The phenomenon behind tumultuous prices

The phenomenon behind tumultuous prices
  • Tomatoes demonstrate cobweb phenomenon in economics.
  • Low prices one season discourage farmers from planting from the next season.
  • Perishable and seasonal nature causes extremes in prices.

Prices of the humble tomato, an integral part of our diet, dominated through July because prices hit Rs 200 a kilo. After the tomato, prices of the ivy gourd or tendli shot through the roof. These prices perfectly demonstrate the cobweb phenomenon of cyclic price fluctuations in economics. It usually applies to agricultural goods, like potatoes or onions, which have inelastic demand.

In layman terms, inelastic demand means that even a large change in price of these goods will cause only a small decrease in quantity demanded. Farmers have to decide the extent of the production, well in advance, based on the results of the previous year. Low prices one season discourage farmers from planting from the next season. Hence, prices skyrocket in the next season due to limited supply, causing farmers to increase the supply. Excessively abundant supply that must be sold immediately due to the perishable nature of the good causes prices to decrease rapidly, setting the vicious cycle into play again.

Less than two months later, farmers are throwing tomatoes on highways because prices have dipped below production cost. In recent times, we have seen farmers shift areas of cultivation to crops like soya and cotton after low price realization for tomatoes between December 2022 and April 2023. Hence, July saw a dramatic decrease in output after the crop’s two- three month harvest period. Limited supply caused very high prices, delivering supernormal or windfall profits to farmers who maintained supply at this point.

The government intervened, selling tomatoes procured by NCCF and NAFED cooperatives at discounted prices to make them more accessible in states like Uttar Pradesh and Bihar.

Supply chain disruption caused by unseasonal rainfall and excessive heat that destroyed crops worsened the situation. For example, heavy rainfall in Karnataka damaged 70% of the crop which would have been ready in August.

The present situation has reached the other extreme with abundant supply since July’s exorbitant prices prompted farmers to increase production. Prices have plummeted to the extent that some farmers are dumping their produce on roads. This dumping is reminiscent of April 2022 when prices dipped to as low Rs 4 due to glut in the market.

Although tomatoes constitute less than 1% of the CPI index (the price index for basket of goods acquired by consumers), their impact is pervasive on consumers’ inflation expectations for all vegetables. The over 200% price increase in July contributed to an inflation rate of 37.34% for vegetables and general CPI inflation rate of 7.44%. In its monthly State of the Economy article for July 2023 , The Reserve Bank of India stated that “Its (tomatoes’) volatility also gets transmitted to prices of other vegetables in both retail and wholesale markets.”

Although the cobweb phenomenon is inherent to demand and supply characteristics of tomatoes, its effects could be mitigated by strengthening processing, preservation and storage practices. Improving connectivity within the country would enable secondary supply to those regions, which experience the most shortage.

The author, Ananya Tawakley, is an external writer and the views expressed in the article are her own.