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Fund manager explains how India’s onion cartel works

Sandip Sabharwal, a Mumbai-based fund manager and investment expert, has explained how unscrupulous hoarders and traders in India jack up the prices of onions.

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In a post on his Facebook page, Sabharwal described the exact methodology of how India’s onion cartel, that pushes up onion prices to as much as Rs 100 per KG, operates.

The price of onion shoots up from around 10 per KG to Rs 100 per KG every year as the traders buy up all the stocks and throw them into cold storage. Onion is produced in a very small area, largely in Maharashtra, and that helps traders buy up stocks quickly and hoard them.

We are reproducing the Facebook post by Sabharwal:

“Recently I had the opportunity to interact with a person who has tracked the operations of the Onion Cartel for a very long time and is currently trying to use the knowledge to make some money of his own. I have myself not done a study of the same and present a verbatim account of what he told me. It is an extremely sophisticated operation in which a few key players make nearly 100%, or more returns over a period of 3 to 4 months.

“Now the Onion crop in India is typified by three produces. The two large produces come in December and April and a small crop comes in October. Now the way the cartel operates is as follows.

“The December crop is the time when prices normally fall and consumers have a good time with low Onion prices. The cartel keeps a low profile during this time frame where they let the entire December crop flow into the market, thus creating a scenario of low prices and consumer happiness. They wait for the next crop in April. The important thing to note post April is that there is no crop likely till October and the October crop is also a small one. The Cartel starts mopping up all the supplies that are coming into the markets in the month of April and early May. Farmers get their typical Rs 6-10 per kg as the middleman network keeps the prices down till the time the supply from the farmers is exhausted. On an average the cost to the cartel comes to Rs 8-10 per kg.

“Subsequently the aim of the Cartel is to hold on to the produce in their warehouses and cold storages for a period of 3-4 months. The cost of storage comes to around Rs 2-3 per kg and they also account for a 30% wastage in storage. The reason is that the Onion crop degrades very fast as it takes time for the crop to be stored post harvest. Taking all of this into account the effective cost to the Cartel for the Onions they have bought comes to Rs 13-16 per kg. The supplies are restricted so much that prices start shooting up by early June.

“The cartel makes full use of technology in order to track the stocks position and to estimate the kind of levels to which prices can be ramped up by August/September. By this time prices are up by at least 100% over their buying price. It is already evident this year where prices have shot up at the retail level from Rs 15 per kg to Rs 25-30 per kg over the last 4 weeks. By August the cartel starts to offload their stocks into the markets. They have already made a killing and made a mockery of Stock Market Operators with the sophistication and ease with which they have made money. Typically prices would have peaked out by October which is the time when the small crop comes in.

“The Cartel is getting stronger by the year and since it involves lot of political elements it requires political will to break. Enjoy the Onions in your salad while you can. Higher prices are coming soon.”

The Narendra Modi government is expected to take action against hoarders, something that the previous government could not do. It is alleged that some traders have links with prominent politicians, especially those from Maharashtra, and this has prevented action from being taken against them.

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