India: Fertiliser Stocks Set To Gain As Government Plans To Increase Subsidies To Help Farmers Tide Over Soaring Fertiliser Prices

With global fertiliser prices skyrocketing, reports have suggested that the government is planning to increase subsidies to Rs 1.5 lakh crore ($ 20 billion) to help farmers keep up with increasing costs.

As a result, fertiliser companies that are likely to benefit from a subsidy increase saw greater interest from investors.

Production Costs Increase

Globally, fertiliser prices have tripled in the current year as manufacturers face increasing costs, raw material constraints and supply chain issues, leading to shortages.

A major factor behind the rise in fertiliser prices has been the increase in energy prices. Fertiliser manufacturing is an energy-intensive sector that requires natural gas, which contributes to around 80 per cent of the production cost.

Resultantly, the natural gas shortage has hit fertiliser manufacturers hard, as they must pay up larger amounts to buy natural gas. As a result, Europe saw several fertiliser plants shut down temporarily in recent months, as production became unviable.

Fertilisers Europe, an association of fertiliser manufacturers, had highlighted the closure of some fertiliser plants due to high energy prices. The association had urged the European Union to take action against soaring gas prices.

According to the Europe-based fertiliser giant, Yara International, the cost of production of a tonne of ammonia has increased from $110 to $1,000 within a small span of time due to increasing energy prices.

Subsequently, the company curtailed its ammonia production by around 40 per cent in recent months. The company’s Chief Executive Officer had earlier said that he expects a food crisis due to low crop yields.

Supply Constraints Lead To High Global Prices

China, the top exporter of phosphates, had put restrictions on the export of the chemical. Phosphate fertilisers are extensively used all over the world, including India, which imports around 60 per cent of its phosphate requirements.

Di-ammonium phosphate (DAP) is the second-most popular fertiliser in India after Urea.

It is estimated that 24 per cent of India’s entire phosphate consumption comes from China alone. While the government does not directly cap the prices of phosphate-based fertilisers, it has subsidies in place to prevent overheating in the market.

In contrast, urea is a commodity with explicit price controls. The maximum retail price (MRP) of the commodity is set by the government at Rs 5,370 a tonne.

However, the price of the commodity is multiple times that on the international market. The government-mandated prices are lower than the cost of production as well. According to available data, urea prices in October stood at around $ 690 (Rs 48,300) a tonne.

Implications Of A Fertiliser Shortage

A lower usage of fertiliser due to high prices would mean lower yields from farming. Given that a large percentage of India’s workforce is engaged in agriculture, and the high open market fertiliser rates, it is expected that the government would increase subsidies to support the sector.

Lower yields have implications beyond possible lower earnings for farmers — a lower crop yield would result in higher food prices for the general population.

Global food prices are already at a 10-year high according to several reports. According to a research report by Rabobank, it is unlikely that global food prices would revert back to their long-term average prices in the near future.

The reasons behind this phenomenon are two-fold — the constraint of high raw material prices in the agricultural sector, and hoarding due to continual supply shocks.

Through the subsidy, the end-users receive fertilisers at a lower MRP while companies are compensated for their expenses. The new subsidy figure at Rs 1.5 lakh is almost double the subsidy amount budgeted for the year by the government.

Government Increased Subsidies Twice This Year

The government has already increased the subsidies for phosphate and potash fertilisers in October due to the increase in raw material prices.

The government approved a net subsidy of Rs 28,655 crore. The government had also introduced a one-time subsidy of Rs 5,716 crore for di-ammonium phosphate (DAP) fertiliser.

The government had previously announced an increase in the nutrient based subsidy scheme in May 2021. The nutrient-based subsidy scheme governs the subsidy given out for potash and phosphate fertilisers.

The government had been resisting an increase in the retail prices, and hence, increased the subsidy to ensure profitability for the industry.

As a result of the new subsidy increase, fertiliser stocks surged during early trade. The market expects these subsidies to boost the profitability of fertiliser manufacturers that have been struggling with higher costs.

Given the indirect and direct pricing caps on the sector, subsidies play a major role in determining the financial health of these companies, and hence investors are tracking government subsidies closely.

Rashtriya Chemicals and Fertilisers is up by 4 per cent, Chambal Fertilisers is up 8 per cent along with other stocks in the fertiliser pack performing quite well.