AAMP Training Materials

Module 1.2: Fertilizer Supply Chain in Africa

B. L. Bumb (IFDC) [email protected]

Module Outline

• Objectives • Key Themes and Components • Exercises • Conclusions • References

Objectives

• Describe the links in the fertilizer supply chain – The role of fertilizer producers, importers, & agro dealers • Understand determinants of farm-gate fertilizer cost – Cost build-up analysis.

• Identify measures needed to improve fertilizer supply in Sub-Saharan Africa – Goal: Reduce supply cost and improve accessibility for farmers • Discuss impact of policy options on fertilizer price using cost build-up analysis

Key Themes and Components

• Fertilizer value chain analysis – Key links in the value chain – Stakeholder functions – Conduct & performance • Fertilizer cost build up exercises – Procurement cost – Shipping, port handling, and inspection – Bagging, storage and transportation – Finance and Letter of Credit – Marketing- wholesale and retail

The Fertilizer Supply Chain: Stakeholders

• Global Market – Manufacturers and traders (supply fertilizers); shipping companies (responsible for shipping products), inspection agencies (ensures truth in labeling) & banks (provide finance and letter of credit) • Domestic Market – Importers, manufacturers, transporters & banks – Port authorities, policymakers, regulators (enforce quality standards) – Wholesalers- sell fertilizer in large quantities to retailers or large farmers – Retailers & stockists- sell fertilizer to small and medium farmers – Farmers- use fertilizer on different crops

Stakeholder Functions

• Procurement, shipping, financing & inspection • Domestic production, blending and bagging • Local financing • Transportation • Domestic marketing – Wholesale – Retail • Farming

The Fertilizer Supply Chain: Conduct & Performance

Conduct (Coordination) Performance (Profitability) 1

FLOW OF FERTILIZER FUNCTIONS TRANSACTION COSTS

Procurement from overseas fertilizer manufacturers Procurement by tender or negotiation FOB cost + International shipping Ocean freight Freight costs + Arrival at African port Unloading, bagging, inspection, customs, and taxes Port charges and taxes

The Fertilizer Supply Chain: Conduct & Performance

Conduct (Coordination) Performance (Profitability) 2

FLOW OF FERTILIZER TRANSACTION COSTS

Warehousing at port

FUNCTIONS

Local transport, unloading, storage, inventory finance costs & rent Warehousing costs + Inland transportation Inland transport by road or rail Transport costs Inland warehouse Inland storage + Warehousing costs

The Fertilizer Supply Chain: Conduct & Performance

Conduct (Coordination) Performance (Profitability) 3

FLOW OF FERTILIZER FUNCTIONS TRANSACTION COSTS

Local transportation Agro dealer Local transport by truck or public vehicles Retail sales to farmer (direct sales or distribution) Transport costs + Operating costs: storage, re-bagging, overhead, finance & margins Farmer

Product Portfolio

• Internationally traded products – Urea, DAP, MOP, NPKs • Regionally traded products – Compound D, Cotton Formula • Local / Specialty Products – NPK 12-24-12, 23-21-0-5S

Role of Product in Cost Build-up

• Internationally traded products • Specialty products • Size of shipment- Quantity shipped • Location of country: Landlocked and Coastal

Fertilizer Price Formation

Cost Components: Malawi & Angola, 2003

Cost Item FOB Shipping Port Handling Duties Inland Transport Dealer Cost/Margin Other Costs

Retail Price

Malawi 145 25 8 2 60 18 63

321

Angola 226 95 98 48 15 220 126

828

Ratio of Angola to Malawi Cost 1.56

3.8

12.25

24 0.08

12.22

2.16

2.58

Constraints to Fertilizer Supply Systems

• Non-conducive policy environment – distortions introduced by government intervention in pricing and marketing of products • Ineffective regulation – poor enforcement of quality control standards at the point of sale – limited capacity with Agricultural Ministries for enforcement • Limited access to finance – high interest rates and stringent collateral requirements • Inadequate human capital – limited skilled manpower for imports and marketing

Constraints to Fertilizer Supply Systems

• Restricted multi-country trade – tariff and not-tariff restrictions on multi-country trade • Inadequate market transparency & business linkages • Poor infrastructure – Inefficient port handling facilities – Underdeveloped road and rail systems • Source: See Gregory and Bumb (2005) and IFDC (2003) for details

Measures Needed to Improve Fertilizer Supply Systems

• Create an enabling policy environment- remove pricing and marketing distortions • Strengthen human capital base- improve skill-base of importers and agro-dealers • Improve access to finance- by reducing interest rate and collateral requirements through risk-management tools • Create market transparency- strengthen market information systems and business linkages

Measures Needed to Improve Fertilizer Supply Systems

• Enforce effective regulatory frameworks- Build capacity of enforcing quality control standards/truth-in-labeling at the point of sale • Integrate multi-country markets by removing tariff and non-tariff restrictions and strengthening linkages among importers and exporters across borders • Source: See Gregory and Bumb (2005) for details

Exercises

• Open Excel worksheet [Fertilizer Cost Components] • Make changes to reflect the following scenarios 1. What is the new retail price of Urea in Malawi if the global price changes to $810.00/ton?

2. What is the price of a 50kg bag of Urea in Malawi Kwacha if the exchange rate is MKW 140/US$?

3. What is the price of a 50kg bag of Urea if the exchange rate increases to MWK 200/US$?

Exercises

4. What is the impact on retail price of a 50kg bag of Urea if the government introduces a 70% subsidy on the retail price and total subsidy bill if consumption of urea is 150,000 tons?

5. With funding support from the World Bank, USAID, and EU, the Government of Mozambique and the Government of Malawi construct a super fast railway between Beira Port and Lilongwe; it reduces the transport cost from $86.91 to $26.11 per ton. What happens to retail price per ton (in US$) and per 50-kag bag (if exchange rate is MKW 140=US$)

Conclusions

• Changes are needed in both supply system arrangements and cost components.

• Improvements in policy, human capital, regulation, access to finance, and market transparency are essential.

• Economies of scale in procurement and internationally traded products can save costs.

• Improvements in port handling and transportation arrangements are also essential for reducing prices at the farm gate.

References

• Chemonics and IFDC: Fertilizer Supply and Costs in Africa. Chemonics International, Washington DC 2007 • Gregory, D. I. and Bumb, B. L.:

Factors affecting Supply of fertilizer in Sub-saharan Africa,

World Bank ARD Paper 24, Washington DC, 2005 • IFDC: Input Subsidies and Agricultural Development: Issues and Options for Developing and Transitional Economies. IFDC Special Paper P-29, Muscle Shoals Alabama, 2003