AAMP Training MaterialsModule 1.2: Fertilizer Supply Chain in Africa

B. L. Bumb (IFDC)

bbumb@ifdc.org

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

Procurement by tender or negotiation

Procurement from overseas fertilizer

manufacturersFOB cost

FLOW OF FERTILIZER FUNCTIONS TRANSACTION COSTS

Conduct(Coordination)

Performance(Profitability)

International shipping

Arrival at African port

Ocean freight

Unloading, bagging, inspection, customs,

and taxes

Freight costs

Port charges and taxes

1

+

+

Local transport, unloading, storage, inventory finance

costs & rent

Warehousing at port Warehousing costs

Conduct(Coordination)

Performance(Profitability)

Inland transportation

Inland warehouse

Inland transport by road or rail

Inland storage

Transport costs

Warehousing costs

2 FLOW OF FERTILIZER FUNCTIONS TRANSACTION COSTS

+

+

The Fertilizer Supply Chain: Conduct & Performance

Local transport by truck or public

vehicles

Local transportation Transport costs

Conduct(Coordination)

Performance(Profitability)

Agro dealer

Farmer

Retail sales to farmer (direct sales

or distribution)

Operating costs: storage, re-bagging, overhead, finance &

margins

3 FLOW OF FERTILIZER FUNCTIONS TRANSACTION COSTS

+

The Fertilizer Supply Chain: Conduct & Performance

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 Malawi Angola Ratio of Angola to Malawi Cost

FOB 145 226 1.56

Shipping 25 95 3.8

Port Handling 8 98 12.25

Duties 2 48 24

Inland Transport 60 15 0.08

Dealer Cost/Margin 18 220 12.22

Other Costs 63 126 2.16

Retail Price 321 828 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