By Rajendra Jadhav
MUMBAI, July 17 (Reuters) - Onion prices in India hit a two-and-a-half-year high on Wednesday riding a supply squeeze due to last year's drought in key growing areas, and traders expect prices to spiral up further in a month as demand remains strong due to Ramadan.
Onion is a common ingredient in many Indian dishes. Soaring prices of the vegetable have helped dislodge Indian state governments in the past, and rising food costs often spark street protests in a country where nearly a third of the 1.2 billion population live on under $1.25 per day.
The average prices at Lasalgaon, India's largest wholesale onion market in the western state of Maharashtra, rose to 2,411 rupees ($40.72) per 100 kg on Wednesday, the highest since January 2011.
The wholesale price has risen about 50 percent in a month, although retail prices have more than doubled in some metros like Mumbai to 30 rupees per kg.
"Last year's drought curtailed production in Maharashtra. The supply shortfall is hardening prices and we can see further upside in coming weeks," said Changdev Holkar, a director at the National Agricultural Co-operative Marketing Federation.
During the Muslim fasting month of Ramadan, which started this year on July 9, consumption of onions rises because it is used in making traditional cuisine.
Maharashtra is the country's top onion producer. In 2012, it was hit by the worst drought in more than four decades, curbing the area planted with onions and trimming yields. The state's output fell nearly 16 percent to 4.76 million tonnes in 2012/13.
Daily supplies in the Lasalgaon spot market have come down to around 1,000 tonnes compared to around 1,800 tonnes during the same time last year, said an official at the National Horticultural Research and Development Foundation.
Food inflation accelerated for the second month in a row in June, touching 9.74 percent as vegetable prices shot up, helping retail inflation rise to 9.87 percent, snapping a three-month easing trend.
The Congress-party led government, battling economic pressures including a rupee falling to record lows and an all-time high current account deficit as well as reviving inflation, must face elections within a year.
NEW CROP, SLOWING EXPORTS
Onion prices may ease with the new crop arriving in small quantities from the end of August, but any substantial price decline will only come in October, Holkar said.
"Farmers have increased the area due to higher prices. Onion prices will fall once supplies peak from the new season crop, but the weather needs to remain favourable until harvesting," he said.
Sometimes, despite a higher area planted with onion, output drops due to excess rainfall that spoils the bulb.
India, a key supplier to Asian and Gulf countries, exported 511,616 tonnes in the first three months of the current financial year that started on April 1. But exports are falling due to higher prices and as new season supplies have started from China and Pakistan.
"Exports demand is very weak. China and Pakistan are offering more than $150 discount (per tonne) over Indian prices," said a Mumbai-based exporter, who declined to be identified.
"Onion exports in July and August are likely to fall sharply. They will recover from September onwards," he said. ($1 = 59.2150 Indian rupees) (Editing by Jo Winterbottom and Sunil Nair)