Relevance : GS-3 : Issues related to direct and indirect farm subsidies and minimum support prices

Key Phrases: Nutrient based Subsidy,Elevated crop prices,Heatwave, Farm Commodities, Global economic Recovery, Cost and Freight Rates , Stock depletion

Why in News?

• Elevated crop prices which are at an all-time high and are in turn driving fertilizer prices higher due to rising demand from unsubsidized and large markets like Brazil and the US.
• Nitrogen fertilizer prices have increased fourfold, while phosphate and potash prices over threefold.
• Global food prices rose 13% month-on-month reaching a new all-time high in March.

Context:

• Dealers were charging ₹500 more than the MRP for a bag of DAP (di-ammonium phosphate), a widely used fertilizer.
• Huge losses to yields of farmers on account of unavailability of DAP
• Wheat yields also took a hit due to an ongoing heatwave beginning March.

Reasons for Crisis:

1. International Price Rise of Raw Materials :
   • The crisis was largely driven by a sharp rise in international prices of raw materials like ammonia and phosphoric acid used to manufacture fertilizers, coupled with rising energy prices.
   • Between March and September 2021, cost and freight rates, or CFR, for muriate of potash (MoP) and DAP shot up by 25% and 70%, respectively.
2. Rise in Global Energy Consumption:
   • Rising energy consumption precipitated by a global economic recovery led to energy prices climbing up since late 2020. As natural gas prices rose sharply in mid-2021, so did fertilizer prices since gas is a key input.
3. Russia-Ukraine War:
   • The conflict in the Black Sea region which is a hub of production and trade in fertilizers, natural gas and grains led to an unprecedented rise in international prices of major nutrients alongside a sharp spike in prices of farm commodities.
   • The nutrient shortage is now threatening to impact global production and yield of a variety of crops in addition to pushing farm input costs higher.

What is the Impact of the Ongoing Crisis?

1. Increase in Subsidy Bill:
   • In India, the price farmers pay for fertilizers is determined by local cost of production, price of imported ingredients and the extent of government subsidies.
   • As the federal government stepped in with more support in 2021-22, its total subsidy bill rose to a staggering ₹1.4 trillion (revised estimate), up from ₹80,000 crore the previous year.
2. Increase in Food Inflation:
   • A protracted shortage will impact yields worldwide and push food prices higher.
3. Increase in Food Insecurity:
   • Today’s high fertilizer prices could lead to lower fertilizer use next season and possibly beyond, with the real prospect of a drop in food productivity leading to even higher food prices
   • This would potentially result in even more undernourished people.

What are the concerns raised by the ongoing price rise?

• India, which imports over 25% of urea, 95% of phosphates and 100% of potash it consumes, is now staring at a situation where either growers will be pushed to pay more for nutrients or the government has to step in with more support.
• With crop prices soaring, rural India could witness a situation far worse than last winter if critical fertilizers go off the shelf. Last year, fertilizer sales were down by about 4% with sales of DAP shrinking by 12% year-on-year following the shortage.
• If manufacturers are forced to raise retail fertilizer prices (for phosphates and potash which are decontrolled), a part of the incomes realized by farmers due to the bull run in crop prices will be chipped off.
• For decontrolled fertilizers, producers fix the retail price after the government announces a fixed subsidy per ton. Unlike urea, MRP of potash and phosphatic fertilizers are not fixed.
• In addition to rising food and fuel prices, ensuring availability of fertilizers at last year’s prices could be the next big worry.
• Taxpayers may have to foot the bill, in terms of higher nutrient subsidies.

How is India Responding to the Crisis?

• The government will absorb the price rise via higher subsidies for urea and phosphatic fertilizers .
• The government is also proactively trying to source nutrients from countries like Jordan and Israel for phosphatic and potash fertilizers and urea from the Middle East.

Managing the Crisis:

For over a year and even before the war in Ukraine began, fertilizer prices had shot up on account of:

• Rising natural gas prices, with the European Union moving towards cleaner fuels
• China putting a brake on exports and demand soaring in big consumers like Brazil in line with rising crop prices.
• In India too, also a top consumer, fertilizer consumption was robust in recent years on the back of normal rains which led to a depletion of stocks.
• Fertilizer stocks in the country are now at its lowest levels in several years.
• The shortage of DAP last October in northern Indian states was primarily because these markets depend on imported fertilizer. With the government capping retail prices, a shortage was natural.
  1. For 2022-23, the budget has allocated about ₹1 trillion but due to geo-political tensions and the way prices are moving, subsidies will have to be raised to keep prices stable.
  2. Last year, subsidies for phosphates were raised by 140% to ensure prices paid by farmers do not rise. It could be a repeat for phosphates and potash this year.
  3. The government is proactively trying to arrange supplies. The opportunities lie in imports from Canada and Israel (for potash), Saudi Arabia and Morocco (for phosphates) and China (for urea).

Conclusion:

• The direct impact of the war on fertilizer markets will first be felt during the upcoming crop seasons in India and Latin America.
• India is partially out of danger as it has secured some potash and substantial volumes of nitrogen in recent months to meet its immediate needs; but it will likely have to act again in the coming months planning to stock fertilizers for winter crops
• Current stocks of non-urea fertilizers are at half of last year’s levels.
• Nutrient-based Subsidy rates have to be increased very sharply, by two-three times for the upcoming Kharif season to ensure farmers do not pay a higher price.

Source: The Hindu

Mains Question:

Q. Elevated crop prices are at an all-time high which are in turn driving fertilizer prices higher due to rising demand from unsubsidized and large markets like Brazil and the US. Examine the reasons and suggest measures to deal with such a crisis . (250 words).