Fertiliser numbers for May 2011 are out and, as expected, show a 20 and a 30 percent year-on-year decline in urea and DAP off-take, respectively. To trace a lower DAP off-take in May, one has to trace back as far as 1997. The farmers lukewarm response to DAP off-take is reminiscent of 2008 when sky-high prices led to a near halt in DAP demand.
Much has been said about the farmers improved economy and their resilience to counter the ever-rising input costs - but the reality of the matter is that urea off-take for FY11 is expected to be clocked down by nearly 1 million tons from the previous year - the largest slump in yearly demand in the past six years.
The urea price has continued its upward journey, clocking over Rs1300/bag and expected to go steeper. The feedstock gas curtailment, plant shutdowns and the removal of GST exemption on fertilisers, all combined to escalate the prices.
Much to the dismay of the farmers, this many not be the end of the price rally, as the government is all set to increase feedstock prices next month. The magnitude of the increase is still an unknown quantum, but the Petroleum Minister hinted towards abolishing the cross subsidy mechanism and raising the feedstock prices to the other industrial level, which could lead to a massive increase in urea prices, leading it close to the international price of Rs2000/bag.
DAP demand on the other hand may continue to suffer as no subsidy has been allocated for DAP fertiliser in the budget - and farmers do not deem DAP feasible at Rs4000/bag. Raw material prices in the global markets have also been increasing of late, which could add more pressure on DAP prices, and the only way to resurrect DAP demand remains a sizeable subsidy, without which the imbalanced fertiliser application would only get worse.
The huge differential in the prices of the two fertilisers, is often considered as the major reason for less-than desired DAP off-take as the farmers trend to substitute DAP with the much cheaper urea, despite the fact that substituting DAP with urea never serves the purpose of improving the yield.
A case in point is the interesting observation that despite a massive increase in DAP prices during the past three years, farmers have continued to dole out a similar amount for DAP purchases to free themselves up for more urea in-take.
Moreover, the combined spending on urea and DAP has not shown as much growth as it should have under the improved famers economy mantra. It seems the government may have to go back to the undesirable decision of subsiding DAP if prices continue to rise.
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