FAI decides against hiking fertiliser prices for now

The Fertiliser Association of India (FAI) has decided not to hike the price of decontrolled fertilisers covered under the nutrient-based subsidy (NBS) scheme, despite an increase in the cost of imports due to the rupee’s depreciation. 

A recent FAI release says: “The Indian Fertiliser Industry has decided not to increase the MRP (maximum retail price) of fertilisers to the farmers for the present. The industry has also decided not to ask the government for any additional subsidy. Industry will absorb the increased cost and also re-negotiate for reduction in the prices with the foreign suppliers”.

This development will be welcomed with a huge cheer by the Indian farmers, as this will restrict their price burden for de-controlled fertilisers like DAP, MOP and other NPK variants. In turn, this decision of not hiking the retail fertiliser prices further than the current levels will also help keep inflation in control, as the farmers will not pass on the burden to the retailers.

On the other hand, this move will have a negative impact on the financial performances of fertiliser companies going forward. Already ridden with contracting margins in the H1 results, one can expect the fertiliser companies to further succumb to margin pressures in the coming quarters. In fact, in the recently-concluded Q2 results season, the fertiliser companies had warned against a further rise in input costs.

In recent developments, though, it seems that the fertiliser industry has managed to break its deadlock with foreign exporters, as the Indian Farmers Fertiliser Cooperative (IFFCO) has managed to get a 5% discount from some of its global suppliers, prompting other fertiliser companies to follow suit. 
  
However, with the rupee having depreciated by more than 17% on a YTD basis to Rs 52.23 per dollar on Friday, 25th Nov, 2011, we believe that this 5% discount will hardly offer much of a cushion to the fertiliser companies. This is especially true of the complex manufacturers, who are expected to strongly feel the heat of a sharp surge in input costs.

The FAI reckons that the weakening of the Indian rupee by 10 paise increases the cost of DAP import by Rs.75 per tonne. Taking into consideration other costs like taxes, duties and port charges, and coupling this with the current value of US dollar at Rs.52.50, the increase in the cost of import of DAP is by Rs.2500 per tonne. This means that the price of DAP needs to be increased by Rs.125 per 50 kg bag. Similarly, increases will be witnessed in respect of other P&K fertilisers.

In conclusion, the fertiliser industry's decision to not hike retail prices further should be accepted as an austerity measure that looks at addressing the larger macro-economic concerns. Though this will have a negative impact on their financial performance in the coming quarters, it will surely manage to keep the country's stubborn and rising inflation well in control.