Onion Rs65/kg, Petrol Rs65/litre, Beer Rs65!

For the first time in history, basic needs, life style needs, luxury needs are at the same price, prompting us to explore why basic needs like onions are so expensive.

The visit: We visited Pimpalgaon and Lasalgaon - Asia’s biggest onion wholesale markets (240km from Mumbai) - and interacted with over 25 farmers, a wholesaler, assistant to APMC chairman (Agriculture Produce Marketing Committee) and visited three farms.


Key Takeaways: The price rise is due to significant supply shortage arising from unseasonal rains, with crop yields falling to a tenth of the normal 70-80 quintals per acre in many cases. At these yields, despite farm realizations reaching 2-3x of last year (Rs2500-3000/quintal) a farmer is still unable to break even. With the next onion harvest expected only in March, supply shortage is expected to continue for at least two months. However, we see pressure on onion prices even beyond that as unseasonal rains have also damaged seeds, due to which seed plantation is likely to be lower than last year. Unseasonal rains have also damaged grapes and tomatoes and thereby prices have doubled.

Our view:

We believe pressure on the price of onion, tomatoes and grapes is going to sustain for at least 6-9 months due to supply shortage (albeit not to the same levels seen last month when onion prices touched Rs 70-80/ kg). A bigger concern, though, is the possibility of high sustained inflation continuing, especially if supply shortages occur frequently across food commodities (as seen in the past year). Even if supply gets back to normal levels, prices will not reduce to the levels last year for two reasons: 1) farmers, having seen increasing crop disruptions, will demand higher prices in normal years to create a higher safety net for a bad year; 2) having seen that the consumer is willing to pay Rs60/ kg, the entire supply chain will attempt to extract slightly higher prices than earlier (scarcity-driven prices that touch super-normal levels always settle at a higher normal due to the sticky nature of inflation). In this case, with onion prices currently at ~Rs45/ kg (up from Rs 20/ kg last year), even if supply does get back to normal in 6-9 months, it is unlikely to get back to Rs20/ kg seen earlier and is more likely to settle at ~Rs25-30/ kg (still at least a 20% increase). While government interventions in terms of export bans are likely to provide temporary relief to consumers, the threat of sustained long-term inflation is likely to stay.