Deconstructing Fertilizer Price Spikes: Evidence from Chinese Urea Fertilizer Market

Recent spikes in fertilizer prices, coupled with government interventions by major exporters, have raised global concerns about food security. This study employs a structural vector autoregression model to examine urea price movements in China, the world’s largest urea producer and major exporter. Using a heteroskedasticity-based identification approach that allows for a smooth transition in covariances, we decompose urea prices into four structural shocks: supply shocks due to changes in energy prices, demand shocks due to changes in crop prices, export demand shocks, and urea market-specific idiosyncratic shocks unrelated to the preceding three shocks. Findings suggest that rising energy costs and idiosyncratic shocks were the dominant factors behind urea price behavior in China between 2018 and 2023. Conversely, shocks to corn prices and export demand played a minimal role. Importantly, we find limited evidence that reduced exports lowered domestic urea prices, thus questioning the effectiveness of the urea export restriction policies China implemented since October 2021. Furthermore, increased domestic demand associated with the temporary fertilizer reserve program implemented at the end of 2021 contributed to urea price increases in China during the stockpiling period in early 2022, while helping to lower the fertilizer prices in the 2022 summer growing season.