Lack of competition keeps fertilizer prices high
African farmers would get higher yields if they used the right amount of fertilizer. Researchers know it, extension agents know it, and many farmers themselves know it. Yet, year after year, African farmers produce crops using an average of 10 times less fertilizer than farmers in Latin America and 20 times less than farmers in Asia. So why aren’t African farmers using more fertilizer?
This question has many answers—among them infrastructure and distribution problems and misinformation—that are usually addressed at the regional or country level. But research by IFPRI Research Fellow Manuel Hernandez and Markets, Trade, and Institutions Division Director Maximo Torero highlights global factors affecting fertilizer use—including the high price of fertilizer. According to Hernandez and Torero, “One of the main structural reasons the price is too high is the market has too few players at the global level.” In fact, the top five fertilizer-producing countries control more than half of the world’s supply of the most commonly used fertilizers.
Competition Is Key
Hernandez and Torero hypothesized that this market concentration has allowed prices to remain artificially high, even after the prices of oil and other commodities have fallen and the food price crises of 2007–2008 and 2010 have died down. They ran simulations to test whether increasing competition in the fertilizer market would reduce prices. Their calculations showed that when competition increases by 10 percent, fertilizer prices fall by 8 percent in a conservative scenario and by 11 percent in a more optimistic scenario.
Though Hernandez and Torero recommend forming a Global Anti-Trust Unit, regulation at a global level is difficult to enforce. An increase in the number of fertilizer plants is more likely to bring change to the industry. “I think it’s really the only option, and there is a need to resolve the market failures and constraints that keep this from happening,” Torero says. Their study outlines a proposal to build nitrogen fertilizer plants in regions such as Africa and South Asia. Although these regions need affordable fertilizer and have the natural resources to produce it, private companies have little incentive to invest. Public-private partnerships and foreign investment will therefore be essential in meeting the upfront costs of building the plants.
High Demand, High Returns
Hernandez and Torero’s proposal would increase global competition in the fertilizer industry and also bring the production of fertilizer closer to the farmers who use it, cutting transportation costs. Their simulations show that making fertilizer more affordable could give a significant bump to fertilizer use, leading to higher crop yields and bigger incomes for rural farmers. “Demand is huge,” Torero says, “and the return could be huge.”
For more information on this topic:
An IFPRI discussion paper on fertilizer markets
- Fertilizer Market Situation: Market Structure, Consumption and Trade Patterns, and Pricing Behavior, Manuel A. Hernandez and Maximo Torero, IFPRI Discussion Paper 01058, 2011.
2012 G20 Agricultural Group Final Report, which called for increasing competition in fertilizer markets
- 2012 G20 Summit page at IFPRI’s Food Security Portal