Off-Season Reserves Promotes a Rapid and Short Rise in Urea Price      

In early March 2008 the price of urea in China increased with the seldom seen high speed in history. Both the ex-factory price and the market wholesale price in most regions increased by RMB300-400 per ton and even RMB500 per ton in some region on the preceding week. The bulk trading price in Hebei, Shandong and Shanxi provinces was around RMB2 000 per ton. From the second week of March, however, the price of urea in the north of China dropped drastically. The nationwide price also had to go down. By the end of March, the ex-factory price of urea in Shandong, Shanxi, Henan and Hebei provinces was restored to RMB1 780-1 800 per ton.
   There are many factors for drastic ups and downs of the urea price in March. The major factor is the impact from the existing fertilizer reserve system during the off-season.  

Examination to fertilizer off-season reserves pushes urea price rise    

Fertilizer off-season reserves in China today is running in a commercial mode, namely enterprise reserve (product ownership belonging to enterprises), bank loan (banks providing fund support), government paying interest (the central government paying interest for the fund), market functioning (incoming and outgoing of goods determined by enterprises, profits retained by enterprises, losses borne by enterprises, market risks shouldered by enterprises), accounting management (enterprises establishing accounts of incoming and outgoing goods and ensuring trueness and accuracy of data) and open bidding (assigning enterprises to make off-season reserves through open bidding). The commercial mode used in fertilizer off-season reserves intends to increase the market supply amount of chemical fertilizers in busy season through selling fertilizers that were reserved during off-season to improve the supply/demand relationship, reduce the selling price of fertilizers in busy season and protect the interests of farmers.
   As it is a commercial mode, enterprises involved in maintaining off-season reserves naturally take profit as the target. They will not reduce aggressively the selling price of chemical fertilizers to protect the interests of farmers, especially when there is a tight supply. Or even fertilizers concentrated in a few large producers or dealers are in ample supply, they will likely hold goods in their hands and create a shortage of supply on purpose. In such cases off-season reserves would help promoting the price rise of chemical fertilizers.
   The drastic rise of the urea price from the end of February to the beginning of March 2009 was just triggered by chemical fertilizer off-season reserves. The price of urea had been straight down from July 2008 and enterprises involved in maintaining off-season reserves basically suffered loss. The enthusiasm of dealers in increasing off-season reserves was therefore dampened and therefore the amount of reserves in the urea market was not enough. March was the last month for the commercial off-season reserves of chemical fertilizers, defined by the government. The National Development and Reform Commission and the Ministry of Finance had to conduct examination to bid winners to see whether they had fulfilled the amount of off-season reserves defined in the bid. If not, the interest would not be offered to them. Bid winners with insufficient off-season reserves had to purchase fertilizers from other producers urgently at the end for February to reach the bid amount in reserve, while the inventory in other common dealers was also small. These factors combined to lead to a shortage of supply.
   When the March examination was over, the price of urea dropped quickly along with the massive sales of goods.

The governmental fertilizer off-season reserves system is imperative    

In the commercial mode for chemical fertilizer off-season reserves, interest subsidy offered by the government to enterprises involved in maintaining off-season reserves are small, and expenses for storage have to be borne by enterprises themselves. China has also cancelled governmental control over prices of chemical fertilizers since January 25th, 2009. (CCR2009, No. 4) Prices of chemical fertilizers both produced in China and imported from abroad (excluding potash fertilizers) will be determined by the market. Since prices of chemical fertilizer become market-geared, they would easily have fluctuations and commercial off-season reserves can not effectively check price ups and downs of chemical fertilizers. Reserves holding in dealers become a risk. As a result most dealers dare not maintain off-season reserves.
   Establishing a system of state-operated chemical fertilizer off-season reserves can effectively remove this defect. Unlike commercial off-season reserves, state operated off-season reserves have no profits to pursue and can really check the drastic price rise of chemical fertilizers during busy season. The system can also help enterprises make smooth sales during off-season and facilitate their normal operation. Besides, it can also effectively regulate the market supply and chemical fertilizers will be put into areas where there are in supply shortage.
   The stimulus program for the petrochemical industry assessed and passed by the State Council in February 2009 proposed to complete "the system of state-operated chemical fertilizer off-season reserves". Recent reports say that China intends to establish two lots of state-operated chemical fertilizer off-season reserves in 2009 and 2010 respectively and the amount of reserves for each lot is 5.0 million tons. It can be said that the time for establishing the system of state-operated chemical fertilizer off-season reserves is approaching.