Farmers will be interested to see that the largest fertiliser company in Europe continues to make healthy profits. Based on some 36m tonnes delivered globally, Yara made an operating income of about €10/t in 2017. A year earlier, the Norwegian-based producer was making €24/t. Over the last five years, margins have averaged just under 10%. Solid margins considering margins in the beef or dairy primary processing sector average between 2% and 3%. Fertiliser is the second-largest expenditure item on Irish farms, costing Irish farmers around €500m annually, and has doubled in price in the last 20 years.

Yara is a fully integrated fertiliser producer, with positions of scale along the complete fertiliser supply chain. Not only is it the world’s largest trader of ammonia, the key raw material used by other fertiliser producers, it is the largest supplier of nitrogen fertilisers itself in Western Europe.

This leading position gives the company sight of the global supply-demand balance of ammonia and therefore nitrogen fertilisers. Interestingly, the Norwegian state is the largest single shareholder in the company, which has a market value of almost €10bn.

No doubt Yara’s position gives it unique opportunities to leverage economies of scale, which give it a competitive edge.

A key part of its strategy has been to sell more directly to farmers, bypassing traditional importers, merchants and co-ops to capture a larger slice of the supply chain margins. In Ireland, it has carved out a significant share of this market in the last number of years. While in theory it should deliver better value to farmers by eliminating profit centres along the chain, in reality it may actually reduce competition (locally) while capturing more of the profit for the producer.

It is true that global nitrogen fertiliser producers are not as closely intertwined as phosphorus and potash producers. Some regions such as Europe and the US have seen significant restructuring and consolidation in the last decade. Despite a consolidation trend, the industry is still highly fragmented, with the top three producers only accounting for 15% of world capacity.

But this does not diminish the scale and power of Yara. It claims it provides fertilisers to some 20m farmers worldwide, which helps feed 300m people globally.

Big business

The fertiliser industry in Europe is big business. The average annual sector turnover is some €13bn. It employs 93,000 people. There are 120 production sites where more than €1bn has been invested in the last five years. The EU imports around 20% of its nitrogen fertiliser needs. Almost all EU member states have a fertiliser manufacturer. Ireland’s last fertiliser manufacturer, IFI, which was owned by the Government and ICI, closed in 2002.

Given that nitrogen prices have doubled over the past two decades, farmers are right to question how fertilisers are priced. No doubt, it is difficult to prove that price increases such as the €50/t to €60/t seen since last autumn are a result of the behaviour of an oligopoly as opposed to market trends.

It is clear the pendulum of pricing-power has swung firmly in favour of the fertiliser producers. The industry has moved away from a fixed margin over costs model. And while price setting may have been the dominant strategy in the past, the strategy now seems to have shifted to managing supply, whether through factory outages, or exporting fertiliser out of Europe, in order to strengthen and maintain prices internally while keeping a close eye on commodities such as grain as to what the market can bear.

Dysfunctional

Over the last two years, the IFA has highlighted the dysfunctionality of the EU’s fertiliser market. The European Commission has agreed to review the anti-dumping measures on ammonium nitrate coming into the EU which the IFA estimate add €30/t to the cost of fertiliser. The review is to be complete later this year.

The impact of an import duty is well-known. By pushing up the price of foreign commodities in competition with local ones, an import duty has a protective effect on local industry.

It leads to a concentration of production by increasing the market share of domestic firms, and it also helps uncompetitive firms remain in business. Simultaneously, import duties raise public revenues and increase local consumption prices.

Up to now, it would appear the EU is more interested in keeping the current market structure intact and protecting big business and employment in those member states that have fertiliser producers at the expense of its farmers and food sector companies. Many of these fertiliser producers occupy top spots as lobbyists in Europe, ahead of the big oil firms and the tobacco companies. Corporate and political control of essential plant nutrients may be one of the most severe competition issues facing the EU today.

Is it time the current EU trade policy is assessed for both its efficiency and redistributive impacts on the supply chain? It would seem like an area at which the European Commission and competition authorities should take a closer look.