Greed is good–invest your Onions – “Notes from the Onion Underground”

In the wake of onion crisis we were commissioned by a client to study all major onion markets all across India and come up with the genesis of crisis, particularly with regard to identification of competition issues.

Since the subject was of prime importance, your humble self took special interest in visiting some of the important the markets for discussions with various stakeholders, including the Govt. and quasi Govt. organizations across the whole value chain.

The current crisis made me dig up my archives and revisit the rough notes I prepared from my various interactions with a vide spectrum of people related with onion trade.

What follows are some unstructured observations, loosely termed as “Notes from the Onion Underground” on a market called Pimpalgaon in Maharashtra, an unheard of sleepy town near Nasik, perhaps a second most important market in India. 

I’ll not pass any judgment but leave it to my dear readers to make their own interpretations on what could have gone wrong except making a bold statement that a market is the combined behavior of thousands of people responding to information, misinformation and whim. In this onion markets are as efficient or inefficient as stock markets across the World.

Read on……

• Pol crop (late Kharif) damage all over Maharashtra, particularly Satara and Sangli belt and adjoining Karnataka was the real culprit last year (Nov –Dec 2010). Rains first in July Aug damaged nursery and again in Sept Oct damaged young crop – this crop was to supply onions in Oct / Nov. Rain fall data collected for the last year for these periods vis-à-vis normal rainfall is available for review and supported this.
• Strong need for good production, distribution planning was felt by all stakeholders to avoid crisis such as onion price spikes. Need to create capacity to hold.
• No evidence for hoarding as all farmers, traders and APMC officials were of the unanimous view that Heavy Rains at the time of transplanting (June / July) and Again on Aug / Sept in southern Maharashtra and Karnataka contributed very much for short production of Pol / Red onion crop which is normally harvested in Oct. This coupled with almost finished stocks of Unhali (Rabi) compounded the lesser arrivals.
• Last year rains played havoc both at the time of transplanting and harvesting, resulting in extensive productivity / quality loss at few farmers, particularly low lying where waterlogging was there. It was not the intensity of rain but the continuance of rains, even for 17 days on a stretch, which caused maximum damage.
• All agreed that continuing exports, media hype, raids by IT / CCI aggravated crisis.
• Most respondents including many farmers squarely blamed the Union Agri minister and Govt. official for manipulation in continuing exports. Other cited reasons were
• Failure of Govt. to pick production / arrival signals in time and take corrective action.
• Control Media hype.
• In time ban on export and initiate import
• Raids at market functionaries were counter productive
• Greed and gambling of traders
• Pimpalgaon is the market in neighborhood where commission agents collects up to 6% commission from farmers. At other markets it is the licensed buyers who take the commission.
• Though no evidence was available, there is a strong feeling that to get price arbitrage and risk appetite of some traders / buyers, onion passed through various hands after auction on mouth transactions only without any physical deliveries. Lot of gambling and speculation seem to have existed.
• Again no evidence existed but activity and number of village level traders increased in some onion pockets in Maharashtra (not visited though because of paucity of time).
• Because of increasing price trend, to make mullah, lot of farmers harvested even the immature onion resulting is further poor shelf life and quality.
• Trader lost much in one single day when because of greed. They bought at continually rising rate but next day the rate crashed by 8/10 rs. Even mother dairy official confirmed losing heavily on one single consignment but with an overall marginal gain.
• Traders did not agree to hoarding theory as pol (late Kharif) crop can’t be stocked because of high moisture content. But definitely transit stocks because of changing market scenario in distant markets played spoil sport in gains / losses of traders and other stakeholders.
• All agreed that select farmers and traders (who had stock either in hand or transit at any given point of time during the crisis) and practically all retailers, made the maximum money from crisis.
• Prices are normally high in Pimpalgaon because exporters who like good quality onion for their overseas buyers, frequent this market through their agents.
• Genesis of price rise at Pimpalgaon – The maximum prices were hovering between 1500 and 1800 per 100 Kgs prior to Diwali. Market was closed from 3.11.2010 to 9.11.2010. When the market opened on 10th Nov, the prices went up to 3200 per Kg and never looked back till situation eased around last week of January 2011.
• During the crisis Central Govt provided 20% subsidy to a cooperative (private?) to buy onion for Nafed and NCCF, who in turn supplied to Mother Dairy and sale through own outlets at subsidized pricing for one month. 1800 MT was supplied to Mother Dairy. It also came to our knowledge that cooperative’s chief is a present Director and ex-Chairman of NAFED. It was also alleged that cooperative purchased onion of bad quality at higher prices during the crisis.
• One of the greatest insight that came our way was that in Pimpalgaon Onion Trader Association is more powerful than APMC. To buy at Pimpalgaon you need to be a member of trader association and to become member of association you have to work with and buy through an existing association member for at least 2 years, pay him 1%, submit a bank guarantee to association. This association is presumably taking regulatory role of APMC to protect trader’s interest. Apparently APMC recognize all this and also collect and use some funds like Goraksha fund (no such fund in other markets) on behalf of this association. List of present 41 association members is available with us.
• Taking a Commission Agent license is not easy at a Onion market in Maharashtra . A case at neighboring new Moongsha market came to our notice where an outsider Maharashtra trader applied for a CA license but all market traders struck work (read market closure and farmer loss) for one month to prevent his entry. Later exchange of rs 15 lakh with right hands settled the matter in his favor.
• Onion freight rates increase during grapes and tomato season (Dec to June) as these are the preferred commodities where rates are higher.
• APMC flatly refused to provide market fee paid detail by individual onion traders and gave direct hints for not raking up the onion crisis issue with members.
• Traders operate under different firms for different jobs. Like a different firm to act as commission agent and a different firm to act as a forwarder. This look like a big manipulative act to transfer goods and money in an opaque manner. But this way they are also responsible for vertical integration of trade which is good in broader perspective. A matter for further detailed study by agri economists.
• Seed availability, supply and prices are important for next season’s crop – an important indicator that has been largely overlooked or grossly ignored by the policy makers.
• There are only 15-20 traders who are operating in market by paying 1% to association members in Pimpalgaon
• Sometimes the local Pimpalgaon traders also sell in neighboring mandis to get the price arbitrage. This shall distort the availability picture if the market arrivals are used to derive same. Traders (as buyers) usually do this when they have to purchase their farmers produce (as commission agents) at higher price just to retain and strengthen their relationships. To recover excess cost, they resell in other markets where prices are higher.
• When tried to get evidence on late delivery of trucks we asked the transporters about demurrage paid, all replied that this will not have any record either at source or destination as demurrage money is paid to truck driver in cash not as part of freight bill
• Best farming land is growing for grapes cultivation. Inferior usually allocated to onions.
• Farmers were unanimous in asking for MSP for onion.
• Mathari Union (labor) is very strong in Maharashtra. They struck work during Diwali period over a petty issue. With market closed, already inferior quality new onion perished at yard or individual farms. This strike was also responsible for reduced arrivals so high onion prices during last season.
• Genesis of Mathari union strike during crisis is also interesting. Earlier 2% quantity discount was permissible when farmer brought onion from auction to traders’ shed. One farmer slapped a court case and won. Ruling in Jan this year resulted in mathari strike as traders demanded exactly 50 kg filled bags which Matharies said they won’t be able to ensure because that involved extra labor so they struck work.
• Private market should have been at Chandwad. Premium market in Nasik is bad location where practically nothing except some grapes orchards are there. So it has just become a transportation and distribution centre not a market. May be land appreciation was the prime motive of promoters.
• Nov to April accounts for almost 70% of onion arrivals at Pimpalgaon. Remaining months contributes about 30%.
• One of the biggest onion commission agenr cum Trader favor formation of markets like SNX (now defunct) because that way he will be able to extend his reach, find new buyers, have guarantee in between and deal with Quality and educated people.
• At some smaller markets, big farmers also have started becoming traders and buy from markets to take price advantage at distant markets.
• Another big insight – Prices were high at the time of storage (April / May) so less onion was stored last year.
• Yet another useful insight – common to all farmers – While bigger and prosperous farmers can gamble, payment security is what brings small and medium farmer to a particular market or a particular commission agent, not price alone. Payment and its security is what brings a farmer to a particular market or commission agent.
• There have been few market failures like smaller markets like Jhodga and Deola where non or delayed payment to farmers resulted in farmers shifting to other markets. APMCs remained silent spectators – this role of ensuring payments to ensure survival of markets is now unofficially taken over by traders union. Call it entry barrier but for the good use. A matter of further detailed study by agri economists.
• Income tax raid were also reasons for crisis as traders in Delhi and elsewhere stopped the vehicles enroute fearing raids because IT officials may see working stocks as hoarded stocks. Truck delays deteriorated the already inferior quality resulting in losses to buyer or seller and resultant price hike.
• Earlier central Ministry of Agriculature used to fix export prices with input from two committees viz Price Advisory Committee and MEP committee. Now after the onion crisis this price fixation role has been given to Ministry of Commerce with MOA having only advisory role. This tussle between two central ministries is being perceived by concerned people as disastrous for Indian export industry.
• All Govt departments cut a very sorry figure of agri data collection and reporting process not only during crisis but during normal times also. Figures pertaining to same parameter as reported by various agencies rarely match.
• Trade processes are discouraging use of modern grading lines that delivers exact product specifications. Not successful unless all buyers ensure grading from all traders through machines only. Reason being – machines are meant for precision grading (45mm or below means as such while manually 45 grading shall also have 42mm plus – no one cares but this impact costing of packer who uses grading lines. is quality standardization good or bad is also a matter of further study in such circumstances
• In Kharif onion there is no control as sowing depend upon rains. Low productivity if no or less rains. 6-7 MT per acre. Delayed sowing of maize because of delayed rains shall impact next sowing of onions (another matter of study) as late sowing of onion shall result in less yield of onion.
• Excessive use inorganic chemical on onion production is there. There are subsidies on inorganic chemicals while none on organic (read farm yard manure)
• Few farmers did not sow this season by now because exports were irrationally stopped by Govt in Jan / Feb – one can never know if the ban shall be lifted or not. So uncertainty is bad for trade. This has made farmers very angry.
• As per many farmers and traders media is the biggest culprit. One farmer even said – No one ever died because of eating costly onions but many farmers have died because of low prices of onion. So why this noise over costly onions which made some farmers and traders get more money. They were of the view that consumers could have brought down the prices if they had stopped eating onions for few weeks.
• Farmers are most worried about price fluctuation. They want msp based on cost of production = at least 100% mark up over cost of production.
• Azadpur Delhi is not a preferred rail mode from Pimpalgaon. Excessive Handling and cost (loading and unloading +local tpt) from Patel Nagar onwards is the main reason.
• Another useful insight – when transported through rail – everyone knows who has loaded how much and sending where. So complete transparency is there, which is not good for trade from trader’s perspective. It is only much lower freight rates than road that compensates for this lack of opaqueness.