Last week the Minister of Agriculture, Audu Ogbeh came under fire when he warned fertiliser companies to stop exporting fertilisers at the expense of selling to local farmers. Understandably, that setup a spate of rebuke from some Nigerians who have seen this as yet another socialist policy of this current government that will as usual end up badly.
As the controversy raged on, the government had no choice but to explain better the reason for the Minister’s remarks. Oil and Gas analysts Adedamola @damoche on twitter explains why the Minister might be correct afterall. Below is an excerpt of his blogpost.
Lots of emotive discussion during the week around Audu Ogheh’s threat to fertilizer companies in Nigeria. He warned them from prioritizing exports over domestic supply in a very Chavez-esque way triggering lots of vitriol and condemnation. I am constrained to use very mild words about Audu Ogbeh’s performance as Agric Minister especially when we had Akin Adesina just a dozen plus months ago. Seems a huge step down. I am convinced that the problem with the fertilizer scarcity is around the corruption along the supply chain, an issue Adesina tacked quite successfully during his tenure.
But is Audu Ogbeh totally wrong to seek concessions from fertiliser producers in Nigeria? No. I am wary of absolutism because it stifles the opportunity for healthy discussions. Government has a role to play in influencing prices especially farming inputs like fertilizer. Until 2015, the US did not allow exports of crude oil while the Jones Act still forbids intra-country journeys with non-US flagged ships.
As an incentive, fertilizer companies in Nigeria pay substantially low prices for their major input, natural gas. The average fertliser plant in Nigeria by regulation pays less than $1/mscf for gas while power plants pay $2.5/mscf and others pay beyond $3/mscf. The argument is that for gas based industries, the low gas prices would support investments, jobs, local supply of fertilizers etc. Infact, a key crux of the gas aggregation process is for gas producers to ‘share in the pain’ of supplying to these fertiliser companies. It’s a necessary form of ‘price socialism’.
So when these fertilser companies prefer to export to the global market where their competitors are paying for gas at $5/mscf, they have an undue, subsidized advantage. Government has the leverage (not right) to demand for lower domestic prices albeit under a clear, unambiguous and well-structured framework. Maybe a ‘domestic supply obligation’ can be introduced especially for those who want to benefit from the low gas prices. For those who are ready to pay ‘market’ prices, they may be free of such obligation.
Another Angle
One of the fiercest critics of the statement by the Minister Feyi Fawehinmi responded to Adedamola’s article in his medium page rejecting claims that fertilizer companies actually buy gas at $1/mscf. Here is his response;
I thought this newsletter was about oil & gas and energy?
As an incentive, fertilizer companies in Nigeria pay substantially low prices for their major input, natural gas. The average fertliser plant in Nigeria by regulation pays less than $1/mscf for gas while power plants pay $2.5/mscf and others pay beyond $3/mscf
I’m an accountant and I drive to work everyday. Is the diesel I put in my car the major input in helping me prepare the reports for which I’m paid? How exactly have you determined that fuel is their major input? How about the chemicals (all imported with $s) they use to create the reaction between nitrogen and phosphate in their NPK? Gas is a fuel. If there’s no gas they wont shut down their business. They will switch to coal or diesel. How can a substitute then be their major input?
But leaving that aside, the claim that ‘by regulation’ they pay less than $1/mscf is ridiculous. How does this work? A private fertiliser company will go to a private gas company and declare that ‘In the name of the law, I demand that you sell your gas to me at a loss price of $1?’ You know that things dont work this way. Who will pay the difference in price? Even petrol that was ubiquitous hardly sold for N97 anywhere outside Lagos. Just because something is written down doesnt mean that’s how it works. Gas prices in Lagos are around $7 or more from the pipeline. By declaring gas to be their major input and knowing the price they pay, you are making the exact same argument that CBN is making by telling banks that they should be able to make profits with a given number of staff.
Govt does not know how to price things. The evidence is all around us. They don’t know how to price petrol. They dont know how to price gas. They dont know how to price electricity. Yet, after declaring that you are wary of absolutism, you still say that govt has a role in setting prices. Please tell, what should this role be? And why is it something that the market cannot do?
What is it about the Jones Act that makes it worthy of emulation? It was an act to boost local shipmakers in America cloaked in the garb of national security at the time. Today both Democrats and Republicans agree it is a costly law that raises prices by up to $200m/year. In the same way that the ban on exports of crude has been lifted, it will be abolished soon.
The problem here is you are making arguments that even Audu Ogbeh is not making. Less than 20% of Nigerian farmers use fertilisers. It is hardly the thing causing food prices to go up. Furthermore, Audu Ogbeh himself later confessed that it was the Army that blocked fertiliser from entering the north to stop it falling into the hands of Boko Haram. This naturally caused prices to go up in the north.
Monguno accused the companies of selling to bomb makers. Ogbeh accused them of exporting. So what exactly is Audu Ogbeh right about?
We should stop giving intellectual cover to mad people. There is nothing absolutist about
