Chapter 8
Fertilizer distribution, pricing and trade

Until 1996, all domestic fertilizer production capacity was publicly owned. With planned additions to capacity, the distribution of ownership can change significantly, although "private sector" participation seems to consist of mixed companies that are more than 25 percent owned by government entities. Fertilizer distribution, by contrast, became increasingly dominated by the private sector during the 1991 to 1998 period, despite some important disruptions. The Principal Bank for Development and Agricultural Credit (PBDAC) previously had a monopoly of the distribution of both domestic and imported fertilizers of all types, through a credit linked system of village level branches. In 1992, the subsidy on most fertilizers was removed. Private traders and cooperatives were allowed to purchase fertilizer directly from processing plants and to import nitrogenous and phosphatic fertilizer subject to a 30 percent import duty. By 1994, private traders handled about 70 percent of the market (nutrient basis) (Saad, 2002).

PBDAC, the agricultural cooperatives and the private traders continue to participate in the distribution of mineral fertilizer. The Government determines the share of each participant. There are about 27 large scale distributors who deal directly with fertilizer manufacturers within the limits of the quota fixed for the private sector by the Government. The quota for each distributor is determined according to his past transactions with the manufacturers. A trader who does not observe good storage practices or the selling price range is deleted from the list. The number of private traders is about 6 000. About half of them are licensed, while the other half are unlicensed, generally small retailers located in villages. Wholesalers generally receive their fertilizer from the distributors and sell to retailers. The Egyptian Association of Fertilizer Distributors and Traders has set the rules for its members to ensure appropriate margins and suitable pricing so that the private traders are not accused of improper practices, as was the case in 1995.

During the 1995 crisis, PBDAC was instructed to take over and handle all the domestic production. This quota had declined to 10 percent by 1998, with the private traders handling about 70 percent and the cooperatives 20 percent. In February 2002, the PBDAC quota was increased to 30 percent and then to 50 percent in March 2002. This change in policy was due to the increase in the prices of fertilizer sold by the private traders. It was intended to penalize private traders who export fertilizers (due to high international prices) without satisfying local requirements. Investigation of the retail prices of fertilizer at different locations indicated that the prices of the private sales were not much different from those of PBDAC and the cooperatives.

Price and trade distortions

The manufacturers are free to reduce prices but not increase them. This inability to increase domestic prices, thus retaining adequate supplies for the domestic market, was the direct cause of the 1995 crisis. It is government policy that pricing and foreign trade decisions should be separate, requiring administrative intervention rather than relying on market signals for coordination. Manufacturers who do not reduce their prices are forced to carry high inventories or to export their fertilizer, unless the Government intervenes or the producers reduce their output.

However, at the present time, because the price reductions are selective and not universal, reductions for non storing traders only reduce producers’ revenues since supplies on the market during the peak season are limited by the storage policies of PBDAC vis-à-vis private traders. The manufacturers can increase the proportion of their output sold at higher domestic prices during the season of peak demand for fertilizer only by increasing storage capacity.

Table 15 shows the prices of imported fertilizers in the period between 2000 and 2002.

Storage problems occur as long as the weekly production capacity of the plants cannot meet peak weekly demand. In the long run, investment in adequate storage capacity by distributors will require much lower ex-factory prices for fertilizer during the off season, in order to cover the costs of storage until the peak season. If these lower prices are made available to all distributors equally, none will be able to profit by selling immediately, at a high current price, quantities intended for storage. The only way to sell at the high price would be to hold the product until the peak season. Past efforts by the producers to persuade dealers to increase the amounts stored have been ineffective, largely because the discounts intended to cover storage costs have been made available to only a few traders, and have been too small to cover the full cost of storage.

TABLE 15
Prices of imported fertilizers

Source: MALR, 2003.

Private dealers are actively weighing up several investment projects that promise to increase competitiveness and quality in local fertilizer production and marketing. Two companies are considering bulk blending operations and one is expanding its extension and training services for dealers in the use of such fertilizers. Some are considering additional investment in storage.