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

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

6. Stakeholder Functions Procurement, shipping, financing & inspection Domestic production, blending and bagging Local financing Transportation Domestic marketing –Wholesale –Retail Farming

7. The Fertilizer Supply Chain: Conduct & Performance Procurement by tender or negotiation Procurement from overseas fertilizer manufacturers FOB cost FLOW OF FERTILIZERFUNCTIONSTRANSACTION 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 + +

8. Local transport, unloading, storage, inventory finance costs & rent Warehousing at portWarehousing costs Conduct (Coordination) Performance (Profitability) Inland transportation Inland warehouse Inland transport by road or rail Inland storage Transport costs Warehousing costs 2 FLOW OF FERTILIZERFUNCTIONSTRANSACTION COSTS + + The Fertilizer Supply Chain: Conduct & Performance

9. Local transport by truck or public vehicles Local transportationTransport 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 FERTILIZERFUNCTIONSTRANSACTION COSTS + The Fertilizer Supply Chain: Conduct & Performance

10. 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

11. Role of Product in Cost Build-up Internationally traded products Specialty products Size of shipment- Quantity shipped Location of country: Landlocked and Coastal

12. Fertilizer Price Formation

13. Cost Components: Malawi & Angola, 2003 Cost ItemMalawiAngolaRatio of Angola to Malawi Cost FOB1452261.56 Shipping25953.8 Port Handling89812.25 Duties24824 Inland Transport60150.08 Dealer Cost/Margin1822012.22 Other Costs631262.16 Retail Price3218282.58

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 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$?

19. 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$)

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