AT the start of May, farmers received good news: the Oil and Gas Regulatory Authority notified reduction in feed gas price ranging between Rs77 per million British thermal unit and Rs123 per mmbtu for fertiliser industry, which translated into reduction of urea price by Rs60 to Rs70 per bag.

The new notified price has thus come down from Rs1,850 per bag to Rs1,790 per bag.

However, in days to come, the market forces might push the prices further down. Some of the analysts see it below Rs1,700 per bag in next few weeks because of huge inventory that the industry is holding amid depressed sales.

The country is now holding some 1.2m tonnes of unused stocks, including around 250,000 tonnes with the National Fertiliser Marketing Limited (NFML). These stocks have been built in the last few months for two reasons: the government has been very liberal with gas diversion to the fertiliser sector, even at the cost of power sector in some cases (like Guddu Power Plant’s gas allocation was diverted to a urea manufacturer for many months).

With the induction of regasified liquefied natural gas (RLNG) into the system, the fertiliser sector has been receiving additional supplies of 80m cubic feet per day (mmcfd), thus exploiting its full production capacity and building stocks.

With diesel prices down and the DAP experiencing almost 25pc price slashing, any reduction in the urea prices will impact positively on overall cost of farm inputs

On the other hand, the urea consumption went down during these months because of the dwindling purchasing power of farmers. Between October-March 2015-16, when the urea manufacturing was in full swing, its consumption dropped by 13pc on a season-on-season basis. This happened during the wheat season when urea usage is normally at its peak. At the most propitious time, its off-take of only 1.7m tonnes was even less (15pc) when compared with last three year’s average. This drop in usage contributed to the huge inventory, which might push the prices further down in weeks to come. The next cotton crop might benefit.

Another factor, which may also help bring down the prices, is the international scenario. The importers are pushing the government to assure them against any levying of duty at the last moment for them to import urea and let them provide urea at a rate of less than Rs1,300 per bag. The only deterrent for them is possible duty regime change during the import process, gobbling up their profits.

Such change of duty regime feeds on two factors: the industry actively spreading these rumours and the government keeping an ambivalent silence over the issue. The farming community is naturally standing besides these importers. It insists if the government wants free market mechanisms to take reign of the market, where farmers are paying world prices for most of the products, why not urea as well?

If world prices are down to Rs1,300 per bag after all expenses (freight and in-land transportation included), why is the government protecting the local industry by around Rs500 per bag. Instead, it should help import urea by assuring the importers there would be no policy change (slapping of duty) at the last moment, as being feared by them and facilitate the imports for further benefit of the farmers.

The debate is still going on and the government does not want the domestic industry to sink under its own weight and is protecting it by keeping an ambiguous silence over the issue of possible import duty.

The farmers always complain that such benefits are always lost among manufacturer and dealers. The dealers raise their profits to pull the benefit towards them. This time, it would be in the interest of the industry to ensure price reduction is passed on to farmers which helps clearance of stocks. The benefit, thus, is sure to reach farmers, at least the one notified now if not more.

With diesel prices already down, the DAP experiencing almost 25pc price slashing, any reduction in the urea prices is a welcome step for its impact on overall cost of production. The Punjab Agriculture Department’s calculation of cotton’s cost of production substantiates the point; against last year’s figure of Rs3,182 per maund, it stands at Rs3,000 per maund for this season.

Published in Dawn, Business & Finance weekly, May 9th, 2016