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Exorbitant onion prices

  • Published at 12:52 am February 4th, 2018
Exorbitant onion prices
Commerce Minister Tofail Ahmed has just assured us that there was no syndicate behind the recent onion price hikes in Bangladesh, as many people have been alleging. Despite the general reluctance of all of us to believe at face value the statements of a politician – any politician – the commerce minister is almost certainly correct here. The recent price rises and their current moderation are not to do with anyone trying to manipulate the market. However, this does bring us to an interesting point. Those prices rises do look exactly like what would happen if someone were trying to manipulate through a cartel, monopoly or syndicate. They also look exactly like what would happen in a pure and clean free market given the vagaries of the weather; something which really is an interesting point. We cannot distinguish between a free market and a manipulated one just by looking at prices, for the manner in which prices change will be the same in both such systems.
Simply looking at price changes isn’t enough to conclude that there has been market manipulation
This has one obvious political point: When prices rise, we cannot just shout “syndicate!” and then assume that we’ll be able to lower them again by finding the guilty ones, for there may not be any guilty ones at all. The reverse is also true -- we cannot glibly assume that price rises are purely from the free market, we should go and find out whether there is manipulation.

So how can we be sure?

Fortunately, there are a few ways of working out which is the true situation: Has the market been manipulated or is it functioning efficiently? The most obvious is for us to look at the general structure of the market itself. Bangladesh has, at minimum, some thousands of onion growers, hundreds of middlemen and wholesalers and thousands of outlets and markets. We would not expect anyone to be able to coordinate such a mass of people effectively. There isn’t anyone there with market power to be able to become a syndicate which could dictate prices to anyone. Note that this isn’t always true. A few years back, in Europe, it was found that some five major suppliers of vitamins (those chemically produced), were colluding over the prices. They got found out and properly punished. But the important point for us here is that perhaps five people can collude, but 500 or 5,000 -- not so much. The technical phrase here is “coordination problem.” It’s a problem that gets exponentially worse the more people are involved. Another point about such a dispersed market is that even if someone were to attempt to manipulate it wouldn’t be worth it. OK, so some evil genius decides to buy up lots of onions and thus drive up the price. But they can’t buy them all up from all those thousands of people. And those other thousands will also benefit rom the higher prices. That is, the manipulator can only benefit from the price rise on the onions they own, not on all the other ones. The usual finding is that such manipulation, in such an open market, doesn’t in fact make a profit. And if that’s true then no one’s going to do it, right? That is not the end of the story though. We cannot identify a syndicate just by looking at prices. But we do have two further methods. One is to look for the process by which the manipulation takes place. In order to drive the price up someone must be buying a lot of the product and then storing it. So, look around for great stocks of onions. No one has found any and they’re not the sort of thing where keeping a few under the bed is going to change the price. The country uses a couple of million tonnes a year, to change the price would require stocks filling vast warehouses. Those stocks aren’t in those warehouses that don’t exist – pretty good evidence that this form of manipulation isn’t taking place. We can also look for the effect of manipulation having taken place. Which is that the people who have done it have just made a lot of money. So, are there onion traders out there splashing out on fine cars as a result of their fixing the market? The absence of such excessive profits is again a signal that there has not been any manipulation.

External shocks

So what did actually happen with onion prices? Given all of the above we really don’t think that it’s a market which can be successfully manipulated. So, our best assumption is that something external to the market itself happened, as it did in India, in fact. The rains came too often and too much – sorry, these correct agricultural phrases don’t come easily – and the seed drowned. Far from there being some syndicate there were simply fewer onions in the country and that great free market engine of supply and demand kicked into action. At first everyone wanted the same number of onions as always, yet there were fewer to be had. Prices rose and some who would have bought at the old, lower, price did not. Thus supply and demand came into balance again, as they do, just at a different price level. With farm crops there is always the next iteration to consider as well. Farmers note that onion prices are high and assume they can gain greater incomes by planting more this season. So they do. And barring problems with the rains again when the next crop comes to market, as it is doing right now, there are more onions than we started with. Prices thus fall back and bring that supply and demand into balance again. And that really is it, I’m afraid. There are markets that are manipulated, there are cartels and syndicates out there and we should crush them at every opportunity we get. But simply looking at price changes isn’t enough to conclude that there has been market manipulation. We’ve got to use other methods, and, barring some truly extraordinary evidence, those other methods tell us that onion prices recently haven’t been controlled; they’re just the result of variable rains. The end result of which is that, Glory Be!, we can believe the commerce minister when he tells us there was no syndicate involved. Isn’t it great to be able to trust the word of a politician?   Tim Worstall is a Senior Fellow at the Adam Smith Institute in London.