Tomato challenge: Hoarding is not as bad as it sounds

The ministry of consumer affairs on 30 June announced a weird-sounding competition: a ‘Tomato Grand Challenge’ hackathon. Last year, there was an ‘Onion Grand Challenge.’ Both came after the prices of these commodities had risen sharply. The objective is to encourage citizens to share ideas to ensure the availability of tomatoes and onions at prices that are fair for both consumers and producers.

I recently asked my students a question that I have asked several previous batches: Should producers of essential commodities be allowed to hoard their produce? The near unanimous answer has always been no.

Why? Because the perception is that holding back supply causes the price to rise. While this is true, what is rarely understood is that we usually see only half the picture. We tend to form an opinion based on what is visible today and ignore what is likely to happen tomorrow. Let’s look at how the two are related and why solving the problem of highly volatile prices of fruits and vegetables partly lies in allowing the hoarding of produce, which seems counter-intuitive.

Take the trends in prices of tomatoes and onions, commonly used in diets across India. The average inflation (year-on-year price change) in both products was about 11.5% between January 2015 and May 2023 (excluding six months of March to May 2020 and 2021, due to data non-availability). This rate of price rise is the highest among all food products.

People cannot make much sense of year- on-year price changes. We tend to have a recency bias. We compare today’s prices with those of goods when last purchased, typically a week or month earlier, and we do it without adjusting for seasonal effects. By this measure, the highest month-on-month price rise since 2014 is 138% for tomatoes and 59% for onions. The sharpest month-on-month price decline is a drop of about 32% for tomatoes and 33% for onions. These are large short-term movements in prices.

In the post-covid period, onion prices on average have been subdued while tomato prices have had a lower price rise compared to the pre-covid period, barring the current episode. Overall, however, tomato and onion prices show high volatility. These prices appear almost like stock prices—a random walk so that past movements are not helpful in predicting the future direction.

Given that tomatoes and onions are essential food items in most Indian households, relatively low-income families face the brunt of it in terms of household expenditure when these prices shoot up, and without notice. In contrast, farmers face distress when prices collapse suddenly, resulting in severe losses.

How can we reduce this variation in the prices of farm produce? Economics tells us that a product’s demand and supply determine its price. When supply exceeds demand, there is a surplus in the market and pressure on prices to decline and vice-versa.

The demand for food products is relatively stable. We cannot adjust our consumption drastically because of a price rise or fall. That means variations in supply, such as a sudden surge or contraction in output, cause dramatic changes in these prices.

There have been several instances when farmers have destroyed excess produce to avoid a price collapse. While this is a rational action taken by farmers, shouldn’t they have an option to stock the extra produce if we develop suitable cold storage facilities (or hoard their produce)?

Until recently, we treated the hoarding of farm produce as illegal. Storage ceilings for potatoes, onions, tomatoes, oilseeds and pulses were removed only in September 2020, subject to a cap on stock piling. In general, even today the stockpiling of essential items is not considered good. The worry is that hoarding raises today’s prices. This is true. However, the release of hoarded produce also lowers tomorrow’s prices when tomorrow comes. This is because supply would be higher tomorrow than it would’ve been had no hoarding taken place. In economics, these are called ‘invisible’ trade offs because what happens tomorrow cannot be seen today. Such trade offs are largely ignored. Overall, hoarding tends to reduce price volatility. We should consider the welfare gains from lower variation in food prices between today and tomorrow.

When would farmers hoard their produce? Logically, they would do that only when they think tomorrow’s prices will be higher, and hence, they can benefit by selling tomorrow. If we reasonably assume that farmers want to maximize their profits, it is unlikely that they would hoard if they think tomorrow’s prices will be low anyway.

Now that storage ceilings have been removed, the faster we develop cold storage options for cultivators, make these accessible at reasonable prices, and allow them to decide when to bring their supply to the market, the better it will be for both producers and consumers. This change would not solve all our problems in the agriculture sector. However, it would go a long way to ensure better price stability.

Coming back to my students, after the class discussion, they were convinced that the hoarding of essential commodities should not be banned. And as far as the government’s hackathons go, hopefully these competitions will throw up creative ideas for developing integrated supply chains that include innovative solutions to achieve low-cost cold storage of farm produce and help develop an efficient food processing sector.

Praveen Kumar contributed to this article.