Tomato challenge: Hoarding is not as bad as it sounds

livemint.com:

The ministry of consumer affairs on 30 June announced a weird-sounding competition: a ‘Tomato Grand Challenge’ hackathon. Last year, there was an ‘Onion Grand Challenge.’ Both came after the prices of these commodities had risen sharply. The objective is to encourage citizens to share ideas to ensure the availability of tomatoes and onions at prices that are fair for both consumers and producers.

I recently asked my students a question that I have asked several previous batches: Should producers of essential commodities be allowed to hoard their produce? The near unanimous answer has always been no. Why? Because the perception is that holding back supply causes the price to rise. While this is true, what is rarely understood is that we usually see only half the picture.

We tend to form an opinion based on what is visible today and ignore what is likely to happen tomorrow. Let’s look at how the two are related and why solving the problem of highly volatile prices of fruits and vegetables partly lies in allowing the hoarding of produce, which seems counter-intuitive. Take the trends in prices of tomatoes and onions, commonly used in diets across India.

The average inflation (year-on-year price change) in both products was about 11.5% between January 2015 and May 2023 (excluding six months of March to May 2020 and 2021, due to data non-availability). This rate of price rise is the highest among all food products. People cannot make much sense of year- on-year price changes.

We tend to have a recency bias. We compare today’s prices with those of goods when last purchased, typically a week or month earlier, and we do it without adjusting for seasonal effects. By this measure, the highest month-on-month price rise since 2014