Fertilizer Subsidies - Which Way Forward? Subsidies - Which Way Forward?

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  • Fertilizer SubsidiesWhich Way Forward?

    An IFDC/FAI Report

    Edited by Jikun Huang, Ashok Gulati, and Ian Gregory

    February 2017

  • i

    Preface

    Fertilizer subsidies in developing countries have been increasingly common policy interventions

    in recent years to increase supply and use of fertilizer and thus stimulate agricultural output and

    farmer income. The volatility of global food and fertilizer prices in 2007 and 2008 provided a

    stimulus for this resurgence in fertilizer subsidies. The multiple objectives and the rapid growth

    in the financial burden of subsidies and their share of the total support to agriculture have

    brought into question whether fertilizer subsidies are an appropriate policy intervention to meet

    the challenges of feeding almost 10 billion people in 2050,1 increasing urbanization in

    developing countries, reducing rural poverty, and reducing environmental impacts on regional

    agricultural production.

    Balanced and efficient fertilizer use is an essential component of increased agricultural

    production together with improved crop varieties, water management, land preparation, weed,

    disease and insect control, and sustained soil health. Harvesting and post-harvest technologies

    are also essential to capture and preserve increased agricultural production. The economic use of

    fertilizer is dependent upon the ratio of fertilizer price to crop output price and the incremental

    crop response to fertilizer nutrients. Fertilizer subsidies are merely transaction subsidies that

    impact the input/output price relationships. However, the whole supply and output value chains

    related to agricultural production include a multitude of services that impact fertilizer demand

    and use from finance to technical to processing and markets. In developed economies, fertilizer

    subsidies have essentially disappeared2 and agricultural support programs, particularly crop price

    stabilization, crop insurance programs, area payments uncoupled from production, and support

    linked to environmental criteria, replaced input subsidies in the 1960s and 1970s.

    The Fertiliser Association of India (FAI) and the International Fertilizer Development Center

    (IFDC) jointly undertook an analysis of fertilizer subsidies in five Asian countries (Bangladesh,

    China, India, Indonesia, and Pakistan) and four sub-Saharan countries (Malawi, Nigeria,

    Rwanda, and Tanzania) to understand their impact on the countries fiscal budgets, on

    1 United Nations Population Fund forecast, 2015. 2 http://www.oecd.org/tad/agricultural-policies/support-policies-fertilisers-biofuels.htm

  • ii

    productivity and nutrient management, and on the efficiency of fertilizer production, distribution,

    and consumption. Such analysis is intended to assist policymakers interested in better

    understanding the impact of fertilizer subsidies by documenting the diversity and effectiveness of

    existing subsidy programs and drawing lessons from the different regimes.

    The selection of the five Asian countries reflects the different sizes of the domestic fertilizer

    marketsfrom the worlds largest and second largest fertilizer nutrient markets (China and India

    with 28.8% and 13.5%, respectively, of the global fertilizer nutrient consumption in 2012/13) to

    smaller Asian markets (Bangladesh with 1.1%, Pakistan with 2.3%, and Indonesia with 2.9%)

    and a geographically challenging farm distribution. All of these countries participated in the

    Green Revolution from 1950 to 1970 and now have a long history of fertilizer use and

    fertilizer subsidy support, which were integral components of the Green Revolution. The

    selection also represents different levels of domestic fertilizer production and imported fertilizer

    dependence and the top five Asian countries with fertilizer subsidies.

    Sub-Saharan Africa (SSA), in total, only accounted for 1.6% of global fertilizer nutrient

    consumption in 2012/13, and national markets are still very small. The selection includes the

    largest SSA fertilizer market (Nigeria in West Africa) and three markets in East Africa, of which

    two (Rwanda and Malawi) are landlocked countries that incur substantial inland freight costs for

    imported fertilizer. None of the SSA countries benefited from the Asian Green Revolution.

    The world fertilizer market is increasingly globalized, with trade in 2012/13 accounting for

    31.8% (N), 36.3% (P), and 82.1% (K) of total consumption, and reaching 181.62 million metric

    tons (Mt) of nutrients (N+P2O5+K2O) in 2012/13, a 30.7% increase from 2000/01.3 In the two

    years from 2007 to 2009, total world consumption of nutrients fell by 25.5% to 54.96 Mt due to

    the financial crisis, economic downturn, and high volatility of international prices for fertilizers

    and agricultural commodities. It subsequently rebounded to 181.62 Mt by 2012/13. In 2012/13,

    the aggregate world demand was 110.17 Mt for N, 41.1 Mt for P2O5, and 30.37 Mt for K2O.

    3 http://ifadata.fertilizer.org/ucSearch.aspx

  • iii

    East Asian fertilizer consumption rose firmly between 2000/01 and 2012/13, and consumption of

    N only fell marginally in 2007/08, while that of P and K declined by 11.9% and 30.8%,

    respectively, in that year.

    South Asian demand also expanded firmly from 2000/01 to 2012/13, and contrary to most

    regions, regional demand soared during the crisis period from 2007/08 to 2008/09, boosted by

    demand in India where farmers were protected from international price increases. Conversely,

    regional demand contracted in 2011/12 following revisions to Indias fertilizer subsidy regime.

    In SSA, after a depressed period of more than two decades following the structural adjustment

    programs that removed national fertilizer subsidy programs, fertilizer demand has gained

    momentum since 2009, albeit from a very low base. Regional consumption of fertilizer nutrients

    is estimated to have increased by 47% between 2000/01 and 2012/13, mainly due to increased N

    consumption. The region was slightly affected by the downturn in 2008/09.

    It is estimated by the International Fertilizer Association (IFA)4 that aggregate fertilizer

    consumption of the countries subsidizing fertilizers accounts for 54% of world fertilizer demand.

    The nine countries considered in this analysis represent 41% of world fertilizer demand, or

    almost 80% of subsidized fertilizer. Not all the fertilizer consumption in these countries is

    subsidized, but they represent a major portion of the global fertilizer subsidy scene.

    Slightly over 50% of global fertilizer use in 2010/11 was estimated to be on cereal crops with the

    three main cereals, wheat, rice, and maize, each accounting for between 14% and 16% of the

    world total use.5 There is considerable variation in use by crop between regions. Cereals account

    for 44% in East Asia, 51% in South Asia, and possibly 60% in SSA.6 The importance of

    fertilizer use on cereal crops, the main staple food source for much of the developing world, is a

    major reason why fertilizer subsidies have been used in attempts to increase food production and

    food security. Initial design of fertilizer subsidies generally involved pan-territorial pricing,

    4 See Chap. 2 of this paper. 5 Heffer P (2013) Assessment of fertilizer use by crop at the global level, 2010-2010/11. IFA, Paris. 6 FAO; World Development Indicators (3) Cereal Yields.

  • iv

    allocations, and rationing. In Asia, they were successful initially at boosting fertilizer use but

    much less so in SSA where they were discontinued in the 1980s as a result of structural reform of

    national financial strategies. Many criticisms of traditional subsidies have been documented,

    ranging from market distortions, to crowding out, leakage, unbalanced and inefficient nutrient

    use, inefficiency, and unsustainable financial burdens. Many modifications to objectives,

    strategies, and implementation have been made by policymakers to improve effectiveness over

    the years. From 2000 onward, these modifications included the development of market-friendly,

    or smart subsidy programs, and following the global financial crisis of 2007/08, these

    expanded rapidly, especially in SSA.

    The global structure of the fertilizer sector, including production, trade, and consumption, is

    presented in this review together with country reviews and developments of fertilizer subsidy

    programs in the selected countries emphasizing the period from 2000 to 2013. Lessons learned

    from the subsidy experiences and suggestions on the way forward are provided for each selected

    country together with an overall assessment of the way forward.

  • v

    Table of Contents

    Page 1 Executive Summary ............................................................................................................................... 1 2 Fertilizer Use and Supply Trend and Outlook at the Global and Regional Levels .............................. 21

    Abstract .................................................................................................................................. 21 Fertilizer Use ......................................................................................................................... 21 Fertilizer