What are the Risks in the Onion Export Business?

Introduction

Did you know that recently, the Indian government banned the export of onions to other countries? As per the export trade limitation notification circulated by the Directorate General of Foreign Trade in 2020, the export of onions was banned except in some forms such as powder, cut, and slice. However, the central government removed the ban on the export of all varieties of onions with effect from January 1, 2021. The government imposes such steps due to the risk factors encountered while exporting the onions to the foreign market. So, if you intend to start import export business ideas or have a full-fledged onion export business, check out the detailed write-up and consider the listed risk factors associated with the onion export business.

1. Low Production Supply and Product Quantity

Onions are subjected to low production supply and product quantity issues. As the onion production cycle and product quantity depend upon the crop quality, the production supply and quantity of the quality onion lot may differ. For instance, if the source from which you are sourcing the onion production suffers a crop crisis due to heavy rainfall, hailstorm, or other issues, it will impact the quantity and production supply of onions.

2. Natural Factors

Onions need special storage conditions and room temperature, or else the presence of moisture or humidity in the storage location may spoil the batch of the onions, which will lead to a reduction in export quantity. Apart from storage conditions or environmental temperature, natural factors may also affect the production supply of onions and may arise as a risk factor in the onion export business. For instance, if the onion crop is ready to harvest and heavy rainfall with hail storms occurs, then a lot of onion will be spoiled, leading to low product quality and quantity. In such cases, the demand for onion rises, and due to limited supply, the onion export business will face fluctuations resulting in a low profit or sometimes no profit rate. Usually, in these cases, the government of the exporter country limits the export product quantity of onions and sometimes halts the onion export business. So, natural factors also play a vital role in the risk factors associated with the onion export business. Ensure that you consider the natural elements, such as rainfall, thunderstorm, hailstorm, flood, drought, and others, into your account while planning the onion export business.

3. Foreign Exchange Fluctuations Risks

While exporting onions to other countries, one of the key deciding factors for profit margins is foreign exchange rates. If you are invoicing the onion export consignment in the buyers' country currency, the profit margin will depend upon the foreign exchange fluctuation risks. For instance, if you have exported the onions in the U.S. and if there is a fluctuation in the foreign exchange rate, you may suffer loss or earn a lesser profit rate as expected. The invoice will be based on the current foreign exchange rate of the currency, and the calculated profit rate was as per the previous foreign exchange rate or the rate before exporting the onions.

On the other hand, if the exporter country currency faces a depreciation rate, then the exporter will stand for a higher profit rate than calculated. So, the foreign exchange fluctuation risks play a vital role in deciding the profit margin if there is a fluctuation in the buyer's or the exporter's country currency rates. To overcome the risk, you can invoice the export bill based on the negotiation under a letter of credit. In such cases, if the foreign currency undergoes oscillation, the bank will bear the loss or the risk. However, if you create an invoice for collection, the exchange rate on receipt of foreign currency in India will be offered to you. Suppose there is an intervening difference in the exchange rate between providing the invoice for collection and the date of realisation. In that case, you will be subjected to reap profit or bear loss in the onion export trade, depending on the trend in the foreign exchange fluctuation. There will be no foreign exchange fluctuation risk in case the invoice is made in INR. In such a case, the buyer or the importer will be subjected to foreign exchange fluctuation risk. Ensure that the onion export bill is purchased and invoiced under the letter of credit (LoC).

4.Transportation

Most of the export trade is initiated with water transports or cargos. One of the most common yet effective risks associated with the onion export trade is the transportation and storage-related risk. There are many instances where the export consignment may suffer huge losses due to risks related to the transit phase with cargos such as thunderstorm, leakage, collision, theft, fire, or sea robbery. So, ensure you consider the mentioned transit risks and then export onions to other countries. To overcome the risk, you can take up marine insurance for your onion export consignment. In that case, if trade loss will occur, then the professional risk bearers known as underwriters Principles of marine insurance will bear the financial loss that occurred due to perils of transit or sea perils.

5. Trade Limitations and Compliance

Trade compliance and limitation factors may arise while exporting onions to some countries. The buyer country may impose the export quantity of onions or completely ban the export from selective exporters. So, in that case, the exporter may face colossal loss or loss of export trade. Ensure that you have agreed with the onion export trade with the export liberal countries that are not subjected to impose bans or trade limitations for a profitable and more extended onion export trade scope and opportunity.

6. High Competition

Onion falls under the category of the essential item, and the export business related to onions is liable for a higher competition rate. So, as per the competition, you will be bound to decide the amount of onion export per the export market rate; or the rate at which your competitors export the onion to similar or other countries. If you face risks associated with production supply, quantity, natural resources, or foreign exchange, then you may bear the loss or no profit in the onion export trade.

Key Takeaways

These guidelines on how to start an import and export business of onions will help with your business.  Along these lines, begin drafting an onion import export business plan and ensure that you have considered all the risk factors before launching the onion export business in India to implement the best onion import and export business ideas.

Also read:

1) The Indian Import-Export Scene
2) How Can I Start Spice Export Business In India?
3) How Can You Start An Import Business In India?
4) Types of Direct & Indirect Taxes in India
5) OkCredit: All you need to know about OkCredit & how it works.

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FAQs

Q. What is the first step in starting the import-export business of onions in India?

Ans. Initially, you will need a well-researched plan. So, start drafting a well-defined and ingenious import export business plan for onion-related export businesses to achieve maximum profits.

Q. How much time will the onion export business idea take to become a profitable one?

Ans. There isn't any fixed duration or dedicated deadline. To make any export business or venture flourish, you will need continuous hard work, business ideas, research, and labour.

Q. What is the estimated budget to launch the onion export business idea in India?

Ans. To implement India's best export business ideas of onions, you will need an estimated budget of around 65,000 INR.