The impact of the world fertiliser market on the fertiliser market in New Zealand

The New Zealand Herald reported today:

Fertiliser prices - a key input cost for farmers - are on their way up.

The international price for DAP - the product that combines ammonium and phosphate - have been bouncing off a low point as major world producers slowly respond to increased demand.

"It's been low for a while and at those low prices, manufacturers around the world - the big players - probably were not making a lot of money," a spokesman for fertiliser co-op Ravensdown said.

"So we are seeing a controlled, disciplined rise, because demand tends to go up in places like Brazil and India at this time of year," he said.

In the world market for fertiliser, there has been an increase in demand. This is shown in the diagram below. The market started at equilibrium with the price PW0 and the quantity of fertiliser traded was Q0. The increase in demand from D0 to D1 leads to a new equilibrium, with a higher price (PW1), and a greater quantity traded (Q1).

Now consider the impact on the New Zealand market. New Zealand is an importing country. That means that the world price of fertiliser is below the domestic equilibrium price, as shown in the diagram below. The original world price, PW0, is below the equilibrium price PA. At that price, domestic producers of fertiliser will only supply QS0 fertiliser, and domestic consumers of fertiliser (i.e. farmers) will demand QD0 fertiliser. The difference between QD0 and QS0 is the quantity of fertiliser imported (the red line M0). When the world price increases from PW0 to PW1, farmers face a higher import price and will demand less (QD1), while domestic producers of fertiliser find it profitable to produce more, and increase production to QS1. The quantity of fertiliser imported declines (to the blue line M1).

The Herald article notes the price changes in both the international and domestic markets:

Over the month or so, DAP prices have lifted to US$350 a tonne from $300/tonne.

Ravensdown has lifted its price to around NZ$780 a tonne from around $750/tonne in August.