In the search for effective and sustainable policies to promote fertilizer use, numerous studies (especially those focused on developing regions) identify several supply-side and demand-side constraints at both the regional and country level that limit the development of input markets, and consequently fertilizer uptake.

However, not much has been said about potential market power exertion at the global level in this highly concentrated industry. Given the considerable and increasing dependence of most developing regions on imported fertilizer, examining the relationship between market concentration and prices in international markets is crucial for a comprehensive understanding of fertilizer markets and for adequate policymaking.

High levels of concentration in the fertilizer industry typically result from high requirements for raw materials that are not available worldwide and from economies of scale in production; however, high levels of concentration in a market could also result in market power exertion:

 Market power exertion, for example, may allow producers to take full advantage of price spikes in raw materials (such as natural gas for the production of ammonia and urea) or price spikes in grains, to the detriment of farmers’ wealth.
 Farmers in developing regions could face high input prices resulting from market power exertion by major world producers.

Ignoring these factors could limit the effectiveness of policies designed to promote the development of input markets in developing regions.
IFPRI researchers have carried out a study of market structure and pricing behavior in the fertilizer industry at the global level, as an attempt to fill this gap in the literature and to promote further research on the topic. Two important patterns emerge from the study:

  1. An overview of the industry structure indicates that a small number of countries control most of the production capacity of the world’s main nitrogen, phosphate, and potash fertilizers. In particular, the top five countries control more than 50 percent of the world’s production capacity for all major products. There is also a high level of concentration at the country level among the major producing countries (except for China).

  2. A formal regression analysis, using annual data on urea prices and market concentration from a panel of countries, indicates that fertilizer prices are typically higher in more concentrated markets. In addition to the (observed) high levels of concentration in the industry, prices are even higher in further concentrated markets. In general, a 10 percentage point increase in the concentration level of a market results in a 10-16 percent increase in prices. It appears, then, that market power effects outweigh cost-efficiency effects of increased concentration in the industry.

The results of this study show the need for further research on the associated effects of higher market concentration on prices. In particular, future research should examine in more detail the degree of the impact of market power exertion in major fertilizer markets, using a more detailed dataset.

Watch IFPRI researcher Manuel Hernandez discuss this study.

Fertilizer Market Situation.pdf1.25 MB
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