As warned by all stakeholders, urea supply and prices seem to have spun out of everyone’s control — impacting the Rabi crop cycle and threatening the coming Kharif. As per market watchers, a number of factors — additional demand, less production, five times higher world prices leading to smuggling, domestic price spiral causing hoarding and governance issues — have joined hands to play havoc on supply and price of one of the most essential agriculture inputs, and, by extension, with the food security of the country; wheat is the major sufferer.
Currently, urea fertiliser has lost its price tag in Punjab. The industry sells it at Rs1,768 per bag to its dealers. The price at which it is available, where and if offered, ranges anywhere between Rs2,000 to Rs2,700 per bag, depending on the clout of buyers or chances (hoarding) in the area.
The government’s reaction only makes matters worse. The ministers are found justifying higher prices by comparing it with international prices (Rs11,000 per bag last Friday when this piece was written) and lecturing farmers how lucky they are to have urea even at this price.
On the supply side, the official logic is equally questionable; more of an expression of the inability to deal with the situation. “When price differential between the local and international market is five times, how can one stop smuggling? Smugglers are minting over Rs7 million on each trawler that slips out of Pakistan,” one of the ministers informed the media.
The worst part of the whole situation is that it was predictable, thus preventable. The government had ample warning and time before the crisis started worsening. Punjab rang alarm bells as early as September 15 last year. In a letter to the federal government, it warned of coming shortage, price problems and implications for wheat. It was ignored.
Applying the conventional method (averaging out consumption over a longer period), the government insisted that urea spending would be around 6.1m tonnes this season against the industry’s calculations of 6.4m tonnes leading to a gap of 300,000 tonnes that was aggravated by the gas crisis
The farmers (Pakistan Kissan Ittehad, the most active farmers’ body) sent a similar SOS five days prior to Punjab. It was never considered worthy of official attention. “Rather, the minister concerned misled the government, saying that the fears for a shortage were mere propaganda and deflected the blame onto political opposition,” says Khalid Khokhar, chief of Pakistan Kissan Ittehad. Our repeated pleas to keep agriculture out of politics fell on deaf ears and disastrous results are here for everyone to see, Mr Khokhar laments.
Warning from the industry was starker. Questioning official consumption calculations, the industry insisted that the government was taking it all wrong. “In the last two years, the country has had record production of wheat, maize and rice crop and the government repeatedly claimed credit for bumper crops. This higher yield could only have two drivers: either an increase in area or per acre yield. Per acre yield, as recorded in the case of wheat, came with additional application of fertiliser — adding to demand.
“Another factor, which increased demand and its pattern, is the introduction of short duration crops, especially in central Punjab. These new exhaustive crops need more fertiliser and keep it in demand all the time, defying traditional peak demand periods. Both these factors altered the historical fertiliser consumption pattern. Officialdom, however, stuck to the traditional and average usage model, which obviously did not register recent changes with all their intensity and impact.
“Applying conventional method (averaging out consumption over a longer period), the government insisted that urea spending would be around 6.1m tonnes this season, and national stocks situation can deal with it easily. The industry, however, calculated it at 6.4m tonnes based on its recent experience and rising demand — a gap of 300,000 tonnes,” explains one of the manufacturers.
This gap further widened by 200,000 tonnes, when gas disruptions from June to September caused a production dent. Two plants went offline due to gas issues and caused the damage. This production loss was reflected in the opening balance in October, which came down to mere 116,000 tonnes against 473,000 tonnes last October. The season thus started on the wrong foot as far as urea was concerned.
Next came the mismanagement of the market, both by the industry and the government. “The industry contributed its share when it released over 350,000 tonnes of urea to its dealers in November against normal supplies of 200,000-225,000 tonnes,” explains one of Punjab’s officials. The entire quantity was hoarded and these additional releases only rigged supplies in the market. Once consumption started climbing, all these deficits, coupled with hoarding, came to haunt the market, farmers and the government.
Once hue and cry started gaining decibels, the government panicked and started doing what it knows in such situations: it inducted district administration into the fray, which raided every suspect premise and tried to release fertiliser to the market. So far, Punjab has registered 563 cases against hoarders. “If the government knows only one (administrative) action in such circumstances, the market also has only one reaction — commodity disappearance — and it did exactly that,” he says.
Meanwhile, the hoarded fertiliser started slipping to Afghanistan due to the price factor. With five times profit margin, the smugglers could afford a much higher price in the Pakistani market, taking prices much higher than otherwise could have gone. Porous (both geographically and administratively) borders helped the illegal trade. Since profits were huge, the smugglers had the margins to throw money around in every corner. Some such attempts, which failed, were also reported in the media.
Jointly, these factors rigged the urea market, and fears are that its consequences would last longer than the current crop cycle. The Punjab Minister for Agriculture, Hussain Jehania Gerdezi, articulates those fears when he says that the province is already trying to assess the damage that can come to maize and sugarcane crops in the next month or so.
“The wheat window is now closing. Farmers might have applied it to wheat, or not, and it will now reflect in the yield. The province is hoping that the damage is not substantial, neutralising provincial efforts to harvest a record crop this year. The fear now extends to sugarcane and maize, which would need urea in the next few weeks. What if the crisis persists and affects both these crops as well.
“Punjab is convinced that the country now needs another urea plant to meet its growing demand. At present, the country has the capacity to produce 6.7m tonnes of urea and it can certainly meet the demand for the next two to three years if the entire potential is fully utilised. Any hiccups, like gas disruptions, would certainly cost similarly. But, what would happen after two to three years when the current capacity starts falling short of the requirement,” Mr Gardezi warns.
Published in Dawn, The Business and Finance Weekly, January 10th, 2022