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Nicole Mason: The scope on fertilizer subsides

21 May 2015

Nicole Mason, Assistant Professor in the Department of Agricultural, Food, and Resource Economics at Michigan State University:

It is a great pleasure to be here. I want to start out in Southern Zambia, we have two farmers' fields here. The maize field in the back belongs to Bernard and notice that the maize there is tall, vibrant green and densely planted and each plant supports two full large maize cobs. The field in the front belongs to Mutinta, only a few plants grew and they are stunted and yellow and the few cobs that were produced are tiny, not much larger than Mutinta's finger. A poor widow, Mutinta worries about how she will feed herself and her family with such a poor harvest. She asked her, Mutinta, what happened, why was your harvest so poor when Bernard's field right next door had flourished. She responded, well, Bernard got subsidized fertilizer from the government and I did not. African governments spend more than US$1 billion per year on fertilizer subsidy programmes and in the ten countries that account for the majority of that spending, fertilizer subsidies account for about 30 per cent of all public spending in the agricultural sector.

Now many of these programmes are targeted fertilizer subsidy programmes meaning that only farmers selected to participate receive the subsidized fertilizer. This is in contrast to universal subsidy programmes where all farmers would have access to the subsidy. So today I am going to focus on these targeted fertilizer subsidy programmes in sub-Saharan Africa.

Coming to Bernard and Mutinta's fields, the difference is really striking and Mutinta attributes the difference to the government subsidy programme, but would Bernard's field really have looked much different if he had not got the subsidy? After all, Bernard was a wealthy farmer, powerful farmer, actually the head man or traditional leader in their village. What if Mutinta had been selected to receive the subsidy instead of Bernard? Might her field have looked different? And what if in general this subsidy programme in Zambia had targeted more farmers like Mutinta and fewer like Bernard, might it have had greater impacts on fertilizer use, yields and poverty? There is little doubt that fertilizer subsidy programmes in Africa have helped millions of farmers to increase their fertilizer use and improve their yields. But are these programmes having maximum impact, and if not what can we do to make them better? And what are the other types of policies, programmes and investments that we need to improve smallholder productivity and reduce rural poverty in Africa? Those are the types of things I want to think through with you today.

First, why are African governments spending US$1 billion on fertilizer subsidy programmes? Well there are a few key reasons. The first is that, on average crop yields in Africa are much lower than in other parts of the world, so in Asia we see average grain yields of about three to five tons per hectare and in developed countries average grain yields can be ten tons per hectare or more. In sub-Saharan Africa on average, grain yields are only about one ton per hectares, sometimes even less than that. And the key reason for these low crop yields is low use of chemical fertilizer. Application rates vary a lot from country to country and within countries but estimates suggest that on average African farmers are only applying about 13 kg per hectare, that is far, far below the developing country average of 94 kg per hectare. Now we all know the majority of the poor in Africa rely on agriculture indirectly or directly for their livelihoods and so improving crop yields through increase use of chemical fertilizer and other methods is absolutely essential for reducing hunger and poverty in Africa.

One recent study of the Montpelier panel actually states that no region of the world has succeeded in raising agricultural growth rates and reducing hunger without increasing fertilizer use. That is a pretty powerful statement. Now African policy makers recognize the critical need to increase fertilizer use and in 2006 they convened an Africa Fertilizer Summit in Abuja, Nigeria, and there they pledged to improve smallholder farmers' access to fertilizer through these targeted fertilizer subsidy programmes and other types of interventions.

In the previous year, Malawi had set up one of the first large-scale fertilizer subsidy programmes and early reports were that was quite successful. Undoubtedly other policy makers saw the Malawi programme and soon followed suit and set up similar programmes in their own countries. So here we are, some eight or nine years after that Africa fertilizer summit. What impacts have these programmes been having and how can they be improved? In order to assess the impacts of these programmes we need to know what their objectives are and their objectives vary a lot from country to country but some of the most common objectives are first increasing fertilizer use; second, raising crop yields and increasing production and then, third, raising incomes and reducing poverty.

So let us look at those one by one. First, have fertilizer subsidy programmes in Africa raised fertilizer use. I have a thought experiment for you. Suppose a subsidy programme is distributing 100 tons of subsidized fertilizer, how much is that going to raise total fertilizer use. It is it going to be 100 tons? Not necessarily. It depends on the types of farmers that are targeted. Think back to Mutinta and Bernard. Bernard was a wealthy farmer who could have afforded fertilizer even without the subsidy. When the subsidy is targeted to farmers like Bernard, 100 tons distributed through the programme is not going to raise fertilizer use by 100 tons because some of it is just going to be replacing what would have been commercial purchases by Bernard. Now what if it had targeted Mutinta, who was poor and could not afford fertilizer without the subsidy. Then we are likely to see closer to 100 ton increase in fertilizer use per 100 tons distributed. When we look at the data from Kenya and Malawi and Zambia, my colleagues and I are finding that 100 tons of fertilizer distributed through those subsidy programmes is only increasing fertilizer use by 50 to 60 tons. It is far below that 100 ton mark. And there are many explanations but a key one is that a lot of the fertilizer is going to farmers that could afford it even without the subsidy. So fertilizer subsidy programmes in Africa are increasing fertilizer use but we can do better. And we can do better by targeting more farmers like Mutinta and fewer like Bernard.

Another way that we can increase the impacts of these fertilizer subsidy programmes on fertilizer use is by tapping into the power of the private sector and using these programmes to build up private sector fertilizer distribution systems. The main way to do that is through voucher coupon programmes where the subsidy beneficiaries get a coupon or voucher that they bring to a private sector fertilizer retailed and redeem for a discount on bags of fertilizer.

Many of the biggest subsidy programmes in Africa actually do not work this way. The programme in Malawi and the programme in Zambia both of those distribute fertilizer to subsidy beneficiaries through a dedicated subsidized fertilizer distribution channel that does not work through private sector fertilizer retailers, it operates parallel to them, kind of side lines them. But some really exciting things can happen when we do engage the private sector and try to use these subsidy programmes to build them up. One exciting example actually does come from Zambia, the main Ministry of Agriculture and Livestock programme does not use these vouchers but another ministry, the Ministry of Community Development, Mother and Child Health, is piloting a voucher scheme for one of its subsidy programmes. And one of the things that is most exciting about this pilot scheme is how focused the implementers are on learning and innovating because in the first year that they did this programme it did not work so well. They started out doing the pilot but they only allowed one fertilizer retailer in each of those districts to participate. You can imagine that this could create a lot of problems. It gave that one fertilizer retailer a lot of power and in some cases that retailer jacked up his or her prices when the voucher recipient went to go and get their subsidized fertilizer. It also meant in some cases that the farmers had to travel a long distance to be able to redeem that voucher. But the implementers did not give up, they said, no, we can do better and in the second year they went on and canvassed the area and found all the agro dealers or fertilizer retailers that were there and signed up as many as seemed up to the task. This was great because it created competition among these fertilizer retailers, they started bidding wars, lowering their prices, trying to capture the business of those voucher holders. They also went mobile in some cases, loading the fertilizer on trucks, bringing it out to the villages, megaphones – fertilizer for sale, fertilizer for sale – and so the fertilizer was right there at the doorsteps of these voucher holders. They even brought extra along so that other people with cash in the community could have better access to fertilizer. These are the exciting types of possibilities that can happen with these programmes when we engage the private sector rather than side lining it. The main Zambia programme has earmarked some funds to do a voucher scheme this year and I really hope they have the political will to do it.

Another key example of the power of these voucher programmes comes from Kano State in Nigeria. In 2009 the government partnered with the international fertilizer development centre to do one of these voucher programmes and through a combination of good targeting, getting plenty of Mutintas in the mix, by engaging the private sector retailers with the voucher programmes and providing other support services to the retailers connecting them with farmers. This programme, according to my colleagues' research, raised fertilizer use by more than 100 tons per 100 tons distributed, it raised fertilizer use by 113 tons per tons distributed. These are the types of successes that we need to build on to increase the impacts of fertilizer subsidies on fertilizer use.

The second of impacts and objectives I want to think about with you today is the impacts of these programmes on crop yields and production. For this I have a couple of pictures. Question for you. I have two maize fields again. Which of these maize fields do you think had more fertilizer applied to it? The one on the right. Actually it is a bit of trick question so sorry for that. They had the same level of fertilizer applied to them, actually everything about the two fields is identical except that the field on the left has much higher soil acidity than the field on the right. The field on the right has less acidic soils. Just giving more fertilizer on African farmers' field is not going to be enough if the soil conditions are not conducive to the plant being able to take up and use that fertilizer. So when the soil is too acidic, as are many soils in parts of Africa, just piling on more fertilizer even if we increase fertilizer use we are not going to see much of an impact on yields. We would see a similar picture if we can two fields with two different levels of soil organic matter, if the soil organic matter is too low the nutrients are not available to the plant. So improving the quality of soils in African farmers' fields is absolutely critical. We need a more holistic approach to improving soil fertility and yields in Africa that goes beyond just fertilizer subsidies.

A second picture; the question this time is which of these fields had subsidized fertilizer applied to it? The one on the left. Okay, the on the left does look healthier but it was another trick question. It is the field on the right that had subsidized fertilizer applied to it, but the problem here was that it arrived much too late so these fields belonged to Evelyn, also a farmer in Southern Zambia and unlike Mutinta she was fortunate enough to be selected to participate in the subsidy programme. So she paid her down payment for the subsidized inputs but then had to sit back and wait for it to be distributed by the government, because remember that main programme in Zambia does not work through private agro dealers. Unfortunately there were some logistical challenges and the rains came, the planting rains came and her inputs had not come yet so she said, oh my gosh, I have to do something. Fortunately she had a bit of cash left over and so she went to an agro dealer and bought some additional hybrid maize seed and fertilizer and that is what she planted on the left part of the field. You can see that that part of the field is doing pretty well, it is off to a good start. Eventually the subsidized inputs came and she planted them in the right part of the field but did not have high hopes for that part of her crop. She was lucky to have had cash left over to go and buy these additional inputs, but many farmers that participate in the subsidy programme may have all the extra cash that they have locked up in that down payment for the subsidy programme and they are sort of held hostage by whether or not it is going to come on time, they do not have any control over that. These fertilizer subsidy programmes have had some positive impacts on yields and production but we can do better, and we can do better again by having a more holistic approach to increasing soil fertility and yields and by prioritizing timely availability of these inputs through subsidy programmes but also through private sector channels.

The last set of impacts I wanted to think about with you today is impacts on incomes and poverty. These impacts have been I think a bit more disappointing than the others and again it comes back in part to targeting. The programmes seemed to have raised incomes a bit but have not had much of an effect on poverty, and you say how can that be because poverty is a function of income, how does that work? Think back again to Bernard and Mutinta: when the subsidy goes to Bernard it could increase his incomes because he is paying less for fertilizer but if he is already above the poverty line we are not going to see much if any impact on the poverty rate. And that is what I am seeing in the data from Zambia and what we are seeing in similar countries, and Zambia participating in the subsidy programme raises farmers' incomes by about 16 per cent, US$42 per capita, that is substantial but it is only reducing the probability of falling below the poverty line or the poverty rate by one percentage point, against a rural poverty rate of 78 per cent. These programmes are having some impact but we can do better through better targeting, but I think we also need to ask ourselves are fertilizer subsidy programmes the most cost effective way to reduce rural poverty – they may not be, we need to look at other options.

So kind of summing up: these fertilizer subsidy programmes are having an impact but we can do better by targeting more farmers like Mutinta and fewer like Bernard by taking a more holistic approach to soil fertility management and improving yields, not viewing fertilizer subsidies as a silver bullet. We can do better by engaging the private sector through voucher schemes and other innovative ideas, and we can do better by prioritizing a timely availability of these inputs to farmers. I focus a lot on how to make these subsidy programmes better and I decided to take that angle because these programmes have a lot of staying power, once they are set they are very difficult to get rid of, kind of like letting the genie out of the bottle, it is tough to get it back in.

I think we also need to ask ourselves: are these fertilizer subsidy programmes really addressing the structural causes of low fertilizer use in African or are they just more kind of short-term fixes that might raise fertilizer use and yields in the short run but when they are removed may not have a lasting impact? I think we also have to ask ourselves if these programmes are the best use of scarce government resources. Remember US$1 billion per year or 30 per cent of agricultural sector budgets – in some cases up to 70 per cent of agricultural sector budgets are going to this one programme. Where is the money coming from? When you are spending that much money on fertilizer subsidy programmes, where is the money coming from for the other types of really important investments that we know drive productivity growth and reduce rural poverty? And those are things like investments in rural roads and agricultural research and development and extension and education. Those types of programmes have time and time again been shown to have higher returns per dollar invested than fertilizer subsidy programmes. We need to be prioritizing those types of investments as well. Fertilizer subsidy programmes are having an impact, we can do better and doing better may mean shifting some funds away from these fertilizer subsidy programmes and towards these known drivers of agricultural growth and poverty reduction, the roads and the agro search and extension and the like. Those types of investments can improve the profitability of fertilizer use as well with better roads. The price that the farmer has to pay for fertilizer will come down because the transport costs will be less. With better roads the price that the farmer gets for his or her crop will be higher because less of that price is being chewed up by transport costs, and with better agro search and extension we can improve the yield response of crops to fertilizer and we can improve the quality of African soils to make those fertilizers work better.

Fertilizer subsidy programmes are having an impact but we can do better. What can you do? I have three suggestions: inform, reform and advocate. Inform yourself and others about who is benefiting from these programmes, what impacts are they having and how can they be improved – and here I really encourage you to get beyond the headlines and the rhetoric and conventional wisdom and get into the empirical evidence because it is often quite different. Second, reform: push for reforms to the programme, that they be improved for greater impact and that these voucher schemes or other methods of trying to improve the private sector be explored. Lastly, advocate: advocate for a more holistic approach to improving soil fertility in yields and productivity and rural livelihoods in Africa. Fertilizer subsidy programmes are having an impact but we can and we must do better.