Fertilizer Subsidies in Developing Countries

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The purpose of a fertilizer subsidy in most countries is to encourage the farmer to use more fertilizer, thereby increasing agricultural production. In Indonesia, the fertilizer subsidy has been used as an important input in programs to attain self-sufficiency in producing rice and other food crops. Due to these programs, fertilizer consumption in Indonesia has increased at an annual rate of 16% during the past 15 years. In Burkina Faso, fertilizers were subsidized as a short-term measure, primarily for cotton, but the subsidies were continued because of large food deficits. Argentina is using fertilizers to increase foreign exchange earnings by producing more grain. In the Ivory Coast, fertilizer is subsidized to increase cotton production, the major cash crop, and to reduce rice imports, which have increased as the population has migrated to the cities. In Gambia, groundnut production is the major source of foreign exchange earnings, and fertilizers have been subsidized to promote groundnut production. In Colombia, fertilizer is subsidized to promote exports by encouraging farmers to use modern coffee varieties. The subsidy influences coffee production, and the percentage of the subsidized fertilizer depends on the country's coffee stocks and the world supply /demand situation. In Zambia, subsidies have been used to reduce food imports and improve the standard of living. How Subsidies are Set Many countries set the fertilizer price by using the subsidy mechanism. Several countries, including India, Indonesia, Ivory Coast, Nepal, the Philippines, Turkey, and Venezuela, also set crop prices. Chile, which has no subsidy, sets minimum crop prices related to international market prices. There does not seem to be a fixed fertilizer: crop price ratio that countries try to achieve in setting the fertilizer subsidy or crop and fertilizer price relationships. The levels of crop and fertilizer prices are generally political decisions made at high levels of government and based on the country's finances and present food situation, as well as its goals and trade policies. Countries try to set crop: fertilizer price relationships to encourage fertilizer use. In Sierra Leone, fertilizer prices are set by a cabinet decision. In Zambia, recommendations are made by the National Agricultural Marketing Board in conjunction with the Department of Agriculture and approved by the Cabinet. Indonesia tries to set crop and fertilizer prices to achieve a ratio of 2. 0. In India, price subsidies are used on grain sales through government-controlled fair price shops. In Turkey, wheat is the major food crop. The wheat: 1 fertilizer price ratio is set to encourage wheat farmers to use fertilizer. Other prices are set about that of wheat. In most countries, the subsidy is set for 1 year. In Colombia, the government sets the fertilizer price every 3 months to reflect changes in inflation or currency devaluations. The fertilizer subsidy in Colombia is changed whenever the fertilizer price is changed. Prices in Sierra Leone changed twice in 1984. Fertilizer prices in Indonesia remained constant from 1977 to November 1982 and have not changed. In India, fertilizer prices have been in effect since June 1983. This is usually done annually in countries such as India, where the government sets crop prices. In Colombia, minimum crop prices are changed twice per year. Prices are usually set immediately preceding the cropping season. However, in Venezuela, prices for many crops have been in effect since 1980. Prices of maize were set in 1981 and those of rice in 1982. Amount of Subsidy Burkina Faso subsidizes about 40% of the actual fertilizer cost, but this amount is being reduced yearly. The new subsidy in Venezuela includes a reduction of 50% in the selling price of each fertilizer product and an additional adjustment according to the new exchange rate for imported raw materials. Before being abolished in Saudi Arabia, the fertilizer subsidy was set at 50% of the ex-factory or the c. i. f. import price. When the subsidy was in effect in the Philippines, urea was subsidized at about 30% of the selling price. The subsidy for locally produced compounds such as 14-14-14 was about twice the rate of the subsidy on imported products. In Gambia, 61% of the urea price, 62% of the diammonium phosphate (DAP) price, and 96% of the single superphosphate (SSP) price are subsidized. In Sri Lanka, urea receives a subsidy of 56%, while mono ammonium phosphate (MOP) receives a subsidy of only 33%. In Zambia, where urea is imported, it receives less than a 1% subsidy, while ammonium nitrate and ammonium sulfate receive 25% subsidies. Sri Lanka once paid the subsidy as a percentage of the c. i. f. import price. Today, however, fixed sums are allocated for the different fertilizers. Approximately 70% of the total Government expenditure is spent on urea. Ammonium sulfate (AS) is not subsidized because it is the policy of the· Government to encourage urea usage because of its high nitrogen content and local urea manufacturing facilities. In Colombia, the price of natural gas used as a fertilizer feedstock is set at 60% of the price charged for industrial use. In India, natural gas is sold by the GovernmentGovernment to the fertilizer industry at lower prices than to other consumers. However, this rate is still higher than that paid by fertilizer manufacturers in other countries. The producer in India is subsidized to cover high gas costs, high customs and excise duties, and high capital 2 costs required to build the infrastructure provided by the GovernmentGovernment of some countries. The subsidy is administered at the manufacturer level. In Zambia, the government-controlled producer is given grants to purchase raw materials. In Indonesia, the fertilizer price to the farmer is fixed, and the subsidy becomes the difference between this price and the actual costs of P. T. Pupuk Sriwidjaja, the company responsible for fertilizer distribution. Coverage In most countries, the fertilizer price is the same for small and large farmers and all crops. In India, some states offer 25% and 33.3% additional subsidies to small and marginal farmers, respectively. The transport of fertilizer over difficult terrain receives an additional subsidy. In Nepal, high transportation costs, as well as the price of fertilizer, are subsidized. In Saudi Arabia, when the subsidy was in effect, farm-gate prices varied from area to area depending on the distance that fertilizer was transported. In Colombia, fertilizer is only subsidized for coffee. In Burkina Faso, when fertilizer was used only for cotton, the subsidy cost was financed from cotton exports. In the Ivory Coast, fertilizer made locally by the Societe Ivoirienne d'Engrais (SIVENG) is subsidized for all buyers; in addition, the remaining costs are paid for cotton and irrigated rice growers by the advisory companies and indirectly by the GovernmentGovernment. These costs include storage and transport. At one time, the Philippines had a different subsidy for priority crops such as rice, feed grains, and vegetables than cash crops. However, the system was abandoned because of the diversion of fertilizer from one crop to another. At one time in Sri Lanka, the same product was sold at different prices for use on different crops. However, Sri Lanka's experience was similar to the Philippines, and the policy was discontinued. Even though the subsidies are the same for the same product on all crops, approximately 63% of the total subsidy expenditure goes for rice because of the area grown and because urea and triple superphosphate (TSP), the major products used, are highly subsidized. Tea benefits are minimal from the subsidy because AS and local phosphate rock are used--neither of which is subsidized. In Indonesia, the fertilizer price paid by the farmer is the same for all fertilizer products. Total cost In most countries, it is difficult to calculate the total cost of the subsidy. In some countries, such as India, warehousing, credit, transportation, and raw materials, as well as the price of fertilizer, are subsidized. In other countries such as Sierra Leone, Government employees sell fertilizer, which constitutes a subsidy to the extent that these costs are not reflected in the farmers' fertilizer price. Some countries, such as Argentina, offer tax concessions that have the same effect as a subsidy. In Chile, 3 fertilizer is not directly subsidized; low-cost credit programs are indirectly subsidized. In Zambia, the government pays for domestic transportation and storage. The fertilizer subsidy in many countries constitutes 2%-8% of the total agricultural budget,· but in some countries, it is much higher. During the past 4 years, the fertilizer subsidy in Turkey has been equivalent to 74%-94% of the total agricultural budget and represents 4%-5% of the total Government budget. In Sri Lanka, the subsidy represents about 2% of the total Government budget. A Rs 1 000 million allocation has remained constant since 1981 and may continue for the next few years. Thus, each year's subsidy declines in importance with inflation and the larger Government budget. In Colombia, the fertilizer subsidy for coffee in 1983 represented 8% of the agricultural budget. In the Gambia, 2% of the agricultural budget is spent on the subsidy, and in the Ivory Coast, 5% is spent. In Zambia, subsidies represented 19% of the agriculture budget in 1984. In India, fertilizer subsidies are estimated to average $55/ metric ton of product.
Subsidies, Fertilizers