KARACHI – The government’s decision to levy GST on key agricultural inputs is believed to push up FY12E farm costs by five to six percent. This should be partly covered by higher farm revenue, as output prices have risen substantially during FY11. It is also likely farmer liquidity will be squeezed in the interim, which poses risk to near-term demand, in particular for DAP. In the case of urea, note the price differential will remain in favor of domestic producers, with domestic urea still the cheapest option for farmers (32 percent cheaper than the landed cost of imported urea even after GST levy). Sales tax exemption has been withdrawn from fertiliser, pesticide and tractors and 17 percent GST will now be linked to retail prices.
We estimate that Pak DAP prices will rise 17 percent to Rs 3,744 per bag while urea prices should rise by a lesser 13.5 percent to Rs 1,158 per bag (as partial GST on input already reflects in current urea prices), said Farah Marwat at KASB Securities, adding that this suggests average per acre fertiliser cost (based on two bags of urea and one bag of DAP) will rise by 15.7 percent going into FY12. In the aftermath of sharp price hikes between December 2010 and February 2011, it is believed that GST-led price hike runs the risk of limiting future pricing flexibility for domestic producers. The total farm cost is estimated to should increase by 5.6 percent in post GST levy on fertiliser (15 percent of farm cost), tractors (13 percent of farm cost) and pesticides (three percent of farm cost). This number does not appear too alarming, especially as higher farm output prices can partly buffer impact.
Similarly, lower disposable farm income though, suggests near term demand risk. It is believes that the risk posed to DAP is higher than urea where the price differential is tilted in favor of urea and it seems likely that farmers take cost into account rather than nutrient composition when making consumer decisions, she added. It is notable that nitrogen in urea evaporates faster from soil and needs to be replenished more frequently while soil absorbs phosphate in DAP thus limiting the need for reapplication. That said, note at a company level, slightly lower demand may do little to hurt sales given Pakistan’s reliance on imported urea and DAP to supplement domestic demand. It is to be noted that in 2010, 50 percent of domestic DAP requirement (0.67 million tonnes) and 16 percent of urea requirement (0.99 million tonnes) were met through imports.
