The Financial Express
Swasti Lankabangla Swasti Lankabangla

Onion price hike and market intervention

| Updated: December 02, 2019 21:34:00

Onion price hike and market intervention

Consumers have witnessed an abnormal and rapid surge in onion prices in the retail markets during the last two months. Average price of per kg onion surged to Tk 210-220 at the middle of this month from Tk 50 at the end of August this year. Earlier, onion prices reached at Tk 100 per kg by the end of September. In October, the price increased slowly. The sharp and fast rise was visible during the first two weeks of November. Later, the prices started to come down slowly.

When prices of onion started to rise in September and crossed Tk 100 per kg in retail kitchen markets, Indian government's decision to ban the onion export was blamed. The export ban was enacted at the end of September to check the soaring prices of the essential kitchen item in the domestic market of India. As 90 per cent of imported onion is sourced from India, it was a big blow to Bangladesh. It was, however, predictable that India would restrain the export as its domestic production was damaged due to untimely rain. Two weeks before the export ban, Indian government also fixed minimum export price of onion at $850 per tonne.   

The blame entirely shifted to so-called trade syndicates by the end of October even when the gross mismatch between supply and demand of onion in the market was clear to all.  No doubt, though, a  section of  unscrupulous traders took advantage of the curtailed supply to make a hefty profit.  Nevertheless, there the problem can be fixed only through market mechanism.

The basic economics says that excess demand over supply or lower supply against demand will push the price of a commodity. Now, higher price at one stage also reduces the demand. Declining demand also gradually pulls down the price. Or, if supply starts to increase, it also reduces the price at one stage.

Demand for a kitchen commodity like onion is, however, mostly inelastic in nature or largely fixed. That's why even some changes in prices don't reduce the demand in most of the cases. In the current case, when prices of onion started to increase at a faster rate, consumers also rushed for making hectic purchases. They were driven by 'inflation expectation' that price would increase further in near future. As more consumers rushed to market, it pushed the demand further and also contributed to further price hike. Retailers and wholesalers started to stockpile and reduced selling of onion. They were aware that big drop in import due to Indian export ban have significantly chocked the normal supply. Eventually, the price of per kg onion crossed Tk 200 mark.

At this stage, most of the consumers found it impossible to pay the excessive price and they cut their demand by rationing onion consumption. Meantime, the government announced to import some 50,000 tonnes of onion from different countries including Pakistan, Turkey and Egypt by air. The first two consignments reached Dhaka in the last week. Reduced or rationed demand and potential rise in supply contributed to halt the further rise in prices. Opinion prices have started to roll back slowly.

MISLEADING DATA: The current crisis has exposed the lack of adequate data on the country's demand, supply and production of onion. The authorities were apparently caught unaware in the absence of proper data analysis and monitoring of the global market and import sources and forecast of supply and demand of the commodity accordingly.

There is no comprehensive data on the demand of onion in the country. The latest Household Income and Expenditure Survey (HIES-2016) showed that daily per capital intake of onion in the country is 31.04 grams which was 22.0 grams in 2010. Thus per capita daily consumption of onion increased by 41.0 per cent during the period under review.  Having an estimated population of 161.30 million (LFS -2017 by BBS), minimum annual demand of onion thus stands at least 1.90 million tonnes. Commerce minister on last Tuesday, however, said that some 2.20 million tonnes of onion is required annually. Bangladesh Tariff Commission (BTC) estimated that the annual demand of onion is at least 2.40 million tonnes.

If demand statistics is not reliable, data on domestic output is largely misleading. BBS showed that annual production of onion in FY18 stood at 1.73 million tonnes while Department of Agriculture Extension (DAE) put the figure at 2.33 million tonnes. Thus, there is a difference of 0.60 million tonnes in onion output data of two state agencies.     

It is assumed that at least 25 per cent of locally produced onion is wasted due to lack of adequate storage facilities and  75 per cent of produced onion usually arrives in the market. By adjusting it with DAE estimated output, it seems that the country needs to import at least 0.65 million tonnes of onion. Customs data from National Board of Revenue (NBR) showed that in FY18 some 0.90 million tonnes of onion was imported which increased to 1.10 million in FY19. Thus, there should be enough surplus of onion. But, taking the BBS output data into consideration and adjusting it with 25 per cent damage, it is apparent that at least 0.95 million tonnes of onion needs to be imported annually.

The lesson from the onion crisis is:  Without having a clear demand pattern it is not possible to manage the demand and so market may turn volatile by any small disruption in supply. 

SYNDICATION & INTERVENTION: So-called 'onion syndication' or market collusion by the traders is considered as the main reason for abnormal rise in onion prices. Different sections of people strongly believe that importers and traders have increased the prices to make a hefty profit by taking the advantage of low supply of onion. Both print and electronic media, coupled with social media, squarely blamed the so-called market syndicate or cartel for pushing the price of onion.

To tame the market volatility, Bangladesh Competition Commission put a public notice in different newspapers warning that alleged oligopoly or collusion in onion market is unlawful and a punishable offence. The law enforcing agencies have stepped in by arresting a number of traders. Mobile courts have also fined some wholesale and retail traders in Dhaka and Chittagong. Customs intelligence has already summoned four dozens of onion importers to check their import and trade trend in recent time.

This kind of intervention may work as an ad-hoc step to crack the possible cartelisation. The Competition Commission needs to initiate a thorough investigation to identify the existence of so-called syndicates and their extent.



Share if you like