Urea vs DAP: set the priorities right

The fall in urea and DAP application in FY11 may be attributed to last years floods. But the key reason for the fall in demand have been steep product prices, which are at all time record high levels currently and are expected to rise further.
The 12 percent decline in urea demand is the biggest fall in four years, resulting from the highest single-year urea price increase of 30 percent over the previous year. Agreed that the floods played their part in dampening urea demand, yet the fact remains that farmers could not keep pace with the ever-rising urea prices especially in the latter half of FY11, as prices jumped from Rs1000/bag in January to Rs1400/bag in June.
The prices were mainly driven by prolonged gas curtailment that varied from region to region, but the impact on prices was the same across the board, given the explosive pricing power of local producers.
The local producers decided to pass on the impact of loss in production resulting from gas curtailment, in a bid to keep their contribution margins intact. In the meanwhile, international urea prices also escalated by 30 percent - further widening the price differential between locally produced and imported urea - hence the stronger pricing power.
The farmers economy has undoubtedly improved over the years; hence higher urea price should not be a big issue to deal with. Experts believe that demand will be back to normal even at higher prices as the farmlands are mostly out of the floods disaster.
What is more worrying is the 15 percent year-on-year decline in DAP off-take, as the steep 43 percent year-on-year surge in prices proved too hot to handle.
Lacklustre demand for the phosphate fertiliser meant a poor nitrogen-to-phosphate ratio that adversely affects crop yields. It was in fact a near repeat of FY08, when DAP demand nosedived as prices sky-rocketed, and the absence of subsidy proved to be the telling blow on DAP demand.
Data reveal that the period when the best N-P ratios were achieved, was when DAP was being subsidised, as farmers tend to substitute it with more urea application when prices reach high levels. The government clearly does not have enough fiscal room to encourage another subsidy, but it could perhaps do away with the feedstock gas subsidy and use the additional proceeds to subsidise DAP.
Should the government decide to do away with feedstock subsidy, urea prices might rise to Rs2000/bag, and given their tight budgets, the farmers will become even more reluctant to apply DAP.
Considering that farmers have spent an identical Rs23 billion on DAP in the past three years, now is the time that the priorities are set straight as farmers do not seem to be willing to spend more than a certain amount on DAP.