DAP subsidy on the cards?

Umbalanced fertiliser application is an age-old phenomenon in Pakistan, stemming from the high price differential between DAP and urea, and the lack of farmers education. The situation, yet again, seems to be out of control and is reminiscent of 2008 when the phosphate fertiliser usage dropped to abysmally low levels due to the price differential between urea and DAP fertilisers.
It seems that the government has been closely watching DAP prices which were seen touching Rs4,000 per 50kg bag last month, up from an average of Rs2,675/bag in CY10. Rising cost of raw materials, both Phosacid and Phosphoric rock in the international market have led to a massive increase, and the telling blow came from the exemption of GST on fertilisers, leading to another round of increase.
Keeping aside the merits of fertiliser subsidies for a moment, farmers reactions in crunch times give an interesting observation. Every time the urea and DAP price differential increases, the Urea:DAP application ratio (NP ratio) goes high, which in essence is harmful for the crop yield (see graph).
The government, as it did in 2008, might again be thinking towards offering subsidy on the DAP fertiliser in order to avert a 2008 like situation. The Budget Strategy Paper 2011-14 offers a hint in this regard, where subsidies for fertiliser have been allocated Rs26 billion for FY12, a five-time increase from Rs5 billion in each of the past three years.
And that roughly translates into Rs800/bag subsidy on DAP fertiliser considering the CY10 DAP off-take as the benchmark. There is no doubt the DAP off-take will improve considerably, but should this happen one still has to look into the need of a subsidy on agricultural inputs, when the farmers economy is believed to have significantly improved in the past three years.
"Purely on the basis of farmers economics, the affordability of fertiliser at current rates is pretty much there. Since DAP is usually considered a less required input especially in crunch times, DAP off-take drops. The subsidy will provide a cushion to the poorer farmers to some extent...a possible way out is to reduce the price differential between urea and DAP as there would be some substitution affect in that case," Rohail Mohammad, CFO Engro Corporation, told BR Research.
Nothing suggests that the government is in any mood to do away with cross subsidisation on urea despite the manufacturers asking for the same. The need of the hour is to educate farmers about the advantages of balanced fertiliser application and gradually reduce the price differential, not by offering DAP subsidy, but rather by eliminating it on urea.