Fertiliser price hikes hurt farmers, companies unsure

Ahram Hebdo, Marwa Hussein, Thursday 30 Oct 2014

Small farmers lash out at sudden price rise in fertilisers, while private and public companies have mixed reactions

Farmers harvest wheat on Miet Radie farm in the El-Kalubia governorate, about 60 km (37 miles) northeast of Cairo (Photo: AP)

A sweeping decision from Egypt's government to raise fertiliser prices on the retail market by 33 percent has upset rural Egyptians, with some farmer unions threatening to boycott elections.

The increase is in line with the government's current efforts to liberalise markets for subsidised products. In July, fuel prices were raised in a bid to cut the state deficit after ratifying a new budget.

But the policy hits farmers the hardest, who pay more for fertiliser, while the prices of major commodities such as wheat and cotton are set by the state.

"Despite the rise in fuel prices in July and fertilisers this month, the government fixed the price of wheat at LE420 (about $60) per l'erdeb (150 kg), the same price as last year," said farmers activist Adel William.

Last week, the president of a farmers union, Mohamed Barghash, threatened to boycott parliamentary elections scheduled for December if the government insists on the price hike.

Under the new rates, the price per tonne of urea increased from LE1,500 ($211) to 2,000 to LE($281), while nitrogen fertiliser prices have reached LE1,900. Farmers will pay LE100 for 50 kilos of fertiliser instead of LE75.

For each feddan (0.42 hectares), farmers are entitled to 600 kilos of fertiliser annually at a price fixed by the government, but for the past two years the agricultural ministry has only delivered half of that, farmers say.

According to farmers, their actual needs are at 900 kilos per year per feddan.

"Farmers buy the remaining amount on the black market at double the price," complained Hashem Farag, chairperson of the Union of Small Farmers in Giza.

The government has defended the price hikes, saying they are the most effective way to take down the black market. The decision's effects on the black market won't be clear until the winter planting season begins, though.

The agriculture ministry also hit back at criticism, saying that it refused an even higher price demanded by fertiliser companies and didn't ease restrictions on exports, according to a ministry spokesman, Mahmoud El-Barghouti.

Public fertilisers have suffered severe losses, the spokesman said, and as such the price hikes are needed.

Covering costs

Publicly owned fertilisers producers may be the first to benefit from the decision, as they are forced to sell their products on the local market according to prices set by the government.

On average, they provide 70 percent of local market needs and are not allowed to export their production.

"Public companies hope to cover the cost of production," says Mohsen Nasser, president of the state-owned Delta company, the largest public fertiliser producer. He said that fertiliser prices have been fixed since 2009, while natural gas prices have increased twice.

According to Nasser, his company alone can cover three-quarters of the local market's needs, if it reaches its maximum production capacity. This is mainly related to the availability of supplies of natural gas, whose shortage has weighed down the fertiliser industry for some time.

Natural gas is a major component of the fertiliser industry, accounting for 70 to 75 percent of the industry's production cost. In 2012, the government raised the price of gas for fertiliser plants from $3 per million British Thermal Units (BTU) to $4, and then to $4.50 this July.
This means that public companies have to raise their prices to curb losses.

The state's budget for subsidies does not include an article for fertiliser, and the budgets of public enterprises are not part of the state budget. The government's support to farmers is financed by the losses public companies incur every year.

Private advantage

Private companies sell between 20 and 30 percent of their production to the local market, which is "in accordance with the agreements the government has signed with each company according to its production," said Hazem Ahmed Maher, associate researcher at EFG Hermes, the country's biggest invest bank.

However, private companies have an advantage that public companies don't: they can export most of their production at significantly higher prices than on the local market. Thus, after the price increase, the difference between local and world prices has shrunk to almost $50 instead of more than $100 before.

According to Maher, even with the old prices, private companies have a profit margin of LE200 ($28) per tonne sold in local markets. The private sector's real problem is the shortage of natural gas supplies. Egypt's energy crisis has affected the fertiliser industry, which is more energy intensive than other sectors.

"Last summer the gas deficiency was so huge that some plants almost suspended production," said Maher.

Maher explained that the cost of production per tonne increases when production is below capacity, as there are fixed costs such as salaries. When operating at full capacity, he estimates the cost of production at $170 per tonne. 

"The situation has improved considerably, but I think it will remain this way for two or three years," says the analyst

Last week, Al-Ahram's daily Arabic newspaper reported statements from Investment Minister Ashraf Salman, who said natural gas supplies to fertiliser plants currently meet 62 percent of the industry's needs – meaning that 38 percent of the country's total production capacity is not being used.

Salman also revealed that the oil minister promised that natural gas supplies would soon reach 92 percent of business needs.


Short link: