Tuesday, January 19, 2010

Why vegetable prices are soaring?

These days one of the statements commonly heard on the streets of India is - "Oh..God..Prices of tomatoes, potatoes etc have increased...Can't help it...but shell more and buy". How many of you ever wondered what and why this is happening?

The AAM AADMI Govt has become KHAAS AADMI. Looks like we have to see vegetables in show cases and not in reality in few years from now if prices keep escalating. Prices will increase ,but not exponentially and certainly not all the time. The quantum jumps all of a sudden as happening today in the market is alarming and uncalled for.

Even when inflation was negative, vegetable prices reached the skies. From and inflation of 20% we have come down to 17%, but that's not checking the prices. Families have to begun to reduce their intake in daily meals.

First of all, let us get some facts straight.
  1. If food prices are increasing, it means that demand is more. India is growing. People now have more money than ever before. This is more true w.r.t cities where income levels are increasing and more products are available to eat. It is also true wr.t rural India as the revolutionary National Rural Employment Guarantee Program is giving sufficient money to a large people for working 100 days.
  2. Subsequently, our agricultural production has not grown and that is the most unfortunate. Our per hectare yield productivity is abysmally low compared to China (already reflected long back in my blog). Agriculture in many parts still lies on old, conventional, traditional method of farming and are unaware what crop must be grown on what soil and at what time.
  3. People in cities esp have begun to eat more pulses, vegetables, milk, meat eggs than the traditional cereals whose production has gone abysmally low. Pulses are not heavily grown in India, but more in the Middle East which we import.
  4. We no longer live in "Green Revolution" era. The fertile Punjab is no longer as fertile as it used to be. The excess water, pesticide usage has rendered land useless thereby more productivity is impossible.
  5. There is a huge shortage of water and electricity in different parts. Gujarat is a standing example of how it has been able to overcome this deficit in numerous ways that media never wants to highlight. Media is more interested in projecting only negative news.
  6. The already fragmented supply chain has become more and more complicated because of 2 factors - (i)Essential Commodities Act (2002) and the (ii) growing number of organized retails like Reliance Agro, Godrej Foods, Sunil Mittal's Field Fresh (with Rothschild), ITC, Cargill, Dabur, HLL Amalgam Foods, Radhakrishna, DCM Shriram, Tata group and many others.
Let's understand how these factors come into play and how prices are going northwards.

PS: The prices are just a number not reflecting accurately on ground and neither is the difference. The price numbers are used just to show that how randomly prices are fixed without any calculations/formulae involved making matters even worse for me as a blogger or for a consumer buying these.

Let's take ONION as the product as it is a very common and a daily item on the dining table.

1) Farmer at his farm calculates (based on his input costs of fertilizers, pesticides, water, electricity etc) Rs. 5/ kg

2) Goes to mandi (vegetable marts where all farmers come to sell) and plans to sell for Rs.6/kg

3) The mandiwala says he will buy for Rs.5.50/kg and not Rs.6/kg.

The farmer desperate to get money (as his land, equipment everything could be under mortgage) agrees to do so.

Now, the mandiwala has 2 scenarios to consider:

4) Scenario 1: The supply is sure.

  • There is adequate supply of onions. So, decides to sell at Rs.6.50/kg i.e Rupee 1 as profit per kg.
  • The retailers buy from these mandis and sell at Rs.8/kg.
  • The retail chain stores buy, package them and sell at Rs.10/kg (making huge profits and sell explaining that packaging and processing costs must be borne)

So, the end customer pays the whole amount either Rs.8 or Rs.10 and farmers don't get any benefit. They go under losses so is the customer

Scenario 2:
The supply is unsure because of rotten crop, low production etc.

  • Now, mandiwala sells at Rs.1o/kg.
  • The retailers buy from these mandi's and sell at Rs. 12/kg.
  • The retail chain stores buy, package them and sell at Rs.15/kg.
  • This difference may even double and there is no control on this price.
Today, dals are being sold at Rs.100/kg or even more while the farmer gets Rs.20/ or more. The remaining 80 is being eaten up by middlemen or mandiwala.

5) Following Scenario 2 as in Step 4, really there are black marketeers, hoarders, speculators, rice millers, agents, traders who buy in huge quantity and don't let the products come into market creating further supply scarcity and prices now go double or triple. So, say a hoarder buys at Rs.10/kg and accumulates huge amount, supply is affected and prices begin at Rs.20/kg and that's when hoarders release and make money.

Now coming to the problem:

The APMC Act - Agriculture Produce Marketing Committee makes it mandatory for farmers to sell at these Marts. But why this obsolete mechanism?

In 2002, the then NDA government led by Vajpayee passed ESSENTIAL COMMODITES ACT by which the essential commodities could be traded like shares in a stock market and farmers would get price on levels with international ones so that it benefits farmers. However, this was true and good when supply was assured. The rule also was this had to be done only after the Government fills its godowns (to be distributed later through Public Distributed System - PDS) to everyone.

In 2004, when NDA govt fell and UPA came to power, the shallow, narrow and money minded corrupt Sharad Pawar took over this agricultural ministry and ruined the farmers, markets and the economy. Instead of amending the act when food production went low, he allowed it to be speculated in the markets increasing the prices even further when already supply was low. (Productivity had hit a new low and bad monsoons continued to wreck havoc in the supply chain)

Under consistent Left Pressure, forward trading of essential commodities was banned. Now, still hoarders continue to play a role because Government is least bothered to fill its godowns before allowing hoarders to acquire them. Every time state governments have been asked to arrest such people, but in a system where law and order is the worst and a nightmare, it will never happen.

Let's get some statistics:

This is what BJP and Mayawati along with Left parties are quoting:

According to government figures, the years 2007, 2008 and 2009 taken together saw the production of 2348 lakh tonnes of wheat. The government boasted that the FCI(Food Corporations of India) godowns are overflowing. Despite this, the government imported wheat at the rate Rs 19 per kg in 2007. Now the same wheat is being made available to the consumers at Rs 24 per kg. SO, WHO IS EATING THE MONEY IN BETWEEN IF WHEAT IS IMPORTED ON ZERO DUTY??

Government records say that there was a record production of 991 lakh tonnes of rice in 2009, but the farmer’s share was only Rs 10 per kg out of the market prices of Rs 48 per kg. Who’s pocketing the remaining Rs 38?

Because of shortage of sugar, Mr. Pawar imported sugar at zero duty. They imported at Rs. 30/kg, but the consumer is paying Rs.45/kg...So, how come a difference of Rs.15??

Here's a detailed piece of news explaining how Sharad Pawar is helping sugar mills and agri-businesses and not helping farmers or end consumers. The report infuriates me even further.


Sharad Pawar said - "I am not an astrologer to predict prices". Then how is it he can say MILK Prices are going to increase...

Remarks like this only helps hoarders and milk supply gets affected.


Food is the most essential commodity and if one can't manage or control the supply management chain, at least attempt. If you sit passive, is this what one has elected this govt for?


There is nothing innovative. Already, Gujarat has implemented so many things which have improved efficiency in agriculture w.r.t TECHNICALITIES NOT LOAN WAIVERS which don't help farmers. Here's what the Parliamentary Standing Committee under UPA Govt came up with and govt has no time to implement it. This is not a state govt issue, but central govt issue which impacts the states. So, the Central govt must pass the following recommendations made both by - M.S Swaminathan (Father of Green Revolution) and Parliamentary Committee consisting of experts from both parties Congress and BJP.

In the short-term, some of the measures suggested by the Parliamentary Standing Committee on Finance could be implemented forthwith. These include: a comprehensive food pricing and management policy; stern enforcement measures to curb hoarding and speculation; ban on diversion of cultivable/agricultural land for industrial purposes, including SEZs; and creation of adequate buffer stocks of essential commodities.

Among other measures, serious efforts would be needed to ensure: (a) eased contract farming rules and retail reform aimed at giving farmers a direct access to markets by eliminating the middlemen wherever possible; (b) greater official encouragement for setting up of cold storage facilities and agro-processing units; (c) promoting local markets and integrated food value chains connecting farmers to processing units and big retailers; and (d) amending the Essential Commodities Act to effectively check hoarding and speculation.

Further References:



devi said...

can not even imagine what happens behind the screen............

Reshmi said...

Very insightful & well written.....

sridhar said...

Raise in Food Prices good for Farmers.

The prices of all commodities have raised in last five years they have trippled. The raise in food prices was the last thing. No one raised their voice when house prices raised n times,rents sky rocketed, every goods price was raised. There is such a hue & cry when food prices raise.

Some of causes of this raise are :
1) The food prices raised along with all other commodities
2) Extemely less rain fall this year.
3) Too much of money flowing in the market due to low intrest rate and stimulus.

This is a supply side problem and a minimal demand side problem. In all supply side problem the producer gains and no one questions where as in this case everyone is questioning.

Well there is an argument that farm labours will get affected due to this raise and hence it has to be controlled. But the raise in food prices will give more money in the hands of farmers increasing the profit and hence increasing the demand for labours and their wages.

When a person can spend 150 for 8 inch pizza, One kg of rice for Rs 40/- is affordable.

With regard to productivity of Indian Farm Land. There are range of issues ... I would like to comment of this issue some other day but One of reason for low productivity is

1) Indian fram land is highly fragmented.
How will We compete with Brazil or US which has 500 to 1000 hectares of cultivation in a single streach using heavy machnieries for cultivation and our farmer having 1/2 a hectare of land ploughing with Bull. There has to be one more layer that overcome this land fragmentation.