April 2008
Egypt's fertilizer sector is bracing for serious changes - and there is a lot of grumbling. On March 2, the Ministry of Trade & Industry (MTI) announced a 90-percent increase in the price of azotic (nitrogen-based) fertilizer, bringing the official domestic market price to LE 1,500 per ton. The pricing revision narrows the gap between local and international prices, a measure aimed at snuffing out the fertilizer black market and ending acute domestic supply shortages, according to Minister of Trade and Industry Rachid Mohammed Rachid.
The problem, he told the local press, is not an insufficiency of production. Egyptian factories produced 15 million tons of azotic fertilizer last year, more than enough to cover the 10 million tons required for local agriculture. The problem is a disorganized distribution system for subsidized fertilizer, an imbalance between local and international prices, and the presence of bidders in the market who exploit circumstances.
Under Egypt's antiquated fertilizer subsidy system, the state-owned Bank for Development & Agricultural Credit (BDAC) provides a quota of subsidized fertilizer to farmland owners. However, the deeply discounted fertilizer is a tempting prize for corrupt producers, distributors and landlords, who instead of selling their subsidized fertilizer at the official rate, divert it to the black market where they can make enormous profit by selling it to local farmers at prices closer to the international market price of LE 2,100 per ton. "Sometimes, development banks and landlords smuggle subsidized fertilizers to the black market, which has resulted in several crises between farmers and banks," says Tarek El-Shennawy, a board member of the Export Council for Fertilizers & Chemical Industries.
Last month's price revision, the first in 11 years, aims to improve distribution to farmers by reducing the profitability of black market operations. Subsidized azotic fertilizer, previously LE 35-38 per 50-kilo bag, now sells for LE 70-75 per bag at BDAC branches, though still short of the LE 120 a bag it fetches on the black market. "[It is hoped that] raising the price will result in increased availability of fertilizer in the market, since the difference between the black market price and that of BDAC branches will give less incentive for [individuals] to smuggle fertilizer to sell on the black market or for export."
Fertilizer subsidies cost the government LE 1.3 billion annually. Mohammed Abdallah, chairman of Abu Kir Fertilizers, the largest state fertilizer producer, estimates that almost 50 percent of the subsidized product is misdirected, with the discounts going to traders instead of farmers. The revenue generated by raising fertilizer prices will not only reduce the subsidy bill, it will be used to import fertilizer to offset any local supply shortfall, he says. "This increase will save the government about LE 800 per ton, 20 percent of which will go to fertilizer factories, while the rest will go towards covering import costs from international markets."
Farmers, however, have opposed the decision to increase fertilizer prices, pointing out that fertilizers account for up to half the costs in agriculture. Eventually, the added costs will be passed on to the consumer, a farmer in Assiut predicts. "The price increase might not be reflected as much on the price of agricultural products this season because most of the planted crops do not require much fertilizer, such as wheat. But when we start planting the crops for next season - the winter products, such as corn - there will be a noticeable impact on the prices," he explains.
Members of parliament have demanded that the government clarify its decision to raise fertilizer prices. According to Abdel Rehim Al-Ghool, head of the Agriculture & Irrigation Committee of the People's Assembly, 120 MPs submitted interpellation requests about the increase in fertilizer prices. "The members are calling for the increase to range from LE 40 to LE 50 instead of LE 75 [per bag] in order to be affordable for farmers," he says.
That seems unlikely given the government's plan to phase out energy subsidies to fertilizer companies within three years, a move that will necessitate price increases. "The government increased natural gas prices for fertilizer factories by 40 percent, which affects the cost of the final product since natural gas represents 55 percent of the total production cost of azotic fertilizers," says Ali Maher, president of state-owned El-Delta Fertilizer Company. "When natural gas prices were increased, they were not met by a corresponding increase in the price of fertilizer sold to farmers. The price increases added to the losses the government and public sector fertilizer companies incurs as a result of subsidizing fertilizers."
Local fertilizer producers have long benefited from subsidized energy designed to protect local industries from international competition. Cheap energy has allowed these factories to produce fertilizer at a very low cost, which they then turn around and sell at international prices, Rachid explained.
In August 2007, the government announced it would increase the natural gas price for fertilizer factories by 40 percent to reach $1.76 per MBtu. The price will climb incrementally to reach $2.65 per MBtu in FY 2009-10, which is the amount the government pays international oil companies for the natural gas produced in Egypt.
The problem, as El-Shennawy sees it, is that private producers are licensed to export and the government has no way of forcing them to sell their product at the official price on the local market. "The Egyptian government is pressuring to raise the price [of gas] to factories operating in free zones, while these companies refuse because the Egyptian government has contracts with them," he says.
Assem Doss, chairman of Yara Agri Trade Misr, a dealer in agricultural products, sees a simpler solution. He says the government should permit the private sector to participate in the import and distribution of non-subsidized fertilizer at market prices. "If the government allows the private sector to import fertilizers, this will help alleviate the problem of fertilizer availability in the market and reduce the burden on the state," he argues.
The shortage of fertilizer is a much graver concern for farmers than the increase in prices, he says. "Experience has proven that some farmers are ready to buy fertilizers at the international price to cover their needs." By allowing the private sector to import fertilizer, the government could effectively set a price ceiling that is comparable to the international rate.
Egypt's fertilizer sector is bracing for serious changes - and there is a lot of grumbling. On March 2, the Ministry of Trade & Industry (MTI) announced a 90-percent increase in the price of azotic (nitrogen-based) fertilizer, bringing the official domestic market price to LE 1,500 per ton. The pricing revision narrows the gap between local and international prices, a measure aimed at snuffing out the fertilizer black market and ending acute domestic supply shortages, according to Minister of Trade and Industry Rachid Mohammed Rachid.
The problem, he told the local press, is not an insufficiency of production. Egyptian factories produced 15 million tons of azotic fertilizer last year, more than enough to cover the 10 million tons required for local agriculture. The problem is a disorganized distribution system for subsidized fertilizer, an imbalance between local and international prices, and the presence of bidders in the market who exploit circumstances.
Under Egypt's antiquated fertilizer subsidy system, the state-owned Bank for Development & Agricultural Credit (BDAC) provides a quota of subsidized fertilizer to farmland owners. However, the deeply discounted fertilizer is a tempting prize for corrupt producers, distributors and landlords, who instead of selling their subsidized fertilizer at the official rate, divert it to the black market where they can make enormous profit by selling it to local farmers at prices closer to the international market price of LE 2,100 per ton. "Sometimes, development banks and landlords smuggle subsidized fertilizers to the black market, which has resulted in several crises between farmers and banks," says Tarek El-Shennawy, a board member of the Export Council for Fertilizers & Chemical Industries.
Last month's price revision, the first in 11 years, aims to improve distribution to farmers by reducing the profitability of black market operations. Subsidized azotic fertilizer, previously LE 35-38 per 50-kilo bag, now sells for LE 70-75 per bag at BDAC branches, though still short of the LE 120 a bag it fetches on the black market. "[It is hoped that] raising the price will result in increased availability of fertilizer in the market, since the difference between the black market price and that of BDAC branches will give less incentive for [individuals] to smuggle fertilizer to sell on the black market or for export."
Fertilizer subsidies cost the government LE 1.3 billion annually. Mohammed Abdallah, chairman of Abu Kir Fertilizers, the largest state fertilizer producer, estimates that almost 50 percent of the subsidized product is misdirected, with the discounts going to traders instead of farmers. The revenue generated by raising fertilizer prices will not only reduce the subsidy bill, it will be used to import fertilizer to offset any local supply shortfall, he says. "This increase will save the government about LE 800 per ton, 20 percent of which will go to fertilizer factories, while the rest will go towards covering import costs from international markets."
Farmers, however, have opposed the decision to increase fertilizer prices, pointing out that fertilizers account for up to half the costs in agriculture. Eventually, the added costs will be passed on to the consumer, a farmer in Assiut predicts. "The price increase might not be reflected as much on the price of agricultural products this season because most of the planted crops do not require much fertilizer, such as wheat. But when we start planting the crops for next season - the winter products, such as corn - there will be a noticeable impact on the prices," he explains.
Members of parliament have demanded that the government clarify its decision to raise fertilizer prices. According to Abdel Rehim Al-Ghool, head of the Agriculture & Irrigation Committee of the People's Assembly, 120 MPs submitted interpellation requests about the increase in fertilizer prices. "The members are calling for the increase to range from LE 40 to LE 50 instead of LE 75 [per bag] in order to be affordable for farmers," he says.
That seems unlikely given the government's plan to phase out energy subsidies to fertilizer companies within three years, a move that will necessitate price increases. "The government increased natural gas prices for fertilizer factories by 40 percent, which affects the cost of the final product since natural gas represents 55 percent of the total production cost of azotic fertilizers," says Ali Maher, president of state-owned El-Delta Fertilizer Company. "When natural gas prices were increased, they were not met by a corresponding increase in the price of fertilizer sold to farmers. The price increases added to the losses the government and public sector fertilizer companies incurs as a result of subsidizing fertilizers."
Local fertilizer producers have long benefited from subsidized energy designed to protect local industries from international competition. Cheap energy has allowed these factories to produce fertilizer at a very low cost, which they then turn around and sell at international prices, Rachid explained.
In August 2007, the government announced it would increase the natural gas price for fertilizer factories by 40 percent to reach $1.76 per MBtu. The price will climb incrementally to reach $2.65 per MBtu in FY 2009-10, which is the amount the government pays international oil companies for the natural gas produced in Egypt.
The problem, as El-Shennawy sees it, is that private producers are licensed to export and the government has no way of forcing them to sell their product at the official price on the local market. "The Egyptian government is pressuring to raise the price [of gas] to factories operating in free zones, while these companies refuse because the Egyptian government has contracts with them," he says.
Assem Doss, chairman of Yara Agri Trade Misr, a dealer in agricultural products, sees a simpler solution. He says the government should permit the private sector to participate in the import and distribution of non-subsidized fertilizer at market prices. "If the government allows the private sector to import fertilizers, this will help alleviate the problem of fertilizer availability in the market and reduce the burden on the state," he argues.
The shortage of fertilizer is a much graver concern for farmers than the increase in prices, he says. "Experience has proven that some farmers are ready to buy fertilizers at the international price to cover their needs." By allowing the private sector to import fertilizer, the government could effectively set a price ceiling that is comparable to the international rate.
By Magdy Samaan
© Business Monthly 2008
