1. AAMP Training Materials
Module 1.2: Fertilizer Supply Chain in Africa
B. L. Bumb (IFDC)
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

2. Module Outline Objectives Key Themes and Components Exercises
Conclusions
References

3. 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

4. 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

5. 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.

6. 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.

7. 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.

8. 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.

9. 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.

10. Product Portfolio Internationally traded products
Urea, DAP, MOP, NPKs
Regionally traded products
Compound D, Cotton Formula
Local / Specialty Products
NPK , S
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 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.

11. 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.

12. 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)

13. 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)

14. 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

15. 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

16. 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

17. 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

18. 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$?
$ /ton
MKW /bag
MKW

19. 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$)
MKW and MKW7.34 billion ($52.44 million)
$438.65/ton and MKW /bag

20. 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.

21. 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