Fertilizer sales to moderate in H2FY21, but still grow at a healthy rate in FY21: Ind-Ra

India Ratings and Research (Ind-Ra) opines that 2HFY21 is unlikely to see the momentum witnessed in fertiliser sales so far in 1HFY21, despite healthy water reservoir levels and better monsoon prospects, owing to the likelihood of increase in the COVID-19 spread to rural areas and higher systematic inventory. 

However, the fertiliser sale is likely to grow in the range of 10%-15% yoy for the full FY21, supported by the increase in 1HFY21 sales due to i) increased sowing and acreage in the ongoing kharif season, ii) better labour availability, iii) favourable monsoon prospects for the upcoming rabi season, iv) an increase in reservoir levels across key fertilizer consumption areas and v) better fund availability with farmers.

What has transpired till now?

India’s monthly fertilizer sales have spiked on a yoy basis since the COVID-19 led lockdown came in to effect at end-March 2020. The fertilizer volumes sold during April-July 2020 were 57% yoy higher at 22.2 million metric tonnes (mmt).

Furthermore, nutrient-wise urea was the major contributor to the absolute fertilizer sales increase during April-July 2020, owing to lower pricing and varied applicability compared to other non-urea fertilizers. However, from a growth perspective, nitrogen-phosphorous-potash-sulphur (NPKS) saw strong growth of 86%, followed by di-ammonium phosphate (DAP) and muriate of potash (MoP). This was in line with the industry push towards NPKS fertilisers which are better for improving soil nutrient balance and soil health than other forms of fertilisers.

What was the cause?

The increase in sales is attributable to the following factors:

Higher Availability of Funds with Farmers: The government of India (GoI) identified agriculture as the essential sector during the COVID-19 led lockdown beginning March 2020. Accordingly, the government spending on agriculture & rural development increased 126% yoy to INR1,247 billion during 1QFY21 (source: Ministry of Finance, GoI), by various means such as better minimum support prices (MSP) for key products harvested during 4QFY20-1QFY21, higher procurement of key rabi crops, timely payments of rabi crops as well as various fund transfer schemes. In the wheat marketing year 2020-2021, the government has so far procured 38.9 million tonnes of wheat through state governments and all procuring agencies led by Food Corporation of India.

Farmers utilised these funds to either purchase agri inputs such as fertilizers, seeds and pesticides or farm equipment such as tractors.

Increased Crop Acreage and Higher Area Sown during Ongoing Kharif season: The area sown during the kharif season till end-July 2020 increased by a hefty 14% yoy whereas the crop acreage is also 9.9% yoy higher.

The increase in sowing and acreage was governed by:

1. better labor availability triggered by the reverse migration of labor during April-May owing to the lockdown and

2. better monsoon rainfall during the pre-monsoon season in FY21 as well as during monsoon season June-July 2020 which prompted farmers to increase the sowing. Rainfall across the country during June-July 2020 was 6% yoy higher while it was 1% yoy higher than the long period average, partly due to the early arrival of monsoons in multiple regions

3. Panic Buying: At the beginning of lockdown in end-March 2020 and early-April 2020, retailers and farmers were gripped by the fear of shortage of fertilizers for the upcoming kharif season owing to the expected plant shut downs and supply chain disruptions and had somewhat resorted to panic buying of fertilizers. However, these concerns were only short-lived as the GoI had soon declared fertilizers as essential commodity. However, this factor led to higher even than usual fertilizers being bought in April.

4. Fear of Further Rupee Depreciation and Consequent Price Hikes: The rupee had depreciated sharply in relation to USD during March and early-April 2020. A higher rupee depreciation generally leads to an increase in the retail prices of imported non-urea fertilizers. The fear of further currency depreciation owing to the continued spread of coronavirus, leading to likely higher fertilizer prices, led to the higher stocking of agri-input products by farmers/retailers.

5. Spillover of March Sales to April: The lockdown was implemented in the last week of March 2020 due to which sales booking in the point-of-sale machine did not happen while the actual retail sales continued. This sale was recorded via the machine during April, leading to overall higher fertilizer sales.

What do we expect?

Ind-Ra expects the yoy higher fertilizer sales will continue during the balance of kharif season, albeit at a lower growth rate, supported by the higher sowing & crop acreage and better farmer liquidity aided by continued government efforts on increasing farmers’ income. This will also positively rub on to the fertilizer sales of upcoming rabi season which, in addition, would be supported by:

1. Forecast of a normal monsoon during the current southwest monsoon season as per the Indian Metrological Department, leading to better crops and continued demand of fertilizers

2. Higher level of reservoirs across the country at end-July 2020 than at end-July 2019. A higher reservoir storage level leads to better water availability for the upcoming Rabi season and thus higher sowing and cultivation as well as increased fertilizer demand

However, the fertilizer sales growth is likely to moderate in the rabi season despite above positives due to:

1. Increase on COVID-19 Spread: There are signs of increasing spread of coronavirus in rural areas which has so far been largely immune. If the virus were to spread in rural geographies the way it has spread in urban areas, it is likely to lead to labour as well as funds shortage with farmers in the upcoming rabi season and affect the fertilizer demand.

2. Higher systemic fertilizer stock with retailers/end-users as a result of the panic and fearful buying during the kharif season.

A lower-than-expected rainfall in the remaining monsoon season, or a higher-than-expected rainfall, leading to flood-like situation in key cropping areas, or a change in the fertilizer policy impacting end-product prices significantly will remain the key monitorables and could lead to a lower-than-expected fertilizer demand in the country.