Onion prices skyrocket, MEP increased to $1200/tonne

If there is one vegetable that is religiously added to all cuisines across south Asia, it is onions. The staple vegetable holds an extremely important place in the common man’s life. Onions are grown on around 136,000 hectares of land, with the 2020 figures showing a total yield of 1.74 million tonnes across all provinces and regions of Pakistan. This makes onions, possibly the most important vegetable in a Pakistani kitchen.

The people who have been doing their groceries in the last two weeks, would have realised that the price of onions has shot above Rs 250/kg and in some areas it has already crossed Rs 300/kg. This surge poses a significant challenge for the economically disadvantaged population, grappling with the affordability of this almost essential food item.

How did Pakistan end up in this fix despite importing extra onions from Afghanistan and other countries earlier this year?

The India Problem

It turns out that a major contributor to this crisis, much like the other crises in Pakistan, is our neighbour India. However the crisis does not stem from some elaborate plan hatched by the hostile neighbour. Rather this shortage in supply comes from the basic economic principles of supply and demand, the onus of which majorly falls in the lap of the Pakistani authorities, for their lack of planning.

Talking on the matter, the Pakistan Fruit and Vegetable Exporters, Importers, and Merchants Association (PFVA), the relevant trade collective, explained that the surge in export orders, prompted by India’s onion export ban, has led to a spike in local prices.

On December 8, 2023, India placed a ban on the export of onions to safeguard its domestic food security. Prior to that, the Indian government had placed a minimum export price of $800 per tonne for onions.

Pakistan, who also grows onions, saw this as an export opportunity. With the minimum export price of $750/tonne and a lot of neighbouring countries seething with high demand for onions, the Pakistani exporter made bank in the month preceding the ban by India. Due to this, the domestic stock of onions dwindled, leaving fewer onions for the local market, which resulted in an increase in domestic price.

The Market

Traditional onion imports in the region from Iran and Afghanistan have gone down due to Iran’s recent imposition of a 40% export duty. Simultaneously, India’s three-month export ban from December 2023 to March 2024 has intensified the demand for onions, in its neighbours notably in the Asia Pacific region.

Pakistani exporters are capitalising on this situation by actively shipping onions to the Middle East and other destinations, including Malaysia, Sri Lanka, and the UAE. This export-driven demand has put a pressure on the domestic prices.

Traders reveal that Pakistani exporters are even procuring onions from Iran and Kabul to meet the overwhelming export demand. Currently, the market offers three to four qualities of onions, with imports from Iran and Afghanistan available at slightly lower prices than domestic onions.

Pakistan’s primary onion markets encompass Malaysia, Sri Lanka, and the UAE, with a substantial share directed towards Gulf countries. Annually, Pakistan exports between 300 to 450 thousand tons of fresh onions. In 2022, floods resulted in a significant loss of the onion crop, turning Pakistan into a net importer, mainly from Afghanistan, Iran, and Egypt.

While onion trade between Pakistan and Europe and ex-USSR Central Asia is relatively small, any restriction on exports could significantly impact markets. A ban on onion exports might lead to higher prices in the Middle East, potentially making onion exports profitable even from countries like Uzbekistan to the UAE. This potential loss of market places Pakistan at a crucial crossroads, to choose between food security and export proceeds.

Minimum Export Price 

Minimum Export Price (MEP) is a measure imposed by a country’s government to control the export pricing of certain commodities, including onions. In the context of Pakistan, MEP for onions would mean that the government sets a minimum price that exporters must receive for each unit of onions they export. This is usually implemented to ensure that essential commodities are not exported at very low prices, which could lead to shortages and increased prices domestically.

Due to a low minimum export price set by the government, the exporters were able to sell their stock outside of Pakistan, leaving the local market devoid of onions. 

In a meeting with the commerce ministry on Friday, PFVA itself proposed a revision of the minimum export price from $750/MT, accompanied by a 100 percent advance payment requirement to prevent losses for growers. 

According to them, the advance payment requirement for export will help protect the interest of the domestic grower. It is also important to note that wholesale onion prices, ranging from Rs 160 to Rs 190 per kg, present a contrast to the substantial profits retailers are currently enjoying, anticipating an increase in future demand.

The Solution

As reported earlier, the Ministry of Commerce has now raised the MEP for onions at $1200 per tonne. A significant increase that is expected to reduce the outward flow of onions, giving breathing space to the domestic market.

The situation is also anticipated to improve in the coming weeks with the arrival of a fresh crop from Sindh. 

The PFVA also highlighted the limited storage capacity in Pakistan compared to India, emphasising the necessity for research and development to create onion varieties with an extended shelf life, effectively controlling onion prices.

While the reactive policy measure solves the problem for now, questions have arisen about the medium-term strategy of the food ministry and also about the effectiveness of market committees in controlling onion prices and the apparent challenges faced by the price-controlling department in fulfilling its duty of stabilisation. 

Because export of onions might handle the demand. But as it seems, there is not much that is stopping the local retailer from carrying on their merry way of overcharging for onions.

According to insiders, both the Ministry of Commerce and National Food Security and Research are yet to make a solid plan of food security, ensuring availability of enough stock and management of prices.

Weekly inflation continues its upward trend:

Pakistan’s weekly inflation has risen for the third consecutive week, with the Sensitive Price Indicator (SPI) for the Combined Group increasing by 1.36% WoW during the week ending January 11, 2024.

The SPI has seen a staggering 44.16% YoY increase compared to the corresponding period last year. Out of 51 items, the average price of 21 items increased, 8 decreased, and 22 remained stable.

Key contributors to the inflation spike during the week were Tomatoes (15.63%), Onions (8.94%), Chicken (6.42%), Electricity Charges for Q1 (5.11%), and Eggs (4.31%).

Conversely, the prices of Potatoes (5.92%), Vegetable Ghee 1 KG (0.84%), Sugar (0.43%), Vegetable Ghee 2.5 KG (0.29%), and Mustard Oil (0.26%) experienced notable decreases.

The SPI percentage change across income groups showed an increase ranging between 1.2% and 1.34% for all quantiles. On a yearly basis, SPI increased across all income segments, with the Lowest Income Group witnessing a rise of 36.06%, and the highest income group recording an increase of 42.71%.

Additionally, the average price of Sona urea rose by 0.07% compared to the previous week and is 66.35% higher than last year. Meanwhile, the average Cement price decreased by 0.39% compared to the previous week but remains 17.17% higher than prices last year.

Officials from the Ministry of Commerce disclosed that, as an initial measure, the ministry intends to revise the Minimum Export Price (MEP) from the current $750 per Metric Ton to $1200 per MT.