Market dynamics in any industry are influenced by trends in supply and demand. Unprecedented events on either the supply or the demand side can result in a change in the trends in pricing relative to quantity of each. Government regulations can also play a role in setting the maximum and minimum prices of products. the onion market in India has faced various challenges that have led to shocks to both the supply side and the demand side. These shocks have resulted in special trends in the price-quantity curves, and the government can take various actions to stabilize the onion price in the Indian market both in the short-term and in the long-term.
- Onion Market in India: An Analysis
In the absence of any market interruptions, the onion market operates in a manner that reflects conventional price-quantity relationships in agricultural products. Figure 1 below shows the trends in onion supply and demand under normal conditions in which there are no unprecedented shocks to either the demand side or the supply side.
Figure 1. Normal Price-Quantity Curve for the Onion Market in India
Graph 1 represents the price of onions in the Indian market under normal circumstances and in the absence of any government protection measures. Agricultural products, such as onions, are naturally considered to be less competitive in local and international markets, and governments of countries that are heavy producers of such products usually have price floors to protect the farmers. normally, in the absence of policies to implement price floors in domestic markets, the conventional trend is for the price of products to decline with increasing supply. In Graph 1, line S1 shows the price of onions under normal conditions in which production is aligned to the existing demand. When productivity increases and the demand remains constant, the supply curve shifts right and the surplus product increases. The equilibrium also shifts right, indicating a lower equilibrium price. In such a case, the buyers are the winners as they are able to get higher product volumes at relatively low costs.
Figure 2 shows what happens under special conditions when shocks have been experienced in the supply and the demand sides of the onion market in India.
Figure 2. Price-Quantity Curve for Onions in India Under Special Conditions with No Government Intervention
Exceptional circumstances are characterized by unexpected trends in product supply. The situation in India is an example, where the production of onions has declined and the supply is much lower than the demand. Supply shocks occasioned by climatic fluctuations, among other factors, and viral infections, such the purple anthracnose, have resulted in the damage of nearly 40% of the total crop produced in the country, thereby causing adverse effects on the onion market (Pailwar 7). At the same time, seasonal increase in demand occasioned by market speculations have contributed to the special conditions reflected Figure 2 above (Pailwar 8). In Figure 2, the supply curve for onions shifts towards the left, indicating increasing onion prices relative to quantities as observed in the Indian onion market. At the same time, the demand curve shifts from D1 to D2. The price of onions is too high for consumers to afford hence they have resorted to finding substitutes products, such as pumpkin puree, thus destroying the onion market equilibrium. The suppliers appear to be the winners until the equilibrium is passed and buyers no longer purchase onions. ought to find solutions to remaining in the market sustainably without incurring losses or driving buyers away. One of the possible solutions entails government interventions, which are depicted in Figure 3 below.
Figure 3. Government Interventions in the Onion Market in India Following Market Shocks
Figure 3 reflects exceptional circumstances in the onions market. The circumstances are similar to those described in Figure 2, in which supply shocks and demand shocks result in declining supply and increasing demand simultaneously. The protection measures by the government in this context include a policy stipulating the price floor, indicated by PF; and the price ceiling; shown by PC in the Figure 3 above. The price floor is the minimum price below which onions cannot be sold both in the Indian market and beyond, and it helps to protect the farmers from the implications of low prices. Such protection is particularly important at this time when significant costs have been incurred in production as a result of price shocks. On the other hand, the price ceiling is that which the onion prices cannot go beyond no matter how expensive they become. In Figure 3, it is observable that the equilibrium price in such special circumstances comes at the price ceiling as the suppliers aim at maximizing profitability. Under the mentioned conditions, the demand and supply balance and a win-win situation is attained between the buyers and the sellers.
- The Wheat Market in Canada: Market Analysis
Wheat is one of the major cereal crops across the world, and plays an important role in the contribution of grain the world’s food. The production of wheat is however affected by various factors, including technology, climate and oil prices in the international markets. Oil prices have the most pronounced effects on the inputs for wheat production and fluctuations are observed in the international wheat prices following fluctuations in oil prices. Most of the net wheat importers are developing countries in which wheat is a staple food and constitutes nearly 24% of the total imports (Enghiad 2). On the other hand, developed countries, including Canada, are, in most cases, net exporters of wheat and low consumers of wheat as nearly 77% of wheat produced across the world is consumed in developing countries (Enghiad 2). Various events have impacted significantly on the wheat productivity over time. One of the most impactful moments in the history of wheat production was in the 1960s, and is attributed to the green revolution, which resulted in higher yields per acre (Enghiad 3). Such shocks in the market result in rapid shifts in demand and supply, and most likely require adjustments in the wheat market equilibrium price.
The trends in the wheat market can be likened to those of the conventional food markets, such as that of onions in India. In normal circumstances, wheat exhibits the same price-quantity trend exhibited by other agricultural products, in which price reduces with increasing supply. greater mechanization of agriculture has increased food production as observed in the average annual yield of wheat from 1855 Kg/ha in 1980 to 3264 Kg/ha in 2013 (Enghiad 3). This increase in productivity has come amidst a corresponding increase in population, which has somewhat resulted in a consistent equilibrium. Nevertheless, if shocks occur in the market, the market response depends to a large extent on the specific measures put in place by the government to protect farmers and/or consumers.
Government policies on wheat trading are mainly aimed at enhancing farmers’ experiences and protecting them from the potentially oppressive pricing regimes in the international markets. In recent years, technological advancement and improved farming practices, such as the use of more effective fertilizers and pesticides, as well as the development of new strains of wheat plant that are resistant to the climatic and pest conditions during growth, have led to increased production capacity worldwide (Rittenberg and Tregarthen par. 5). With increased production capacity, the supply curve for wheat shifts towards the right, resulting in a reduction in the price of wheat as observed with that of onions in India. Such prices can reduce to ludicrous levels hence the need to have farmers actively involved in lobbying for the government to implement policies that protect them from unreasonably falling prices. Comparison can be made between the wheat market with the complaints of onion farmers in India, who claim that when the onion prices declined unreasonably, the government did not cushion them from the effects of declining onion prices (Pailwar 9). Nonetheless, in the case wheat, the Canadian government took the initiative to cushion its people through setting price floors.
Price floors are common not only in the wheat producing countries, such as Canada, but for all agricultural products manufactured for export. Increasing productivity puts pressure on suppliers to reduce the prices of their goods, and can be unreasonable. However, the government uses the price floors to maintain wheat prices above a certain limit. another measures that the government can take is to buy surpluses to ensure that the amount of wheat available for sale is equivalent to the demand when the target price is higher than the average market price, especially for exports (Rittenberg and Tregarthen par. 9). Figure 4 presents a price-quantity chart for the wheat produced under government price floor policy implementation. Su1 indicates the surplus wheat that may be purchased by the government for other uses in case the price floor marked by PF is higher than the average market price, which is the equilibrium price.
Figure 4. Market Dynamics for the Wheat Market Indicating the Surplus
- Recommendations for the Indian Government
For the short term, the Indian government should implement a policy on onion price ceilings for the domestic market to prevent the price of the product from going above the market equilibrium thus ensure that buyers can still afford onions in spite of the past shocks on the supply and the demand sides. Onions are an essential requirement in food preparation and can be considered as a food. Price ceilings on onions would be based on past observations of the outcomes of price ceilings placed on foods during pandemics such as the World War II, in which there was limited access to food (Khan Academy par. 4). Using price ceilings for onions can ensure that even the poor can access onions. The main advantage of a price ceiling is that it will lead to lower consumer prices. This advantage is particularly important for the onions given that the supplier power is stronger than the power of the buyers. The disadvantages of setting the price ceiling include the probability of reduced supply because of the competition from the international markets, increased probability of black market operations as sellers seek options to gain more, and increased probability of shortage (Khan Academy par. 4). All these disadvantages are attributed to the already existing shortage of onions in the country. The Figure 5 shows the probable change in supply with the price ceiling if the demand remains the same.
Figure 5. Change in Supply and Demand with Price Ceilings in the Domestic Market
For the long-term, the government should implement export restrictions. According to Pailwar, one of the reasons behind the escalation of onion shortages in India was the government’s focus on expanding export without consideration of domestic demand (9). Therefore, onion export has been on-going even when the domestic demand is on the rise. As such, finding a long term solution will require the government to ensure that the domestic demand for onions is filled before selling the surplus. Setting such export restrictions can also improve the outcomes of price controls, such as price floors and price ceilings. The main advantage associated with export restrictions therefore, is that it would ensure domestic sustainability even in hard times. The quantity limits can be made to fluctuate depending on the supply characteristics. For instance, the maximum export quantities can be increased during high supply seasons and reduced during seasons in which market shocks result in low supply. The second advantage of such export restrictions is that they protect consumers from exploitation by suppliers (Pettinger par. 6). In the context of India’s onion market for instance, the sellers are currently practicing exploitation by hiking prices unreasonably with claims that there was no government support when they needed it during dips in onion prices. Limiting export quantities will result in competition in the onion markets due to surges in supply, hence also limiting the power of sellers.
Despite their benefits, export restrictions are disadvantageous in the long run because they risk new entrants into the international markets due to the deficits caused by reduced supply from India, which has been the main onion producer in the world. The entry of new players into the market would imply increase in competition for the onion market. Additionally, with the introduction of export restrictions, the supply of onions will shift to the right as shown in Figure 6. If the demand remains constant at what it is now, such a shift in supply will result in a reduction in the equilibrium price hence increasing affordability in the local market.
Figure 6. Change in Domestic Supply of Onions Under Export Restrictions
The supply and demand side shocks in the onion market in India have resulted in the increase of onion prices beyond affordability. The escalation of onion prices can also be attributed to the government’s continuous focus on promoting onion exportation with set price floors without consideration of domestic demands as well as the lack of policies to protect domestic onion consumers. Evidence from literature shows the effectiveness of various price control policies such as price floors and price ceilings for other agricultural products. The case of wheat in Canada is a perfect example for this application of price policies, from which India can learn. The recommendations outlined in this paper therefore, should be effective towards addressing the issue in the short term as well as ensuring stability in the domestic market for onions in the long term.
Enghiad, Eliakbar, Danielle Ufer, Amanda M. Countryman and Dawn D. Thilmany. “An Overview of Global Wheat Market Fundamentals in an Era of Climate Concerns. International Journal of Agronomy, 2017. http://downloads.hindawi.com/journals/ija/2017/3931897.pdf. Accessed 17 June 2020.
Khan Academy. “Price Ceilings and Price Floors.” Khan Academy, 2020. https://www.khanacademy.org/economics-finance-domain/microeconomics/consumer-producer-surplus/deadweight-loss-tutorial/a/price-ceilings-and-price-floors-cnx. Accessed 17 June 2020.
Pailwar, Veena Keshav. “India Shedding Tears over Onion Prices.” International Journal of Case Studies in Management, vol. 11, no. 2, 2013.
Pettinger, Tejvan. “Price Controls – Advantages and Disadvantages.” Economics Help Organization, 30 Jul 2019. www.economicshelp.org/blog/621/economics/price-controls-advantages-and-disadvantages/. Accessed 17 June 2020.
Rittenberg, Libby and Tim Tregarthen. Microeconomics Principles vol. 1.0. Creative Commons, 2012. https://2012books.lardbucket.org/books/microeconomics-principles-v1.0/s07-02-government-intervention-in-mar.html. Accessed 17 June 2020.