Hyderabad onion Case
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Hyderabad receives most of its onions from the Kurnool region. The Economic Times stated that the Mahboob Mansion wholesale market here normally receives around 1,500 tonnes on a daily basis but the supply has not exceeded 800 tonnes in the second week of September 2013. This shortage of supply is due to a couple of reasons. One is the transportation situation in the protest-hit regions of Andhra Pradesh. The bifurcation of Andhra Pradesh issue has caused protests in many areas including Kurnool. Second is due to the excessive rains in these areas. Excessive rain adversely affects the onion crop.
The more it rains, the more there is a shortage of onion supplies. As the overall quantity supplied decreases from Q1 to Q2 and the overall demand remains the same, the prices move up from P1 to P2 (See Figure.3) as the equilibrium point shifts from e0 to e1. This is exactly the situation in areas that depend on Kurnool for onion supplies.
Local Indian restaurants would deal with this situation by restricting purchase of onions as much as possible. Using onion in smaller quantities for preparing dishes. Some restaurant would also stop offering onions as part of their salad. These measures would enable the local restaurants to purchase as little onion as possible while the prices are up. Whether the restaurants should start growing their own onions would completely depend on the scale of the restaurant and the future expectations of the price of onions. Assuming a small local restaurant in this case, the expectations are that onion prices would come back to normal in some time, the restaurants should not start growing their own onions. A new crop is expected from Maharashtra, the biggest supplier of onions, which would bring back the onion prices to normal. Suppose the onion prices were to go up and not return back to normal for a very long time, vertical integration by growing own onions might have been feasible in the case of a large chain restaurant like McDonalds which requires huge supplies of onions every day and also depends on the consistent quality of the onion.