Nepal has opened a letter of credit (LC) to import up to 50,000 tonnes of chemical fertilizers from India under a government-to-government (G2G) agreement. The earlier plan has been scaled back as fertilizer prices have started falling in the international market.

The imports are considered crucial to mitigate potential shortages during the ongoing monsoon paddy sowing season, which is considered the most important period in Nepal's agricultural calendar.

The Cabinet meeting held on May 4 had given in-principle approval to the Agricultural Materials Company Limited to purchase 80,000 tonnes of chemical fertilizers from India after the ongoing tensions in West Asia disrupted global supplies and price hikes, affecting the supply chain.

The one-time purchase package included 60,000 tonnes of urea and 20,000 tonnes of DAP. Nepal had initially demanded 150,000 tonnes from India.

'The Cabinet has approved 80,000 tonnes of chemical fertilizers from India.' "Despite the approval of 50,000 tonnes, we have decided to import only 50,000 tonnes of chemical fertilizers," said Ramkrishna Shrestha, Joint Secretary at the Ministry of Agriculture and Livestock Development and Chairman of the Agricultural Materials Company. He said that two reasons have prompted the government to reduce the import volume.

"The first reason is the availability of financial resources and the second is the decline in prices in the global market," he said. "We are optimistic that some suppliers who had suspended supplies earlier will resume shipments as prices fall."

The decline in international prices has brought some relief to both the government and farmers who are struggling to secure sufficient fertilizers amid market fluctuations. He also said that Nepal accepted the price quotation submitted by India's state-owned Rastriya Chemicals and Fertilizers Limited after it was found to be within the cost estimate prepared by the agricultural materials company. It is estimated that about Rs 7 billion will be spent on importing these fertilizers.

'We have received the necessary budget from the Finance Ministry and are planning to transfer the funds to the suppliers soon,' he said. Although the price issue has been largely resolved, delivery remains a major concern. Officials say the procurement process could take up to 120 days to complete.

Nepal has also requested India to expedite the transportation process, keeping in mind the seriousness and urgency of the farming season.' 'That is our biggest concern,' Shrestha said. 'In the Nepal-India Joint Working Group meeting held last week, we have requested the Indian side to transport the fertilizer at a fast pace. We are hopeful that the fertilizer will arrive by mid-Bhadau (mid-August). The Indian side has accepted our request.'

Paddy is cultivated on an area of ​​about 1.4 million hectares across Nepal. It is one of the most important crops in the country, contributing significantly to rural income and economic growth.

Economists estimate that a 10 percent change in rice production can change Nepal's economic growth by about 0.4 percentage points, so timely availability of fertilizer is crucial. Amid supply challenges, agriculture officials say the country is unlikely to face a serious shortage of fertilizer this season.

According to the Ministry of Agriculture, Nepal currently has about 142,000 tons of fertilizer in stock. However, it is estimated that about 250,000 tons of fertilizer will be required during the rice planting season alone. "The government may not be able to fully meet the demand, but there should not be an extreme shortage of fertilizer," Shrestha said.

The challenge of chemical fertilizers comes at a time when global agencies are warning of increasing risks to agricultural production due to climate and geopolitical factors. Analysis by the Food and Agriculture Organization of the United Nations (FAO) has highlighted the high risk of agricultural droughts linked to El Niño conditions in major grain-producing regions, including South and Southeast Asia.

The FAO, using 41 years of satellite imagery from its Agricultural Stress Index System, said strong El Niño events have historically caused severe droughts in many of the world's major agricultural regions. The organization warned that below-average monsoon rains could threaten crop production and food security in vulnerable countries.

The report found that South Asia, Southeast Asia, southern Africa, the Sahel and parts of Central America and the Caribbean are at high risk of drought.

Meanwhile, the disruption of shipping routes through the Strait of Hormuz, a narrow waterway connecting the Persian Gulf to the Gulf of Oman, has raised the cost of energy and chemical fertilizers globally, putting additional pressure on agricultural economies preparing for planting.  

While urea prices have recently started to fall, DAP prices are still high.  According to the World Bank's 'Commodity Market Outlook', urea prices have risen by 80 percent since February and exceeded $850 per tonne in April, the highest level since April 2022. 

As the war between Iran and the US-Israeli conflict that began on February 28 has dragged on, Iran has stopped ammonia production.  Qatar has also suspended production of urea, ammonia and sulphur due to losses, adding to the pressure on supplies.  India has also reduced production of urea and ammonia due to low supplies of liquefied natural gas.

Concerns about possible export restrictions from China have further tightened global supplies and weakened fertilizer purchasing power.

DAP prices, which had been relatively stable at the start of the year, also rose by 10 percent in April due to rising sulfur costs and tight supplies. China's export restrictions have added pressure.

The World Bank has projected DAP prices to rise by about 6 percent in 2026 and fall by about 10 percent in 2027 as new production capacity comes on stream. However, risks remain significant. A prolonged closure of the Strait of Hormuz or reimposition of export restrictions by major suppliers could disrupt global fertilizer trade and lead to a fresh spike in prices.

In Nepal, subsidized urea fertilizer is sold at Rs 18 per kg through government-designated cooperatives, while DAP is available at Rs 46 per kg. These prices reflect a subsidy of about 92 percent for urea and 80 percent for DAP, compared to the actual market prices of about 160 and 162 rupees per kg, respectively.