China hikes tariffs to stem fertilizer exports

BEIJING Thu Apr 17, 2008 6:51am EDT

A worker pushes a cart loaded with packs of rice at a storage house in Hefei, Anhui province April 16, 2008. REUTERS/Jianan Yu

A worker pushes a cart loaded with packs of rice at a storage house in Hefei, Anhui province April 16, 2008.

Credit: Reuters/Jianan Yu

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BEIJING (Reuters) - China slapped massive tariffs on fertilizer exports on Thursday in a bid to control rapidly rising domestic agricultural costs and inflation, and above all to ensure it grows enough grain to feed its 1.3 billion people.

Beijing's 100 percent-plus tariffs on some fertilizer exports should temper domestic costs but may drive up prices in world markets that depend on China's supplies, the latest in a series of commodities-related protectionist moves around the world that risk fuelling rather than cooling global food costs.

China's anxiety is greater than most -- it is struggling to grow enough corn and wheat to feed its multiplying urban eaters, and fears higher costs of fertilizer, diesel and labor might discourage farmers from planting grains, thereby raising feed costs for meat breeders and exacerbating inflation.

Inflation in China ran at 8.3 percent in the year through March, nearly double the government target for 2008, supported by strong grains and meat prices.

China is in the peak season for fertilizer demand, since spring planting has been under way since March. Even so, sharply rising international fertilizer prices have caused exports to surge, the Ministry of Finance said on Thursday.

"The overly fast export rise increased pressure for domestic fertilizer prices to rise, and also caused tight supply of certain fertilizers in some regions," the ministry said on its website, www.mof.gov.cn.

It added that China had sufficient output of most fertilizers and could ensure domestic supply if exports were effectively controlled.

The tariffs on fertilizer exports will rise by 100 percentage points, to range from 100 percent to 135 percent, effective from April 20 to September 30.

Exports of urea increased by 250 percent in the first two months from a year earlier to 1.71 million tonnes, while exports of monoammonium phosphate and diammonium phosphate rose by 280 percent and 130 percent, the ministry said.

Exporters are attracted by international prices that have risen by 128 percent in the year through March, and 62 percent in the last quarter alone.

TIGHT-ROPE POLICY

Beijing often uses tariffs as a policy tool to dampen domestic prices, and discourage exports, of commodities ranging from metals to wheat flour. Tariffs are easier to administer than price controls or subsidies, and leave less room for corruption.

Planners do not want higher food prices to trigger urban unrest, but they are also mindful that farmers are finally seeing healthier returns after years of lagging rural incomes.

Keeping a lid on agricultural costs could help preserve profits in the countryside while limiting price shock in the cities.

"Agricultural costs are going through the roof. Land prices, the cost of money, the relative cost of labor, fertilizer, a shortage of seeds," said Paul Schulte, of Lehman Brothers in Hong Kong. "Yet rising agricultural prices can be a windfall for those with economies of scale."

Farmers have little pricing power over inputs such as fertilizer, because they usually do not negotiate for bulk purchases through rural collectives or other associations.

The tariff was hiked in order to "ensure smooth spring planting and set a solid foundation for the annual grain harvest," the ministry said.

As it is, China's grains production barely meets demand from an increasingly wealthy population that consumes more and more meat, instant noodles and processed foods.

But planners are wary of becoming dependent on imports, since any sign of China buying on the global market could cause a spike in already record-high prices.

The move to curb exports comes after Chinese importers agreed to pay triple for potash, a nutrient that boosts crop yields, while sharply reducing contracted import volumes.

Shares in Sinofert, China's largest fertilizer company, dropped by 8 percent on Thursday. The company relies on imports for nearly two-fifths of its sales.

(Additional reporting by Langi Chiang; Editing by Jonathan Leff and Ramthan Hussain)

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