X

Sign up for Equitymaster's free daily newsletter, The 5 Minute WrapUp and get access to our latest Multibagger guide (2017 Edition) on picking money-making stocks.

This is an entirely free service. No payments are to be made.


Download Now Subscribe to our free daily e-letter, The 5 Minute WrapUp and get this complimentary report.
We hate spam as much as you do. Check out our Privacy Policy and Terms Of Use.
The volatile onion market - Outside View by Asad Dossani
 
 
The volatile onion market

Onion prices have been making headlines, as prices recently have been extremely volatile. On December 20th, prices were up 346% over the course of the month. As onions are so widely used, the price rises have become a political issue. In response to the price rise, the government has banned exports and eliminated import duties on onions. The result has been that prices have come down by 50%. Nonetheless, the volatility is big problem. The price is so volatile that in the time between while Iím writing this to the time this article is published, the price could be dramatically higher or lower.

Most of the reasons cited for the price increase have been the poor crop this year that has led to reduced onion production and reduced supply. This makes perfect sense right? Supply is low so prices have gone up. The fact that the crop has been poor is not something new. This was certainly known a few weeks ago before prices skyrocketed. There seems to be no logical reason why the price should go up only in the last couple of weeks. Why then did prices go up so violently?

The reason for this volatility is that there is no futures market for onions. The purpose of a futures market is to allow producers of the commodity to hedge their risks if they think prices may fall. Similarly, the market allows buyers to hedge their risks if they think prices will rise. Not having this market means that buyers and sellers of onions had no way to hedge their risks.

As a result, because there is only a spot market - the commodity is much riskier for both producers and consumers, as they cannot in advance fix the price at which they wish to buy and sell it. This risk gets reflected in the volatility of the spot price.

A futures market has other benefits too. The trading in the commodity is properly regulated by an exchange. This way, it is easier to detect market manipulation. If prices go up or down extremely quickly - it is easy to look through the buy and sell orders that generated the volatility, and hence detect possible manipulation. It is highly likely that some market manipulation has taken place as onion prices rose 346% in 20 days. That magnitude of price rise in such a short time is quite unheard of. A futures market will also bring increased liquidity, which further reduces volatility and reduces transaction costs.

A futures market is not going to make onions any cheaper - if there is a poor crop then prices inevitably will rise. However, a futures market will dramatically reduce the volatility in the market, and make the market a lot more transparent. It would make it easier to plan for and deal with potential shortages and price rises that can arise from a bad crop.

Disclosure: I do not hold the currency/commodity viewed/opined in this column

Asad is an Economics Graduate from The London School of Economics who has also been a part of the currency derivatives team of Deutsche Bank in London. Currently pursuing his PhD at the University of California San Diego where he's researching on Algorithmic Trading Strategies, Asad will be your direct line for answers to all the questions you might have on short-term investing. A part of the Equitymaster Team since 2010, Asad has been sharing his knowledge on short term trading strategies with our valued readers, like you, through our various services. In fact, at the last count, his weekly newsletter, Profit Hunter, was being delivered to more than 100,000 smart traders across the world!

Disclaimer:
The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

 

Equitymaster requests your view! Post a comment on "The volatile onion market". Click here!

  
 

More Views on News

Sorry! There are no related views on news for this company/sector.

Most Popular

Demonetisation Barely Made Any Difference to Tax Collections(Vivek Kaul's Diary)

Aug 7, 2017

The data tells us quite a different story from the one the government is trying to project.

Proxy Plays: A Smart Way to Bet on 'Off Limits' Companies(The 5 Minute Wrapup)

Aug 4, 2017

The small-cap space is full of small players that are clear proxies to great growth stories and Indian megatrends.

Should You Invest In Bharat-22 ETF? Know Here...(Outside View)

Aug 8, 2017

Bharat-22 is one of the most diverse ETFs offered so far by the Government. Know here if you should invest...

Signs of Life in the India VIX(Daily Profit Hunter)

Aug 12, 2017

The India VIX is up 36% in the last week. Fear has gone up but is still low by historical standards.

7 Financial Gifts For Your Sister This Raksha Bandhan(Outside View)

Aug 7, 2017

Raksha Bandhan signifies the brother-sister bond. Here are 7 thoughtful financial gifts for sisters...

More
 

Become A Smarter Investor In
Just 5 Minutes

Multibagger Stocks Guide 2017
Get our special report, Multibagger Stocks Guide (2017 Edition) Now!
We will never sell or rent your email id.
Please read our Terms

MARKET STATS