AAMP Training Materials Module 1.2: Fertilizer Supply Chain in Africa B. L. Bumb (IFDC) bbumb@ifdc.org This is the second section of the Smallholder Productivity module which is part of the AAMP training materials. Exercises in this presentation are found in the excel spreadsheet entitled: Fertilizer Supply Chain in Africa.xls

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 The fertilizer value chain is large and complex with many stakeholders performing the various steps necessary to bring fertilizer to the end user at the farm gate.

Stakeholder Functions Procurement, shipping, financing & inspection Domestic production, blending and bagging Local financing Transportation Domestic marketing Wholesale Retail Farming Each stakeholder in the chain performs a function that adds a cost to the end user, the farmer. Understanding the links in the chain, and identifying areas in which costs can be reduced is the focus of this presentation.

The Fertilizer Supply Chain: Conduct & Performance Procurement by tender or negotiation Procurement from overseas fertilizer manufacturers FOB 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 + Most fertilizer in Sub-Saharan Africa is imported from overseas. Therefore, the first cost in the fertilizer supply chain is international procurement. FOB stands for “free on board” and refers to the price of the fertilizer excluding transport and other costs. At this point in the supply chain, the fertilizer has been produced and delivered to a ship in a foreign port. The FOB cost represents 50 – 70% of retail price of fertilizer. The next link in the chain is International Shipping. Fertilizer shipping costs to Africa are generally high due to small cargo sizes. As a result, freight costs account for 10 to 15% of farmer cost. Upon arrival at an African port, the fertilizer accrues further costs in the form of port charges. Although accounting for only 1 to 3% of retail price, port charges in most African ports are still very high compared to Thailand.

The Fertilizer Supply Chain: Conduct & Performance 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 2 FLOW OF FERTILIZER FUNCTIONS TRANSACTION COSTS + Warehouse costs at the port include local transport costs, truck unloading, stacking, warehouse rents and inventory finance costs. Average storage times are about two months, so warehouse costs vary, representing 1 to 1.5% of the retail price of fertilizer. Inland transportation costs represent the second largest component of the fertilizer value chain, accounting for 20 to 40% of the retail price. Rail systems in Africa are generally inefficient, unreliable, under-capitalized and virtually unused, leaving the majority of fertilizer transportation to 28 metric ton trucks. Long distances, road conditions, fuel prices, and unofficial payments all contribute to high inland transport 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 + At last, the Fertilizer Supply Chain reaches the end user, the farmer. All the costs from FOB to Agro Dealer make up the retail price. This price can be too high for many smallholder farmers who choose not to purchase, or purchase a sub-optimal amount of fertilizer.

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 Urea (46% N) and MOP (muriate of potash- 60% K2O) supply nitrogen (N) and potash (K2O) for plant growth; DAP (di-amonium phosphate) contains both N (18% N) and phosphate (46% P2O5) NPKs- Complex fertilizers containing all three nutrients N, P2O5, and K2O; e.g. NPK 15-15-15 contains all three nutrients- 15% each of N, P2O5, and K2O Compound D is a NPK fertilzier product used in Southern Africa ; Cotton formula contains both NPK and micro-nutirents (supfur and boron) used generally in West Africa Specialty products: custom-made fertilizer products for specific crop and location.

Role of Product in Cost Build-up Internationally traded products Specialty products Size of shipment- Quantity shipped Location of country: Landlocked and Coastal Internationally-traded products like urea and DAP are produced in large scales, so their cost of production is lower than specialty products produced at a small scale. Because of economies of scale in shipping, large shipments like 25,000 tons cost lower than small shipments say 5000 tons in shipping Land-locked countries have to pay additional cost for in-land/in-transit transportation. For example, Mali has to incur $70-80/ton for moving product from Dakar port in Senegal to Mali border say, Bamako. Coastal countries do not incur such costs. Of course both countries have to incur inland transportation cost for marketing products to farmers in different parts of the country.

Fertilizer Price Formation This graph compares cost of urea in three different countries: An Asian coastal country (Thailand- large market), an African coastal country (Tanzania- small market), and a landlocked African country (Mali- small market) and reveals that how the location and size of the market can affect retail price. Retail price is 80% higher in Mali than in Thailand. Source: Chemonics and IFDC (2007)

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 This slide compares fertilizer costs in a relatively large market (Malawi) and a very small market (Angola). In Malawi fertilizers are imported in large shipments whereas in Angola they are imported in 22-ton containers, which adds to shipping cost. The very small size of the market also results in high transaction cost in other areas. As a result, retail price in Angola is over two-and half times the price in Malawi Source: Gregory and Bumb (2005)

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 What is the new retail price of Urea in Malawi if the global price changes to $810.00/ton? What is the price of a 50kg bag of Urea in Malawi Kwacha if the exchange rate is MKW 140/US$? What is the price of a 50kg bag of Urea if the exchange rate increases to MWK 200/US$? $1127.65/ton MKW3496.15/bag MKW4994.00

Exercises 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? 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$) MKW1048.85 and MKW7.34 billion ($52.44 million) $438.65/ton and MKW3070.20/bag

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