Record-high fertiliser prices welcomed farmers bracing up for the Kharif season that started in April. Apparently, that did not affect fertiliser off-take a great deal in both the urea and DAP case. In fact, urea off-take for April was the highest ever recorded for the month, whereas DAP off-take for the month was more than double of that in the same period last year.
But thats only half the tale. As prices, according to agriculturists, did not take full steam in April as they started picking pace in the dying days of the month, the off-take improved. The imbalanced application of fertilisers, though, continues to be a problem as the urea: DAP application ratio for 4MCY11 stands at an alarming 8.6, while the ideal application ratio is considered 2-2.5.
Fertiliser manufacturers argue that farmers economy in the past three years has considerably improved so higher prices should not be too big an issue to deal with and the off-take should largely remain intact. And they do have a point. Farmers incomes in general have improved owing to better crop prices and the resilience shown after the devastating floods is a testimony to the argument.
But DAP prices over and above Rs4,000 per bag are surely going to test farmers spending power and there are growing concerns that they will not be overly engaged in buying the all-important phosphate fertiliser. The situation is reminiscent of 2008 when DAP prices rocketed above Rs3,000 per bag, leading to a halt in DAP off-take.
The government, back then, had to intervene by offering huge subsidies on DAP to resurrect the ailing DAP demand and succeeded in doing so. The current situation has gone out of hands as there is no subsidy on DAP fertiliser at the moment, which has widened the differential between urea and DAP prices.
The huge differential in the prices of the two fertilisers, is often considered as the basic reason for less than desired DAP off-take because the farmers tend to substitute DAP with the much cheaper urea, despite the fact that substituting DAP with urea never serves the purpose of improving yields. The current differential is at the record high level of Rs2,800 per bag, an increase of more than Rs1,000 per bag in just a years time.
"Let the off-take numbers for May come out and you will see DAP off-take to have nose-dived considerably...there is no way farmers will apply DAP at such high rates, especially when urea prices have crossed Rs1,200 per bag. If the government does not announce subsidy for DAP in the budget, no one will buy DAP," said agriculturist Aurangzeb Magsi, speaking to BR Research.
And it seems the government is seriously considering offering subsidy over DAP since the Budget Strategy Paper 2011 hints as much. It suggests a fertiliser subsidy allocation of a hefty Rs26 billion for FY12.
Carrying on with subsidies is not the best option given the governments overly ambitious target of containing fiscal deficit for FY12. A much better option is to reduce the urea- DAP price differential, which would automatically lead farmers to stop substituting the two products.