Estimating demand elasticities of mineral nitrogen fertiliser: some empirical evidence in the case of Sweden

The geopolitical developments that occurred in 2022 shook the global fertiliser market. One of the issues that the EJP SOIL ‘Scenario modelling for assessing impacts of policy changes and socio-economic effects on ecosystem services of soils (SIMPLE)’ project currently investigates is the potential consequences of increased fertiliser price on its demand and subsequent application. Looking at this question from an economic perspective, an answer can be found via the estimation of the relevant elasticity of demand. Therefore, we aim at providing empirical evidence on the responsiveness of demand for nitrogen (N) fertiliser to changes in its price. Having a better understanding of how farmers can react to changes in the price of this production input is key for several reasons. Firstly, lower fertiliser application can reduce soil productivity, leading to price increases of agricultural commodities due to lower production volumes. Secondly, an increase in the cost of inputs can affect negatively the financial viability of those farming activities which rely on mineral fertiliser. Thirdly, important negative environmental impacts are associated with its excessive use, creating a need to curb demand under certain circumstances. Taking Sweden as a case study, three different econometric techniques (OLS, FE and FE-IV) are applied to a panel that covers all Swedish regions over the period 1990-2022. This contribution finds a negative and inelastic relationship between urea prices and nitrogen fertiliser sales, which is in line with the existing literature providing estimates for other world regions.