Monday, December 10, 2012

The Onion Conundrum – a peculiarly Sri Lankan odyssey

Sri Lanka grows big onions only seasonally and harvests 90% of its local production in the months August to October, before the October rains. Therefore the Government in order to help the local onion producer had slapped an import levy of Rs50/kg in August satisfying the local farmers as imports would create an oversupply.

Those traders who knew about the import levy, were able to purchase and land their onions in the country on time, so despite them not needing to pay the higher duty, they were nevertheless able to retail their stocks at the higher prices, before the full effect of the harvest and its surplus came to the market, thereby profiting handsomely.

There is a slight difference in taste between the local onions and the generally drier and larger Indian Variety. Also I believe the Indian variety stores better and can be kept for a lot longer than the local variety and is also generally larger in size.

I do not wish to go into the intricacies of onion storage except to say that it requires some purpose built shelves, to keep out moisture and preserve dryness, something that the Indians are far better at.

So when imported onions with the lower Rs15/kg was in the market in August, the price was around Rs60/kg retail, where the landed cost to the importer at the port before the duty is around Rs30/kg, if he buys in huge quantities. Then the local variety flooded the market as soon as the harvest was sent to the market, the Govt. increased the Tax to Rs50/kg, an increase of Rs35/kg.

At that point imports stopped, as the local was retailed at about Rs60/kg, when the farmer was only given around Rs35/kg, the rest being made by the intermediate players known as middle men, who also had a stock of the cheaper imports to sell off as mentioned above. The Rs35/kg farm gate price was less than the cost of production to the farmer, and many farmers were demonstrating about it. No amount of duty increase was going to help them at that stage, merely because the supply exceeds demand, and large scale storage is not possible.

If one takes a reasonable view, the product is demand inelastic as the consumption pattern as a food item is pretty steady all year round, and the price will only affect consumption marginally. The farmers are not sufficiently sophisticated in terms of numbers to store this until prices rise, when supply weakens, and therefore they receive a low price. Middle men cannot buy and store until prices rise, as the special storage is needed just for a few months and the attendant risk of spoilage,  and due to the type of onions we have. The lack of proper storage facilities that are unique to onions, and where long life cannot be assured, as one is unable to look at a sack of onions and determine if it was harvested without being subject to a recent rain or some such moisture inducing event thereby closing that option.

After a while, when the supply reduced, the price began to rise to around Rs90/kg where farmers who were able to store it were able to sell their stock at about Rs65/kg to Rs70/kg. I must mention at this time that the Lak Sathosa outlets of the Govt. owned retail stores around the country had purchased directly from farmers at Rs60 and sold at Rs65 to the customers. There were problems in disposal and Lak Sathosa had to throw away a lot as it was cheaper in the open market!

I must say when I looked at the quality of those onions in those stores, there was a lot to be desired, as their quality was bad, and only about 75% of what one bought could be used. So no wonder trying to manipulate the free market ended up costing this State owned enterprise a lot.

Now that the price reached Rs90/kg, supply being short, and a Rs50/kg import tax which also corresponded to the retail price of imports also being at that level, the consumer was left paying a much higher price. So now the consumer rights overtook the farmers.

The Govt. suddenly and without warning, reduced the duty back to Rs15/kg. It was the same for potatoes, and the duty on Red Onions was also reduced by less, as this harvest also has now ceased.

It does not take a rocket scientist to realize that the importers knew that the tax would be reduced as there was no way the local market could supply the needful, so they desisted from imports to only the minimal amounts ahead of the duty reduction. As usual again, the onion farmers who were sophisticated enough to be able to store the onions to get a higher price, were only releasing stock that was likely to go bad, and held onto the balance to sell at the top.

With the duty reduced, the market price must fall by at least the reduction in the duty, and the farmers who held on hoping this price level would continue have begun to dump their onions in the market before the imports arrive. Now they cannot even sell their lovingly and carefully stored onions for Rs30/kg as traders are now taking advantage of their distress and making a bigger margin as middlemen!

The farmers are now agitating, saying if they were given three weeks notice, they would have released their stocks to the market in anticipation of the import duty reduction. In this example one can clearly see the lack of a coherent policy ALWAYS affects the farmer, however clever or versatile he may be in the knowledge of storage methods, to keep his onions for a longer period.

The farmer is not powerful as a group to affect the price, leaving it to the Trader to do the needful.

Sri Lanka will not produce enough onions for local consumption, and cannot produce it all year long, so we MUST import it. The govt is encouraging more onion cultivation which will ADD to the seasonal woes not reduce it unless long term storage facilities can be set up at local level, but has to be done by individuals and not collectively as it is difficult to manage in a cooperative way. 

The Govt takes in a lot of tax from imports during the year to fund its other activities. Nothing will prevent the temporary price dive in August and September when the harvest comes in, as there is no way to store the excess by anyone other than the farmer who grows it who knows the quality of his own stock, store-able or not!