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Working paper 3 - Fertilizer Markets and Agricultural Production Incentives: Insights from Kenya

Author(s):  Wanzala, M; Nyoro, James; Staatz, J; Mugera, A; Kirimi, J; Owuor, J


Introduction

Agriculture is the major economic sector in Kenya, employing over 70% of the population and contributing 24.6% to GDP (Economic Review, 1999). Therefore, economic development hinges on an improvement in agricultural productivity which, in turn, hinges on the use of productivity-enhancing inputs such as fertilizer.

As was the case in many African countries, in the late 80’s the Government of Kenya embarked upon a process to reform its agricultural sector, including the fertilizer subsector. However, unlike most other African countries, fertilizer market reform in Kenya has entailed not just the legalization of private trade, but also the virtual exit of government from continued involvement in distributing fertilizer.

In other African countries, concerns with the ability of the private sector to meet the needs of smallholder farmers, especially with regard to credit and service provision to farmers in remote areas, has motivated governments to continue distributing fertilizer during the liberalization period, often at subsidized prices. Some studies have concluded that government distribution programs have often hampered commercial trading incentives and hence impeded the private sectors’ response to liberalization (IFDC 2001; Govereh et al 2001; Stepanek et al 2001).

By contrast, in 1993, the Government of Kenya withdrew completely from fertilizer distribution and since then, it has relied on the private sector and cooperatives to meet the fertilizer needs of farmers. By contrast, 95% of the fertilizer consumed in Kenya is imported and distributed by the private sector. Because of this, the Kenyan experience provides an interesting test of how fertilizer markets have evolved (for a given level of institutional and infrastructural development) and whether they effectively serve the needs of smallholder farmers.

There are two types of private sector groups involved in the market. The first group consists of importers, wholesalers and retailers who sell to farmers and to non-governmental organizations. The second group consists of smallholder cash-cropping firms involved in interlocked input-output market arrangements, and large estates, some of whom import their own fertilizer directly and some of whom purchase fertilizer directly from private importers.

Government and donors anticipated that the fertilizer market reforms would initiate major investment by private firms in fertilizer distribution and marketing that would increase financial and physical access to fertilizers, particularly by smallholders who had been neglected under the controlled system, and thus catalyze farmer uptake and more efficient use of fertilizer (Arwings- Kodhek, 1996).

Moreover, advocates of output market reforms, which were launched in the late 1980s, argued that the reforms would raise farm prices and production, which would in turn stimulate demand for purchased inputs like fertilizer (Nyoro et al., 1999).

However, the general view in Kenya is that the performance of the reformed fertilizer subsector has fallen short of expectations. On the one hand, liberalization has increased private sector participation in fertilizer marketing and distribution. The number of players in the fertilizer subsector has mushroomed; 78% of the retailers and 73% of the wholesalers surveyed in1999 entered the fertilizer trade after liberalization commenced in 1990. Allgood and Kilungu (1996) estimate that in 1996 there were already 10-12 importers, 500 wholesalers, and 5000 retailers of fertilizer countrywide. But despite the increase in the number of traders, the expected large increase in fertilizer use has not taken place.

The paper has several specific objectives. First, we identify how fertilizer marketing costs and the types of fertilizers used have changed over the course of the liberalization process in Kenya. A second objective is to examine the fertilizer subsector in Kenya with a view to identifying organizational and institutional changes that could improve its performance. To do this, we identify various types of fertilizer supply chains serving farmers in western Kenya, examine the cost structure of these supply chains, identify potential sources of cost reduction in these supply chains, and lastly, estimate the impact of illustrative scenarios for reducing fertilizer marketing costs on the profitability of maize production in western Kenya. We draw our findings from small/medium farm budgets in three districts: Bungoma, Lugari, and Trans Nzoia.

This study may have broader regional significance in that the Kenyan experience provides an opportunity to assess the private sectors’ response to reforms and their ability to meet the needs of smallholder farmers in the an environment where the state has almost totally withdrawn from fertilizer marketing. The findings of this study may therefore be useful to the other African countries that are still undergoing the process of liberalizing their fertilizer subsector, and can benefit from the lessons to be learnt from Kenya’s experience.

 

 

Fertilizer Markets and Agricultural Production Incentives: Insights from Kenya

 

 

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