Fertilizer Subsidies and Sustainable Agricultural Growth in Africa: Current Issues and Empirical Evidence from Malawi, Zambia, and Kenya Isaac Minde, T.S. Jayne, Joshua Ariga, Jones Govereh, and Eric Crawford IFDC workshop on Strengthening Trade in Agricultural Inputs in Africa: Issues and Options Taj Pamodzi Hotel, Lusaka, 1-4 July, 2008 Key challenges 1. How to raise incentives (i.e., profitability) of using fertilizer in a sustainable way How to reduce costs of acquiring fertilizer (marketing)? How to improve the efficiency of farmers use of fertilizer? How to achieve reasonable output market stability? How to promote access to input credit? 2
Key challenges (cont.) 2. Recognizing that progress on the above requires major public investments in crop science, extension, infrastructure, and nurturing of private input supply channels, then: What is the appropriate balance between expenditures on these investments vs. input subsidies? 3 Objectives of this presentation: 1. To highlight lessons from experience with fertilizer subsidies in Malawi and Zambia 2. To highlight lessons from Kenya s experience of rapid smallholder adoption of fertilizer without subsidies 3. To assess the implications of sharply higher world food and fertilizer prices in 2008 4. To provide guiding principles of a smart fertilizer subsidy program 4
What I will show: factors that could raise the viability of fertilizer subsidies 1. Target relatively poor farming households This will minimize displacement and have the most direct effect on poverty reduction 2. Involve full spectrum of private sector don t restrict to 2-3 firms 3. Reduce fertilizer application levels 200kg Compound D + 200kg Urea depresses the overall contribution of fertilizer to maize output 5 What I will show: factors that could raise the effective demand for fertilizer generally 1. Prioritize R&D to generate improved fertilizer- responsive seeds 2. Open regional trade (especially in good harvest years) will raise and stabilize the price of maize improve profitability of using fertilizer on maize 3. Invest in physical infrastructure, especially between countries in the region, to help stabilize output prices 6
African Country-Level Situation and Policy Environment Really Counts! Intensity of fertilizer use (1996-2002) < 25 kg/ha % growth in fertilizer use intensity (kg/ha cultivated) (mean 1996-2002 / mean 1990-95) < +30% DRC (0.5, -47%) Angola (0.7, -69%) Niger (0.9, +5%) Guinea (2.0, -4%) Burundi (2.3, -6%) Madagascar (2.9, -8%) Mauritania (4.0, -64%) Tanzania (4.8, -47%) Gambia (5.2, +15%) Nigeria (5.6, -73%) Burkina Faso (5.9, -28%) Zambia (8.4, -34%) Mali (9.0, +7%) > +30% Uganda (0.6, +237%) Rwanda (1.8, +89%) Mozambique (3.2, +142%) Ghana (3.6, +68%) Chad (4.3, +93%) Cameroon (5.9, +77%) Togo (7.0, +30%) Cote d Ivoire (11.8, +53%) Botswana (11.8, +294%) Senegal (13.2, +67%) Ethiopia (14.4, +71%) Benin (17.6, +76%) Lesotho (23.2, +35%) > 25 kg/ha Swaziland (30.5, -40%) Malawi (30.8, +9%) Zimbabwe (48.3, +9%) Kenya (31.8, +33%) 7 Zambia: trend in % of smallholders using fertilizer nationwide 36 35 34 33 32 31 30 29 28 36.0 34.8 33.3 32.0 30.9 31.3 2002/03 2003/04 2004/05 2005/06 2006/07 2007/08 8
Zambia: Maize yields (mt per hectare of area harvested), fertilizer users vs. non-users 3 Tons per hectare 2.5 2 1.5 1 Fertilizer users non-users 0.5 0 2001 2002 2003 2004 2005 2006 2007 2008 9 Zambia: Fertilizer acquisition sources among small-scale farmers using fertilizer on maize, 2003/04 and 2007/08** 90 80 Percentage 70 60 50 40 30 20 10 commercial purchases FSP PAM 0 smallest (0 to 0.6 ha) 2nd (0.6-1.0 ha) 3rd (1.0-1.7 ha) largest (1.7-5.0 ha) ** note: NGOs and other farmers account for less than 6% of primary fertilizer acquisition source by small-scale famers 10
Zambia: % of farms receiving FSP and maizefertilizer response rates, CFS, 2007/08 25 24.2 20 18.1 19.1 15 10 5 4.0 4.55 9.7 4.56 4.21 5.33 3.32 0 Smallest (0-0.6ha) 0.7-1 ha 1.0-1.7 ha 1.8-5.0 ha 5-20 ha % hhs receiving FSP maize-fert response rate 11 Insight #1 Efficiency of fertilizer use not appreciably different on small farms than on larger farms 12
Concept of incremental fertilizer use from a fertilizer subsidy programme: How much additional fertilizer goes on farmers fields per ton of subsidized fertilizer distributed? 13 Farmer fertilizer purchases, Malawi Purchases 350 Subsidised* Unsubsidised Total '000 tonnes 300 250 200 150 100 50 0 1997/98 1998/99 1999/00 2000/01 2001/02 2002/03 2003/04 2004/05 2005/6 2006/7 14
Change in Commercial Fertilizer Acquired/Used -1000-500 0 500 1000 Malawi Change in Fertilizer Acquisition/Use Between '03 & '07 Slope: - 0.48-500 0 500 1000 Change in Goverment Subsidized Fertilizer Acquired/Used 15 Change in smallholder fertilizer use, 2000 vs 2004, Zambia Change in Commercial Fertilizer Acquired -2000-1000 0 1000 Slope=-0.41-1000 -500 0 500 1000 1500 Change in Government Fertilizer Acquired Fitted values Change in Commercial Fertilizer Acquired 16
Insight #2 Few poor households can afford to buy fertilizer incremental fertilizer use is high for them. 17 Insight #3 Relatively non-poor households tend to buy fertilizer if profitable. For them, incremental fertilizer use is relatively low. 18
Upshot: Targeting poorer households will simultaneously contribute to many government policy objectives: 1. Achieve more maize output per unit of subsidized fertilizer distributed 2. Contribute more to national food security 3. More effectively reduce hunger by allowing the poor to produce more for themselves 4. Promotes equity and reduces the widening rift between the haves and have-nots 19 Insights from Kenya 20
Fertilizer use trends in Kenya, 1990-2006 500000 400000 000 metric tons 300000 200000 100000 0 90 92 94 96 98 00 02 04 06 Commercial imports Total Consumption Donor Imports 21 Percent of Households using Fertilizer (all crops) Agro-ecological zone 1995/96 1996/97 1999/00 2003/04 2006/07 Coastal Lowlands 2% 3% 5% 6% 12% Eastern Lowlands 19% 30% 37% 46% 57% Western Lowlands 2% 3% 4% 8% 30% Western Transitional 29% 32% 59% 61% 88% High-Potential Mz Zone 67% 69% 86% 90% 93% Western Highlands 52% 57% 73% 74% 95% Central Highlands 63% 78% 90% 93% 98% Marginal Rain Shadow 12% 20% 22% 27% 54% National total 43% 51% 64% 69% 76% 22 Source: Ariga, Jayne, and Nyoro (2008) based on Tegemeo Institute/Egerton University household surveys, 1997, 2000, 2004, and 2007.
Reasons for the Upsurge in Fertilizer Use in Kenya 1. GoK has maintained a stable fertilizer policy stance since 1990 Eliminated import licensing quotas Foreign exchange controls Retail price controls No large subsidy programs to undercut private investment in fertilizer distribution system 23 Reasons for the Upsurge in Fertilizer Use in Kenya 2. Private sector investment in fertilizer distribution has expanded rapidly 10-11 importers 500 wholesalers 8,000 retailers 24
Reasons for the Upsurge in Fertilizer Use in Kenya 3. Small farmers are now much closer to fertilizer retailers 1997: 8.4kms 2004: 4.3kms 25 4. Large decline in fertilizer (DAP) marketing margins 600 Nominal USD per metric ton DAP 500 400 300 200 100 1990 1992 1994 1996 1998 2000 2002 2004 2006 c.i.f. Mombasa wholesale markets, Nakuru 26
How has the private sector been able to reduce fertilizer marketing margins? 1. Greater competition has led to lower margins 2. Emergence of brokerage services for exploiting opportunities for cheaper backhaul transport, e.g., linking upcountry fertilizer supply with trucks transporting cargo from Rwanda and Congo to the port of Mombasa; 3. private importers are increasingly using international partners to source credit at lower interest and financing costs than are available in the domestic economy 4. mergers between local and international firms in which knowledge and economies of scope are being passed onto local firms to achieve cost savings in local distribution (e.g., Mea partnering with CONAGRA) 27 How has the private sector been able to reduce fertilizer marketing margins? 1. These cost reductions directly benefit smallholder farmers 2. These cost reductions occur as a result of market development and a stable policy environment for private sector investment 28
Insight #4: If subsidy programs are to be implemented, design them in ways that involve the full range of private importers, wholesalers, and retailers. Providing tenders to only 2-3 firms can entrench their position in the market, cause other firms to cease making investments in the system or drop out altogether, leading to a more concentrated input marketing system and restricted competition when the input subsidy program comes to an end. 29 The emerging situation in 2008: Zambia 500 400 USD per metric ton 300 200 100 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 Chipata Kabwe Kasama Lusaka Ndola Lusaka time trend 30
Zambia: maize prices in real kwacha per tonne 3600000 Real 2007 Kwacha per tonne 3200000 2800000 2400000 2000000 1600000 1200000 800000 400000 2000 2001 2002 2003 2004 2005 2006 2007 2008 Chipata Kabwe Kasama Lusaka Ndola Lusaka time trend 31 Malawi: maize price trends 70000 Real 2007 Kwacha per metric ton 60000 50000 40000 30000 20000 10000 0 99 00 01 02 03 04 05 06 07 08 Lilongwe Lunzu Lilongwe time trend c.i.f. Lilongwe from South Africa 32
Zambia: maize-comp.d price ratios 1.2 price ratio: maize / compound D 1.0 0.8 0.6 0.4 0.2 1994 1996 1998 2000 2002 2004 2006 2008 33 Kenya: maize-dap price ratios.8.7 price ratio: maize /DAP.6.5.4.3.2 1994 1996 1998 2000 2002 2004 2006 2008 34
Malawi: maize-npk price ratios 1.4 1.2 price ratio: maize / NPK 1.0 0.8 0.6 0.4 0.2 0.0 90 92 94 96 98 00 02 04 06 08 35 Insight #5: Maize-fertilizer price ratios are relatively low in 2008, but not abnormally low when compared to the past 10 years. 36
Factors that could raise the viability of fertilizer subsidies 1. Target relatively poor farming households This will minimize displacement and have the most direct effect on poverty reduction 2. Involve full spectrum of private sector don t restrict to 2-3 firms 3. Reduce fertilizer application levels 200kg Compound D + 200kg Urea depresses the overall contribution of fertilizer to maize output 37 Factors that could raise the effective demand for fertilizer more generally 1. Prioritize R&D to generate improved fertilizer- responsive seeds 2. Open regional trade (especially in good harvest years) will raise and stabilize the price of maize improve profitability of using fertilizer on maize 3. Invest in physical infrastructure, especially between countries in the region, to help stabilize output prices 38
Zikomo Kwambili, Natotela sana, L'i tumezi ahulu, Twalumba kapati, Thank you we welcome questions and comments http://www.aec.msu.edu/fs2/