The recent slump in international DAP prices made it easier for the government to do away with its subsidy on the commodity in FY10 budget, citing lower price levels and higher DAP off-take in domestic market seen in the past three months.
While the governments decision seems right in the current scenario, this article argues why the officials need to a keep a vigil on prices and be prepared to re-introduce DAP subsidy later this year.
Global DAP demand had been on a persistent rise between 2002 and 2008 while capacity constraints ensured that phosphate prices remained northwards. However, the demand-supply scenario changed since FY09 as countries around the world came up with massive capacity expansions of phosphate-rock and phosphoric-acid, both being major ingredients of DAP fertilizer.
According to French firm OCP, a leading name in phosphate industry, new phosphate-rock capacity is expected to even exceed demand growth such that there is a risk of an over-supply situation, particularly if North American producers actualize their intended expansion plans. This, together with the expectations of an increased phosphoric-acid supply have kept a downward pressure on DAP fertilizer prices in international market for last few quarters.
However, there is a caveat to this serene picture. Industry sources have been lately expressing concerns over phosphoric-acid plant expansions in China and Saudi Arabia, which were expected to be operational by 2010 and 2011 respectively.
Considering that these two future plants have been the driving force behind cooling DAP prices, with potential of 40 million tons of phosphate rock, the slightest of delay there would drag the phosphoric-acid supply situation back to 2007-08 - exerting an upwards pressure on input prices.
Consequently, any such increase will drive DAP prices higher by October-December 2009 - a period when DAP consumption is quite significant (nearly 40-45%). This in turn can arrest DAP off-take by farmers, as it happened last year when DAP prices peaked, when in fact there is greater need to increase DAP utilization.
Globally, a nitrogen-phosphate ratio (generally known as N:P or urea-DAP ratio) of 1.75:1 is considered ideal for major crops. Pakistan is no exception to the rule and the health ministry recommends an N:P ratio of 1.7:1 for wheat crop and 2.5:1 for most of other crops.
Sadly enough, these recommendations are not backed up with adequate steps to ensure and promote the balanced application of nutrients. N:P ratio in Pakistan has been as poor as 4.15:1 in the past 10 years - with 2009 witnessing the worst ratio of 7.33:1.
Hence, the need of the hour for the government is to be proactive and avoid the laid back attitude which resulted in massive under-application of DAP fertilizer last year. This means the government should also prepare to create fiscal space for DAP subsidies, if need be, at least for the peak demand season (October-December).
Leaving it to the last hour might prove hazardous as local farmers are not educated enough to weigh the pros and cons of a balanced fertilizer mix. If prices rise, they will simply stop using DAP - some thing which can potentially lower crop yields, adding more burden on the slowing economy.
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