An old debate continues: whether “high onion prices are good or bad” and the answer is, “it depends on whether the poor are selling or buying.” High prices benefit farmers who are net sellers, and hurt consumers in urban areas. Low prices have the opposite effect. In each case, the net effect depends on the balance between who is able to manoeuvre the policy in his favour.
High prices do not mean high price realisation by onion farmers. It only shows a better information arbitrage by a selected few while the ‘babus’ remain the most ill informed in times of impending crisis. Price instability is a general feature of agricultural markets. The current onion price crisis has highlighted the vulnerability of inter-ministerial communication or rather the lack of it.
Too many cooks spoil the broth is nowhere more apparent than the current onion crisis. A coordinated effort between four ministries —ministry of consumer affairs (dealing with controlling price), ministry of commerce (dealing in trade, exports & imports), ministry of earth sciences (weather forecasting) and agriculture ministry — would have yielded better price-control mechanisms.
The architecture of decision-making at the ministerial level does not seem to be sensitive to the issue that the government’s role in a free market economy is not to bring down the price at every spike of a commodity but to create a consistent policy environment where such surprises become minimum. The executive arm is still stuck in a time-wrap when the state was supposed to control prices for the consumers (the middle class in general).
Ad-hoc trade policy interventions such as export ban and import subsidies have always been harmful in the long run. The Left politicians (as usual) are making noise to ban forward market without knowing the fact that onions are not traded on the futures. Hopefully, they shall come better prepared the next time or should they start asking to ban oil futures on NYMEX/ICE for petrol price rise. It was also amusing to see an Opposition politician (from my school), who has refined taste for good things in life, talking about ‘aam admi'.
What is perhaps most telling about the price increases of onions is the negative impact of their extreme volatility. Both high and low prices have winners and losers but volatility hurts everyone except traders and speculators. Stable and remunerative prices should be the goal. That will attract investment into agriculture and bring long-term benefits beyond the short-run effects.
In the US, the ban on trading of futures contracts in onions was passed on August 28, 1958, and remains in effect as of 2010. The studies by Holbrook Working and later by Roger Gray (Stanford 1963), Aaron C. Johnson (1976) have concluded that onion prices had been less volatile during the years when the contract was active.
While the politicians continue to make the right noise about the failures and ability of the government to control prices, the real issues of productivity, export policy, weather forecasting in a coordinated fashion remains a dream (in spite of huge investments). Past adhoc efforts on stabilising prices at a certain level by some individual countries have generally been unsuccessful all over the world.
Price spikes in the times of market economy are going to remain chronic. Should the government continue to intervene every time during the price spike on tax payers’ money, that would be to rob Peter to pay Paul.
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