Fertiliser's U-turn: Linking prices, monsoon, subsidies and reforms

Market watchers say the reason for the drop in prices was China's big re-entry into world fertiliser markets

A strange thing happened in the fertiliser markets some days ago: A tender to purchase 1.7 million tonnes of urea floated by state-run National Fertilisers Ltd fetched a price which was a mind-boggling 51 per cent lower than the last quoted tender price finalised in April.

 

The April tender, for the purchase of 2.5 million tonnes of urea and floated by Indian Potash Ltd, fetched a price of $935-959 per tonne.

 

But June’s $445-449 per tonne quoted for deliveries in the east and west coast was lower than even the pre-Iran war level of $510 per tonne for urea.

 

Clearly, prices have tumbled from the highs of April when global urea markets were threatening to top $1,000 per tonne and reach levels last seen during the Russia-Ukraine war of 2022.

 

So what brought about this sudden decline? After all, the factors that had pushed up world fertiliser prices – the closure of the Strait of Hormuz and disruption in liquefied natural gas supplies – remained in place.

 

Enter the dragon

 

Some market players and watchers said the main reason for the sudden drop was the re-entry of China into world fertiliser markets in a big way supported by other factors.

 

China, which had been gradually tightening its export controls, decided to ease some of the curbs probably because of surplus stocks and allow more export quotas around late May, a move that directly benefitted India.

 

Some reports said China exported around 4.9 mt of urea to the world in 2025, down from 5.2-5.5 mt that it usually shipped.

 

The impact on India was particularly positive as the country  is the world's second largest consumer of fertilisers. Industry watchers said that of the 3.17 mt of urea offered to be supplied in the June NFL tender by companies in the east coast of India (states such as Odisha, Andhra Pradesh and Tamil Nadu), the bulk will have to be sourced from China.

 

This is because of geographical proximity and ease of transportation.

 

Another reason, government officials believe, is that India has managed to build a sufficient buffer of urea, di-ammonium phosphate (DAP) and other major fertilisers through aggressive purchases ahead of the kharif season. This might have started weighing on global markets.

 

“This could also be getting reflected in prices now because if India does not require fertilisers in huge quantities any more then demand is bound to cool down,” a senior official said.

 

As per the government’s assessment, it has built up fertiliser inventories equivalent to more than 51 per cent of its full kharif requirement of 38.39 million tonnes. Usually the pre-season opening fertiliser stocks are not more than 33 per cent of requirement.

 

A third and equally important reason which some experts believe might have helped influence global fertiliser markets is the anticipated impact of El Nino on sowing: A long absence of the southwest monsoon in June and early July would mean that there won’t be a strong early demand for urea for kharif season crops.

 

Urea is required for initial application for paddy and maize, the two big food grains grown in the kharif season.

 

In 2025, when the rains came early, there was a sudden and sharp spike in urea demand starting around late June as farmers scrambled to plant more paddy and maize to take advantage of good soil moisture.

 

At the time, officials believed bunched-up demand led to a shortage of urea in several districts.

 

But this is unlikely in 2026, as the monsoon is already delayed in large tracts of central, eastern and southern India. Till June 21, rains are more than 41 per cent deficient across India. 

 

The fiscal math

 

There’s one more dynamic to be considered. Between March and June, India’s fertiliser sector has done a sharp U-turn which could also mean lower government spending on fertiliser subsidies.

 

From projections of fertiliser subsidies reaching a high of over Rs 3.40 trillion (some informal estimates had this in excess of Rs 4 trillion), experts have now significantly scaled down their subsidy projections for FY27 by almost Rs 1 trillion to around Rs 2.4 trillion or even lower.

 

The government had pegged the fertiliser subsidy requirement for FY27 in the Union Budget presented in early February at around Rs 1.71 trillion.

 

This means that within a span of just four months, the subsidy requirement projections for FY27 have moved from a high of almost double the BE to around 41 per cent of the BE and might be even lower if the market sentiments persist till August 2026.

 

While this might be great news in terms of freedom to manage its fiscal space, the government should not be lulled into a sense of complacency and take its foot off the reform pedal.

 

Import dependency

 

As per a recent paper by the Indian Council for Research on International Economic Relations (ICRIER), titled ‘De-risking Fertiliser Supplies for Indiа Amid Rising Geopolitical Risks’, India’s fertiliser sector badly needs reforms. This is because more than 68.6 per cent of the value chain – 44.5 per cent of feedstocks that go into making fertilisers and 24.1 per cent of finished products – is imported, and this is getting frequently exposed to geo-political tensions.

 

Only about 5.8 per cent comes from domestic feed stocks, and domestic value addition (processing and manufacturing) accounts for just 25.6 per cent of fertilisers.

 

When all factors are combined, India’s effective self-sufficiency in this segment is only 31.4 per cent, the ICRIER paper said.

 

When such a large part of the value chain is exposed to global uncertainties, any slight disruption in supplies anywhere could have an immediate cascading impact on domestic pricing and subsidy calculations. (According to a Reuters report around 78 per cent of China's urea output comes from gasified coal).

 

To tide over this recurring problem, the paper written by Ritika Juneja, Sachchida Nand, Emil Thomas Johny and Ashok Gulati advocated long-overdue policy reforms such as directly transferring fertiliser subsidies to farmers and gradual price deregulation of macro nutrients. These will not only promote balanced fertiliser-use but also ease fiscal pressures and plug leakages which are estimated to be around 20 per cent of total sales.

 

And if these are found to be too bold, the paper advocates short-term alternatives such as putting quantitative restrictions on fertiliser sales based on farm size and cropping patterns.

 

To be fair to the government, several of the suggestions made by the ICRIER paper, particularly those related to capping the sale of fertilisers using digital platforms such as agristack, have already been put in place in some districts.

 

The need is to quickly scale these up nationally in consultation with states.

 

In addition, at some point the government will need to lift the cap on urea and DAP, the two most widely used fertilisers in India, experts said.

 

The government could refer to its own Economic Survey tabled in Parliament earlier this year that advocated a modest increase in the retail price of urea while transferring an equivalent amount directly to farmers’ bank accounts on a per-acre basis to curb overuse.