High fertiliser prices despite low costs are an unsolved mystery

Life and the universe have many mysteries that can’t be readily explained. However, complex as they are in the way they operate, there is an explanation for what happens to the major commodity markets. These are generally driven by old-fashioned supply and demand – with the added feature of what economists call ‘demand push and cost pull’ when it comes to prices. These phrases simply mean higher demand can drive prices up, while higher production costs will pull prices up. As with all things in economics, the opposite effect applies when demand or costs fall.

Against that background, one market mystery frustrating farmers now is: why do fertiliser prices remain so stubbornly high in the face of falling production costs?

For years we’ve been told fertiliser prices are linked to energy costs, and to the cost of natural gas in particular. But despite a massive drop in all energy prices over the past year or so, the cost of fertiliser hasn’t moved to reflect that change. If anything it’s gone the opposite way, despite lower production costs and the impact of the strength of sterling on import prices. There doesn’t seem to be a ready explanation for this, and farmers are suspicious as to whether things are being done to prevent the market properly reflecting production costs.

Whether or not it comes off, the Irish Farmers Association (IFA) deserves credit for pressing the European Commission to investigate the fertiliser market. This might seem a simple demand, but any decision to act would have to be based on hard facts. What the Commission would have to investigate is whether steps are being taken by the industry to prevent the market operating properly.

The case for an investigation was first raised by the farm commissioner, Phil Hogan, who said he couldn’t understand why fertiliser prices were not reflecting what’s happened with energy costs. But an investigation is not within his powers. If this is to happen, the EU’s competition commissioner, Margrethe Vestager, would have to take his concerns on board. A decision on whether or not to have an investigation is still some way off, with the Commission still at the early stages of collecting data. Even if an investigation is triggered, success is far from assured. This would not mean there was no cause for suspicion, but simply that it couldn’t be proved that actions were taken to prevent a free market operating.

According to the IFA, back in 1995 it took a tonne of grain to buy a tonne of calcium ammonia nitrate (CAN). Today, even despite the plunge in energy costs, it takes 2.6t of grain to buy that tonne of fertiliser. That statistic is skewed by the fact that grain prices have fallen, but the other side of the argument is that fertiliser alone has failed to follow other commodity prices downwards. Gas accounts for around 75% of the cost of producing ammonia. Gas prices have fallen by about a third over the past year, yet the price of fertiliser is still at best flat and possibly even rising slightly.

Compelling as those figures may be, they’re not enough to trigger an EU investigation. What Brussels needs is evidence that the market is not operating properly, because of deliberate attempts to prevent that happening. The number of fertiliser businesses has shrunk dramatically because of mergers over several years. Controversial as these were, they were all approved by competition regulators. This tight global sector creates the theoretical conditions for market manipulation, but there is a big difference between circumstantial and real evidence, and if the Commission is to act, real evidence will be needed.

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