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AAMP Training Materials

AAMP Training Materials. B. L. Bumb ( IFDC ) bbumb@ifdc.org. Module 1.2: Fertilizer Supply Chain in Africa. Module Outline. Objectives Key Themes and Components Exercises Conclusions References. Objectives. Describe the links in the fertilizer supply chain

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AAMP Training Materials

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

  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 Conduct (Coordination) Performance (Profitability) 1 FLOW OF FERTILIZER FUNCTIONS TRANSACTION COSTS Procurement from overseas fertilizer manufacturers Procurement by tender or negotiation FOB cost + International shipping Ocean freight Freight costs + Arrival at African port Unloading, bagging, inspection, customs, and taxes Port charges and taxes

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

  9. The Fertilizer Supply Chain: Conduct & Performance Conduct (Coordination) Performance (Profitability) 3 FLOW OF FERTILIZER FUNCTIONS TRANSACTION COSTS Local transport by truck or public vehicles Local transportation Transport costs + Operating costs: storage, re-bagging, overhead, finance & margins Retail sales to farmer (direct sales or distribution) Agro dealer Farmer

  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

  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$?

  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$)

  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

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