Derek Byerlee24th July, 2009

“”While I had a fairly open mind about fertilizer subsidies when I began this greview, I am now considerably more skeptical about them….. it is my view that ysubsidies should be used very cautiously and very selectively” Dana Dalrymple, Evaluating Fertilizer Subsidies in

Developing Countries, USAID, 1975.

1. A strong case for market smart subsidies2 But not easy to implement2. But not easy to implement3. Even when well implemented, they are

t i b ll tnot a magic bullet

300 Fertilizer use (kg per 4.00 Cereal Yield (t/ha)

250

( g pirrigated equiv ha)

3.00

3.50

( )

150

200

SS Africa

Asia2.00

2.50

Asia

Lat Am

100

L America

MENA

1.00

1.50 SS Africa

MENA

0

5061 64 67 70 73 76 79 82 85 88 91 94 97 00 03 06

-

0.50

61 64 67 70 73 76 79 82 85 88 91 94 97 00 03 06

196

196

196

197

197

197

197

198

198

198

199

199

199

200

200

200

196

196

196

197

197

197

197

198

198

198

199

199

199

200

200

200

Adoption of improved varieties much greater than fertilizer

Agree on critical importance of improved seed Agree on critical importance of improved seed and soil fertility in sub-Saharan Africa. Fertilizer use extremely low in Africa Fertilizer use extremely low in Africa. Prices double other regions

There is a good theoretical case to subsidize There is a good theoretical case to subsidize inputs in the early stages Market failures--many specific to fertilizer Market failures--many specific to fertilizerEconomies of scale, learning, risk and credit

constraints Countries should own their food security policies

Traditional “blanket” subsidies have not worked Traditional blanket subsidies have not worked in AfricaInefficiencies of parastatalsInefficiencies of parastatalsRent capture by large farmersFiscally unsustainableFiscally unsustainable

“Market smart subsidies” could work?Help build markets vouchers for private dealersHelp build markets—vouchers for private dealersWell targeted to not displace commercial salesExit strategyExit strategy

Often still state directedNot well targeted—larger farmers male etcNot well targeted larger farmers, male etcDisplace commercial sales

E i h f b d tExpensive as a share of budgetCrowd out investments in core public goods

Political capture

Subsidy

(2 bag/hh)

Some subsidy

( 1 bag/hh)

None

(2 bag/hh) ( 1 bag/hh)Value of assets (K/hh) 15,850 8,755 6,500Land holding (ha) 1.22 0.91 0.81a d o d g ( a) 0 9 0 8Female head hh (%) 18 26 30

Measures to strengthen private sector equally importantKenya success story of reducing transactions costs

and no. input dealers from 8 km to 3 km Not by fertilizer alone. Need for balanced

approaches—Kenya organic matter Need for manage price volatility Funding for long-run investmentsIrrigation, R&D

STEADY RISE IN FERTILIZER USE

DECLINING MARGINS FOR FERTILIZER DISTRIBUTIONFERTILIZER USE FERTILIZER DISTRIBUTION

500000 600

300000

400000

etric

tons

400

500

met

ric to

n D

AP

100000

200000

000

me

200

300

Nom

inal

USD

per

0

90 92 94 96 98 00 02 04 06

Commercial importsTotal ConsumptionDonor Imports

1001990 1992 1994 1996 1998 2000 2002 2004 2006

c.i.f. Mombasa wholesale markets, Nakuru

N

Source: Marenya and Barrett, 2008a

PRICE OF UREA ($US/T) SHORTAGE OF PHOSPHATE?PRICE OF UREA ($US/T) SHORTAGE OF PHOSPHATE?

10

12

350

400

450

6

8

200

250

300

350

Gas

($/G

J)

Ure

a ($

/t)

Urea

0

2

4

0

50

100

150

G Nat gas

Source: Cline (2007)

Doubling of oil prices increases

00

Peak extraction by 2034

12

Doubling of oil prices increases grain prices by about 20%

Peak extraction by 2034

Can provide rapid gains (if it rains)Monitor learn adjust for long runMonitor, learn, adjust for long run

sustainabilityT t b tt i l th i t tTarget better, involve the private sector

Imbed as part of a wider agricultural d l t t tdevelopment strategy