Analyzing Fertilizer Procurement Costs

7/25/2019 Analyzing Fertilizer Procurement Costs

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Fertilizer Toolkit: Promoting Efficient and Sustainable Fertilizer Use in Africa

Analyzing Fert il izer Procurement Costs

It is difficult to make good policy and business decisions about reducing fertilizerprocurement costs if one does not have the complete picture of the cost build upfrom point of initial purchase through final delivery to the farmer. We present threeillustrations of procurement cost analysis conducted by IFDC in Africa.

Table 1 compares costs across five countries (the US, Nigeria, Malawi, Zambia, andAngola). The format used and information presented assists the reader to pinpointvarious places in the supply chain where costs are much higher for some countries

than for others. The format used in this table can be used as a model for collectingand analyzing cost data in other countries.

Table 2 presents a recent cost analysis done for Kenya, where concreterecommendations are made for interventions that could reduce the costs. Kenyanfertilizer products are imported through Mombasa port but are used mostly inWestern Kenya. The transportation cost of supplying fertilizers to Western Kenyaranges from $45 to $50/ton. Most of the fertilizers are transported through trucks.While Kenya has railway lines reaching out to different parts of the country, due todelays and risks in transporting goods through rail, few distributors use railways. Theshortage of covered wagons also discourages the use of railways. If railway capacityis streamlined and strengthened to transport fertilizer products, the cost oftransporting fertilizers could be reduced by 20%-30%.

In addition to transportation costs, excessive port charges and inefficiencies also addto high transaction cost. While c.i.f. cost of urea was $299/ton at Mombasa, portcharges, import declaration fee (IDF), bagging, storage, and other related costs addanother $65/ton. Rationalization of port services and related charges could reducefertilizer prices by $35/ton. Improvements in transportation arrangements (moving

from road to rail) could further reduce transaction cost.

The third example is from West Africa. IFDCs project MIR (Marketing InputsRegionally) analyzed ways to lower the costs of fertilizer in Mali. At the time of thestudy, the price of 1 Mt of urea increased from $265 in the Ukraine to $570 by thetime it reached cotton farmers in landlocked Mali. We do not show the entire costbuild-up, but the IFDC analysis showed that total costs could be reduced by 19-27%,i.e. to $415-460 per ton by the following interventions:

Abandoning the tender system and changing to direct negotiation withsuppliers, using freely available market information on urea, can reduce theFOB price by 10-20%. Savings: $23.00 to $46.00.

Purchasing urea in Euros instead of FCFA reduces the cost of money by half.Savings: $14.40.

Reducing the 15% tax in Mali and other West African countries. 30-50% canbe saved on taxes through lobbying ECOWAS and WAEMU as was recently


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Reducing retail margins, which are high because the tender system breedslocal corruption along the chain.

Abandoning the tender system and addressing corruption can save 80% ofthe retailers gross margin. Savings: $35.28

Source: IFDC MIR project documents.


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Table 1. Comparison of fertilizer procurement and distribution and marketing costs, 2003 (US$/ton)

USA Nigeria Malawi Zambia Angola

US$/t % US$/t % US$/t % US$/t % US$/t %Costs items & margins

FOB cost 135.00 135.00 143.00 145.00 226.00

Ocean freight 25.00 160.00 30.00 165.00 25.00 170.00 25.00 170.00 95.00 321.00

Insurance 0.08 160.08 0.10 165.10 0.10 170.10 0.10 170.10 2.00 323.00

CIF cost160.0

870.64

165.10

49.12170.1

052.94

170.10

51.03 39.00

LC cost 0.80 160.88 1.65 166.75 1.70 171.80 1.70 171.80 3.23 326.23

Port costs, transfer inland 4.00 164.88 21.70 188.45 7.82 179.62 17.50 189.30 98.00 424.23

Duties 0.00 164.88 12.04 200.49 1.63 181.25 1.63 190.93 48.00 472.23

Losses 1.65 166.53 3.77 204.26 1.80 183.05 1.89 192.83 0.00 472.23

Bags & bagging 0.00 166.53 15.69 219.95 0.00 183.05 0.00 192.83 0.00 472.23

Free on barge/truck 166.53 2.85 219.95 16.32 183.05 4.03 192.83 6.82 472.23 18.02

Barge/truck transport 10.00 176.53 4.41 50.00 269.95 14.87 60.00 243.05 18.67 72.00 264.83 21.60 5.00 477.23 0.60

Barge/truck unloading 4.00 180.53 0.50 270.45 0.50 243.55 0.50 265.33 0.50 477.73

Storage & loading 10.00 190.53 1.00 271.45 7.29 250.84 1.50 266.83 3.00 480.73

Interest 2.22 192.75 16.97 288.41 12.54 263.38 13.00 279.83 30.05 510.78

Wholesale cost 192.75 288.41 263.38 279.83 510.78Importer margin 3.8 196.61 2.00 31.73 320.14 11.00 39.51 302.89 15.00 28.84 308.67 10.31 97.50 608.28 19.09

Wholesale price196.6

186.76

320.14

95.24302.8

994.26

308.67

92.59608.2

873.44

Dealer cost & margin 30.00 226.61 15.26 16.01 336.15 5.00 18.44 321.33 6.09 24.69 333.36 8.00 220.00 828.28 36.17

Farmer price226.6

1336.1

5321.3

3333.3

6828.2

8

Wholesale : CIF ratio 1.20 1.75 1.55 1.65 1.58

Retail : CIF ratio 1.42 2.02 1.89 1.96 2.56

Source: Gregory, D.I., and B.L. Bumb. 2006. Factors Affecting Supply of Sub-Saharan Fertilizer in Africa. Agriculture and Rural Development Discussion Paper 24.World Bank, Washington, DC.


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Table 2. Kenya Fertilizer Costs

Existing Proposed

Cost Element DAP ex-Tampa Urea ex- Arab Gulf DAP ex-Tampa Urea ex-Arab Gulf

US $/ton KSh/50-kg bag US $/ton KSh/50-kg bag US $/ton KSh/50-kg bag US $/ton KSh/50-kg bag

1 f.o.b. bulk 235.00 881.25 274.00 1,027.50 235.00 881.25 274.00 1,027.502 Ocean freight 62.00 232.50 25 93.75 62.00 232.50 25 93.753 c. & f. 297.00 1,113.75 299.00 1,121.25 297.00 1,113.75 299.00 1,121.254 Marine Insurance 1% 2.97 11.14 2.99 11.21 2.97 11.14 2.99 11.215 IDF 2.75% of cif 8.25 30.94 8.30 31.12 - - - -6 Finance cost 70% c. & f. at 16% p.a.

for 3 months8.32 31.20 8.37 31.39 8.32 31.20 8.37 31.39

7 LC commission/other bank charges 2%c. & f.

5.94 22.27 5.98 22.42 5.94 22.27 5.98 22.42

8 KBS/Radiation levy Sh 40/mt 0.53 1.99 0.53 1.99 0.53 1.99 0.53 1.999 Port charges (KPA) 5.00 18.75 5.00 18.75 - - - -

10 Stevedoring (KPA) 8.00 30.00 8.00 30.00 - - - -11 WPP Bag with liner 6.20 23.25 6.20 23.25 6.20 23.25 6.20 23.2512 Bagging and other 4.00 15.00 4.00 15.00 4.00 15.00 4.00 15.0013 Inspection and tally 2.00 7.50 2.00 7.50 2.00 7.50 2.00 7.5014 Spillage and losses 0.5% c. & f. 1.48 5.55 1.49 5.59 1.48 5.55 1.49 5.5915 Clearing and forwarding

KSh 40/mt0.53 1.99 0.53 1.99 0.53 1.99 0.53 1.99

16 Transport to warehouse in Mombasa Sh200/mt

2.66 9.97 2.66 9.97 2.66 9.97 2.66 9.97

17 Handling at warehouse Sh 300/mt 4.00 15.00 4.00 15.00 4.00 15.00 4.00 15.0018 VAT 16% shore handling 9 to 17

(except 14)5.18 19.42 5.18 19.42 - - - -

19 Landed cost warehouse Mombasa 362.06 1,357.72 364.23 1,365.85 335.63 1,258.61 337.75 1,266.5620 Loading at warehouse Sh 150/mt 2.00 7.50 2.00 7.50 2.00 7.50 2.00 7.5021 Road freight to Nairobi Sh 2,000/mt 26.67 100.00 26.67 100.00 26.67 100.00 26.67 100.0022 Handling at warehouse Sh 300/mt 4.00 15.00 4.00 15.00 4.00 15.00 4.00 15.0023 VAT 16% on 20-22 5.23 19.61 5.23 19.61 - 19.61 - 19.6124 Landed cost Nairobi 399.96 1,499.83 402.13 1,507.95 368.30 1,381.11 370.42 1,389.0625 Landed cost in Kitale 426.63 1,599.83 428.80 1,607.96 394.97 1,481.11 397.09 1,489.06

Source: IFDC, 2005. An Action Plan for Developing Agricultural Input Markets in Kenya, Main Report.

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Analyzing Fertilizer Procurement Costs