AURORA: How has the fertiliser industry in Pakistan evolved?
RUHAIL MOHAMMED: In order to harvest crops, the soil requires three basic nutrients; nitrogen, phosphate and potash. Traditionally, the soil used to replenish naturally. As populations grew (over the last few centuries) and cropping patterns changed, it became necessary to replenish the soil with artificial nutrients, hence the need for chemical fertilisers. Nitrogen is the largest of the nutrients required and about 200 million tons of nitrogen is produced worldwide. The need for chemical fertilisers arose in Pakistan in the mid-sixties and it was then that Exxon (as Engro was known then) set up a plant in Daharki. At the time, chemical fertilisation practically did not exist; Exxon introduced the concept to the farmers and from then on, usage grew from zero to six million tons today.
A: Six million tons covers the entire industry in Pakistan?
RM: Yes and Engro accounts for about one-third. The main ingredient needed to replenish nitrogen is urea, which is manufactured from natural gas, and until the eighties, Pakistan had an abundance of natural gas – shortages only began to occur 10 to 15 years ago. The other two nutrients are phosphate and potassium (potash) and their requirements are much less; in Pakistan, the phosphate requirement is two million tons and for potash it is about 50,000 to a 100,000 tons. Because Pakistan does not have sufficient raw material to produce phosphate and potash (there are small quantities in the northern areas but not enough to mine commercially), we import them.
A: Is this a heavily import-dependent industry?
RM: For phosphate and potash, yes. As for nitrogen, because the government values fertilisers as a means to ensure food security, they allocate gas to the fertiliser industry on a priority basis to enable us to produce urea. After domestic consumption, the fertiliser industry is the number two priority for the government.
A: How many players are there in the industry?
RM: Three; the Fauji Group, which between Fauji Fertilizer Company and Fauji Fertilizer Bin Qasim Limited, account for about 50% of the market share and control about three million tons of urea. Engro account for about 1.8 to 1.9 million tons (about 30%). The Fatima Group, which own Fatima Fertilizer Company Limited, account for 10% and the remaining 10% is made up of other types of nutrients.
A: Who is your target market; the government or the farmer?
RM: With the exception of specialty fertilisers, most fertilisers are sold via dealer networks. We have about 2,000 dealers all over Pakistan and Fauji, about 3,000. In Pakistan, the total area under cultivation is about 50 million acres and there are approximately eight million farm owners. I am not talking about farmers, because each farm owner may have a family member working on the farm. In terms of ownership, the government has three broad categories; zero to 12, 12 to 50 and over 50 acres – and here, broadly speaking, the 80/20 rule applies; so about 6,000 to 7,000 dealers cater to about eight million farms. We supply to the dealers and they provide the inputs and the credit – the latter is a big component of the supply chain cycle.
The government often comes up with various schemes, whereby they tell the industry they will give us X amount if we reduce our retail price by Y amount. The fact that the government have not paid us for many years is a separate topic. With urea, because the government control the price of gas, they dictate, or at the very least semi-control, the end price. Today the price of urea is about Rs 1,550 a bag, while imported urea costs over Rs 2,000 (almost 20 to 25% higher); this is because the government supplies the gas at a lower price.
A: The dealers work with multiple companies?
RM: The majority provide multiple inputs from multiple brands. There are different types of dealers. There are usually two crops in a year and in terms of the four principal ones, rice and cotton are summer crops, wheat is a winter crop and sugarcane requires a full year cycle; depending on the crop, the fertiliser requirements vary.
A: Do you interact only with the dealers?
RM: The sales transaction is with dealers, although we deal with the farmers as well, but they would be the larger ones who are able to make payments directly to us and they account for only about one percent of our turnover. However, our communication is done directly with the farmer. We undertake farmer activities in terms of experimenting with particular fertilisers, hold farmer meetings and listen to their issues or hold technical seminars; all these are done directly with the farmer. Of course this is selective; maybe with 100 farmers from a particular district. So, yes we do interact with farmers but the sales transaction is with the dealer only.
A: How do you identify your dealers and motivate them to sell more of your product rather than a competitor’s?
RM: We have an evaluation process, whereby a dealer must understand the business, have a certain turnover, be based in the right location and meet our minimum target. As we hardly give credit, we don’t need to evaluate their credit rating. In terms of incentives, Engro and Fauji would give a three percent discount on the prevailing retail price; this constitutes the margin and the motivation. A lot of the demand for our products is driven by the farmers who decide the product they want; the margins are mainly to compensate the dealer for stocking the product along with making a small profit. Sometimes dealers make money through price increases; they buy at a certain price and when the retail price goes up, they make money on their stocks. The main motivation is the pull of the brand. However, we have other product lines where we need to motivate them; these are specialty fertilisers (mainly combinations in micronutrients), which are sold in small quantities. Here, dealers have to do some work in terms of explaining the benefits of the products. So here, the margins are a little higher.
A: Do farmers have preference when buying a particular product? Are there any differences between the products?
RM: There is no difference in the urea, which is the core product. We are very strong in Sindh; we have been there for a long time and farmers have developed a preference for our product, so we sell at a one percent premium compared to Fauji. In Punjab, where we have been relatively weaker in the past, Fauji products probably sell at a one percent premium over ours. Farmers know there is hardly any difference between the products: It is simply that they have been using it for a long time; they are happy with it, so why bother changing. Fatima recently launched their brand Sarsabz and they trade at about a three to four percent discount because it is a new product and they have to penetrate the market.
A: Regionally, what is the demand breakdown?
RM: About 60 to 65% comes from Punjab and 30% from Sindh; Baluchistan accounts for five to 10% and Khyber Pakhtunkhwa, two to five percent. The reason why we were slightly weak in Punjab was because initially, we had only one urea plant, producing about 900,000 tons. We concentrated on Sindh because of the way the pricing is structured; the government has decreed that we must sell urea at the same price across the country, as opposed to a cost-plus-freight model. So the idea was to minimise freight charges by concentrating on Sindh. In 2010, we established another plant in Daharki and doubled our capacity which is why we have expanded to Punjab.
Engro has initiated a CSR project, whereby we have gone to a particular district and worked with farmers and yields have increased by 10 to 25%, depending on the crop and the area. We are trying to turn this into a business model and this means breaking away from the shackles of the middleman; the middlemen make a lot of money, especially on the financing side. We have started providing farmers with quality seeds, fertilisers and with some support from the banks, we are taking part of the credit risk.
A: In terms of business, what is the current breakdown?
RM: Fifty to 60% in Sindh and the rest in Punjab.
A: Is there room for more players to enter this market?
RM: The constraint as far as urea is concerned is that although the current capacity is almost seven million tons, the demand is not more than six million. As far as other fertilisers are concerned, the raw material has to be imported; they can import the semi raw material and then do a one-stage value-addition here by finishing the product, but it won’t be end-to-end manufacturing like we do for urea. So, in terms of manufacturing, the answer is that there is no further scope for manufacturing fertilisers.
A: Apart from insisting on a uniform cross-country price, do government policies have any other impact on pricing?
RM: Theoretically, on paper, fertiliser pricing is deregulated. The government do not interfere with the pricing of imported fertiliser; they know that if they don’t allow a margin, imports will stop and the farmer will suffer.
So from time to time, the government provides a subsidy on imported products, sometimes at national and sometimes at provincial levels. The government often comes up with various schemes, whereby they tell the industry they will give us X amount if we reduce our retail price by Y amount. The fact that the government have not paid us for many years is a separate topic. With urea, because the government control the price of gas, they dictate, or at the very least semi-control, the end price. Today the price of urea is about Rs 1,550 a bag, while imported urea costs over Rs 2,000 (almost 20 to 25% higher); this is because the government supplies the gas at a lower price. So from time to time, they ask us to pass on some of the benefits of cheaper gas to the farmer, which we do. If I take the average over the last 10 years, in nine of those 10, we have passed on the benefits and more to the farmer. So it is semi-controlled; if we increase the price too much, the government remind us that they are supplying the gas at a cheaper rate.
A: Seen on a broader perspective, what are the challenges facing the agriculture sector?
RM: One is the fact that overall, the yields are very low and the cost of inputs is very high; as a result, our farmer economics are not very good.
A: Could you define farmer economics?
RM: Farmer economics is basically the cost of inputs and how much the farmer gets from his crop yield. In India, and in many Asian countries, the cost of inputs is heavily subsidised. For example, India has a $10 billion fertiliser subsidy programme, so the cost of a bag of urea is almost a third of what it costs in Pakistan. In Pakistan, except for urea, which is partially subsidised, the cost of inputs is high. Phosphate, potash, seeds, pesticides and diesel are all available at market prices, whereas in other countries, these are subsidised. Another challenge is that our farmer practices are archaic. For example, when it comes to wheat (our biggest crop), the best a progressive farmer has achieved is about 60 maunds per acre, and in areas where the soil conditions are not so favourable, it goes down to 40 maunds per acre. There is a lot of scope in improving yields; I would say the potential is to improve by almost 50%, within a five to eight year period. Another challenge is the support price mechanism. For wheat, the support price is Rs 1,300, almost 30 to 40% higher than international prices and the same goes for sugarcane. Then, to protect local farmers, the government impose import duties ranging from 25 to 40%, which has a reverse effect, because we end up growing more wheat and sugarcane than we require. This leads to surpluses, the mills don’t pay the farmers and the government has to intervene with subsidies to encourage exports, which is inefficient, if only in terms of water management. We import almost $3 billion worth of food stuff, such as sunflower, palm oil, canola, pulses and fodder. Yet, we can grow a lot of these, but we don’t because there is no ready market. Farmers prefer wheat, cotton and rice because they are cash commodities.
Dams are not necessarily a solution; they may have been 20 years ago when there used to be frequent flooding and dams could be used to store water. Such surplus water is no longer present for a dam to be effective. If Mangla and Tarbela cannot be filled to capacity, how will Kalabagh and Diamer Bhasha be? Experts are emphasising the need to solve the supply and usage issues. First, we need to solve the supply issue. A solution is more prudent usage and stopping losses in the system.
A: Does the responsibility of solving these issues lie with the government?
RM: Partly with the government, partly with the farmer and partly with input providers, such as ourselves. The government has to set the policy. You don’t need artificially high support prices, whereby everybody goes into sugarcane and ignores the other crops. Farmers need to understand that they cannot have a free ride and that they need to improve their yield. They cannot rely on the government to bail them out every time they have a bad crop. Input providers need to educate farmers and train them to achieve better yields. Engro has initiated a CSR project, whereby we have gone to a particular district and worked with farmers and yields have increased by 10 to 25%, depending on the crop and the area. We are trying to turn this into a business model and this means breaking away from the shackles of the middleman; the middlemen make a lot of money, especially on the financing side. We have started providing farmers with quality seeds, fertilisers and with some support from the banks, we are taking part of the credit risk. We don’t give cash; we give them the inputs and they provide the labour. They sell the output and we take a small commission on this.
A: Is this a sustainable proposition?
RM: The idea is to create an alternative business model. The problem is that no one is experimenting with new business models. The first step is always the most difficult, but once a model is proved then other companies will come in. We also need to experiment with new crops. If a farmer owns 20 acres, why not plant wheat on 18 and experiment on two acres with canola or sunflower and see what the results are? There are different business models. The idea is to get rid of the exploitative practices and improve yields; start farming alternative crops, which we are importing and stop producing water intensive crops.
A: To what extent will companies like Engro be affected by the impending water crisis and are you taking steps to address this? RM: We will be affected in terms of lower demand for fertiliser, but the degree to which we will be affected will be one-tenth of how much it will affect the farmer and one hundredth of how much it will affect the government. We can play a small role but the problem needs a comprehensive solution plan from the government. Dams are not necessarily a solution; they may have been 20 years ago when there used to be frequent flooding and dams could be used to store water. Such surplus water is no longer present for a dam to be effective. If Mangla and Tarbela cannot be filled to capacity, how will Kalabagh and Diamer Bhasha be? Experts are emphasising the need to solve the supply and usage issues. First, we need to solve the supply issue. A solution is more prudent usage and stopping losses in the system. There will have to be a water charge so that people realise there is a cost to it. The government needs to act, price the water and solve the upstream problem. Companies such as ours can contribute in terms of farm water management but we can’t line canals, build dams or price the water.
Ruhail Mohammed was in conversation with Mariam Ali Baig. For feedback, email email@example.com