders even if they are well represented in APMCs.