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Agricultural Input SubsidiesThe Recent Malawi Experience$

Ephraim Chirwa and Andrew Dorward

Print publication date: 2013

Print ISBN-13: 9780199683529

Published to Oxford Scholarship Online: January 2014

DOI: 10.1093/acprof:oso/9780199683529.001.0001

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Impacts on input market development

Impacts on input market development

Chapter:
(p.167) 8 Impacts on input market development
Source:
Agricultural Input Subsidies
Author(s):

Ephraim Chirwa

Andrew Dorward

Publisher:
Oxford University Press
DOI:10.1093/acprof:oso/9780199683529.003.0008

Abstract and Keywords

The involvement of the private sector in the FISP has changed over the life time of the programme with increasing participation in fertilizer procurement, inclusion and them exclusion in fertilizer retailing, and increased participation in seed sales and in the fertilizer transportation. This chapter documents these changes and identifies benefits and challenges of private sector participation in programme implementation. The analysis shows that commercial sales of fertilizers although lower than the pre-subsidy levels have been increasing, suggesting some medium term stimulation of fertilizer demand. This has occurred at a time when the private sector has increasingly participated in the procurement of subsidy fertilizer but been excluded from retailing of subsidy fertilizers. In addition, there is evidence that the private sector-led seed component of the subsidy programme has attracted additional seed growers and expanded the number of varieties for maize seeds and legumes.

Keywords:   input subsidies, input markets, private sector, Malawi

8.1. Introduction

The implementation of the Farm Input Subsidy Programme (FISP) in Malawi since the 2005/6 agricultural season has involved the interaction of the government of Malawi, the private sector, the development partners, Civil Society Organisations (CSOs), non-governmental organizations, traditional leaders, and smallholder farmers. These have played various roles in the implementation and success of the programme. The private sector has played a critical role in the procurement, transportation, and retail of farm inputs, but their involvement in the programme has changed over time. The private sector is involved in several aspects of the subsidy programme including the procurement of fertilizers, the transportation of fertilizers to various markets, the retail sale of fertilizers, and the production and sale of improved seeds.

There are potential benefits from the inclusion of the private sector in the implementation of a large and nationwide agricultural input subsidy programme, as noted in Imperial College et al. (2007). First, it is believed that most of the activities can be done more efficiently by the private sector, which is less prone to the bureaucracy associated with state delivery of services. Second, the involvement of the private sector is seen as a strategy for developing the private market system, especially in remote areas where the incentives for private sector investment in markets are weak. Third, the involvement of the private sector may allow the government to use scarce resources on other activities, by reducing the cost of the subsidy to the government. Fourth, the participation of the private sector in input retailing may reduce the displacement effects of the input subsidy programme.

This chapter assesses the impact of the Farm Input Subsidy Programme on the development of the private sector. The next section reviews the roles and nature of private sector participation in the input supply systems and the subsidy programme. Section 8.3 highlights the overall input purchases (p.168) and use. Section 8.4 analyses the changes that have occurred in the fertilizer market and the experiences of private sector participation in the subsidy programme. Section 8.5 looks at the impact of the subsidy programme on the seed industry. Section 8.6 highlights the challenges and opportunities for greater private sector participation in the implementation of the subsidy programme. In Section 8.7 we conclude and highlight the issues and options for improving private sector participation in the implementation of the subsidy programme.

8.2. Roles of various players in input supply systems

The public and private sectors play various roles in the supply of farm inputs in Malawi, from procurement of inputs to retailing of inputs to farmers. The Malawi Government is directly involved in the supply of farm inputs through its two state-owned firms, the Agricultural Development and Marketing Corporation (ADMARC) and the Smallholder Farmer Fertilizer Revolving Fund of Malawi (SFFRFM). These state-owned firms compete with private sector enterprises comprising large-scale enterprises, cooperative, retail chain stores, and small-scale agro-dealers. With the introduction of the farm input subsidy, state enterprises and private firms have played varying roles over the life time of the programme. The input suppliers have a number of associations and networks including the Fertilizer Association of Malawi (FAM), the Seed Traders Association of Malawi, Agricultural Input Suppliers Association of Malawi (AISAM), and a network of input suppliers under the Citizen Network for Foreign Affairs (CNFA)/Rural Market Development Trust (RUMARK). In addition, the National Association of Smallholder Farmers of Malawi (NASFAM), a farmer cooperative, also provides input access to smallholder farmers on a commercial basis through a network of input supply shops. While state-owned enterprises have had consistency in the supply of inputs, the private sector participates in the subsidy programme in various ways in the fertilizer and seeds components of the programme. On the one hand, the relative roles of the private sector in the fertilizer component of the programme have varied over time as regards their participation in and exclusion from retail sales while remaining important partners in the procurement of fertilizers for the programme and commercial sales. On the other hand, private sector participation in the seed component of the programme has been consistent. Apart from participation in the subsidy programme, the private sector also procures fertilizers and seeds for commercial sales in various market outlets across the country. (p.169)

Impacts on input market development

Figure 8.1. Structure of the fertilizer industry in Malawi in 2010

Source: Kelly et al. (2010) and School of Oriental and African Studies et al. (2008).

8.2.1. Fertilizer markets under FISP

The structure of the fertilizer industry in Malawi has evolved since the introduction of the input subsidy programme, with exits and entries, but it remains dominated by a few players with vertical and horizontal relationships. Figure 8.1 shows the characteristics and level of participation of various players in the supply of fertilizers in procurement, distribution, and retail. At procurement level, the private sector players can be categorized into large/well-established private firms (commercial firms and cooperatives) and small/new entrants, while in the public sector there is SFFRFM and ADMARC. The private sector firms and SFFRFM import fertilizers for both the subsidy programme and commercial sales while ADMARC has only procured for the subsidy programme. The private sector firms participate in the procurement of fertilizers for the programme in a competitive tendering process. In addition, the two state-owned enterprises, ADMARC and SFFRFM, also take part in the fertilizer tendering process.

Over time, the business opportunities in the supply of fertilizers to the programme have led to new entrants in the importation of fertilizers. Dorward et al. (2010b) note that there has been increased participation of the private sector in the supply of fertilizers to the programme, be it in terms of number of players and the relative volume handled by the private sector relative to (p.170) volumes handled by the state-owned enterprises or parastatals. Most importantly, private sector participation in the procurement of fertilizers has been consistent since the programme started in 2005/06. There has been growing interest in the supply of fertilizers to the programme. Logistics Unit (2012) shows that in the 2011/12 season, 65 enterprises submitted bids to supply fertilizers to the subsidy programme of which 20 were awarded contracts, an increase from 11 companies in the 2007/8 season (Logistics Unit, 2008).

Procurement is vertically linked to the distribution and retail of fertilizers to farmers, with some of the private sector firms and the two state-owned enterprises owning retail outlets in different parts of the country. The large private firms and some small to medium-scale new entrants also supply unsubsidized fertilizers to a network of agro-dealers and retail chain stores or supermarkets. However, the participation of the private sector in the retailing of subsidized fertilizers has been limited. Although the private sector plays a dominant role in the procurement of fertilizers, its participation in fertilizer retailing to smallholder farmers under the subsidy programme has varied, with the private sector participating only in the 2006/7 and 2007/8 agricultural seasons (Dorward and Chirwa, 2011c). In these two seasons, smallholder farmers were able to redeem fertilizer coupons at some of the major retailers of fertilizers, but smallholder agro-dealer sellers were excluded from the redemption of fertilizer coupons. Otherwise, ADMARC and SFFRFM have been the only market outlets through which smallholder farmers have redeemed their subsidy fertilizer coupons.

The other important role played by the private sector in the implementation of the subsidy programme is the transportation of fertilizers from the national depots to retail outlets in various parts of the country. There is no participation of state-owned enterprises in this activity, and this service is purely provided by private transporters through competitive bidding. The transporters of fertilizers from depots to unit markets are selected by the Ministry of Agriculture through a bidding process (Logistics Unit, 2008). In the 2011/12 season, a total of 23 transporters participated in the distribution of fertilizers from SFFRFM depots to various unit markets across the country (Logistics Unit, 2012) compared to 16 transporters in the 2008/9 season (Logistics Unit, 2009).

8.2.2. Seeds market

In contrast to the fertilizer market, the seeds market is a private sector-based system, with no state-owned enterprise playing a role in the procurement of seeds. Figure 8.2 shows the structure of the seed industry in Malawi at various levels of the supply chain. The seed industry comprises the growers and retailers. The growers form the Seed Trade Association of Malawi (STAM) and (p.171)

Impacts on input market development

Figure 8.2. Structure of the seed industry in Malawi in 2010

Source: Kelly et al. (2010) and School of Oriental and African Studies et al. (2008).

are classified by ownership into international firms and domestic firms; by 2011/12 there were18 seed growers in Malawi. The international companies are involved in the production of hybrid and open pollinated varieties while Malawian-owned companies tend to specialize in open pollinated varieties and legume seeds. The international firms include Pioneer and Monsanto who specialize in hybrid maize, and Pannar and Seed Co specializing in both hybrids and open pollinated varieties (OPV). The domestic firms specialize in OPVs and legume seeds and include Funwe, Demeter, and the Association of Smallholder Seed Multiplication Group (ASSMAG). The retail sector of the seed industry consists of seed growers’ distributor outlets, agro-dealers, cooperatives, supermarkets, and parastatals (ADMARC and SFFRFM).

The private sector has been a major player at all stages of seed supply and distribution of seeds in the subsidy programme. Its exclusive role in seed procurement and retail has been consistent since the commencement of the programme in 2005/6. Both large international and smaller domestic firms (including smallholder seed multiplication groups) have been awarded contracts to supply hybrid and OPV maize seeds and legumes to the programme. In the 2007/8 season, for instance, six growers of seeds participated in the supply of maize seeds to the subsidy programme with one specializing in hybrid seeds, two in both hybrids and OPV, and three specializing in OPV seeds. More recently, as we observe below, the number of companies for supplying maize and legume seeds to the subsidy programme has increased. (p.172)

The delivery of the seed component of the programme has, since 2006/7, been consistent with the promotion of private sector development in input markets. In the 2005/6 season, all the distribution and retailing of seeds under the subsidy programme was done through ADMARC and SFFRFM (Imperial College et al., 2007). However, beginning with the 2006/7 season, seed procurement has been handled purely by the private sector, and seed suppliers have been distributing the seeds to retailers (parastatal and private sector retailers) across the country. The 2006/7 season also saw the inclusion of small-scale agro-dealers in the redemption of seed coupons (Dorward and Chirwa, 2011c) and Logistics Unit (2008) notes that maize seed dealer outlets were unrestricted and seed producers entered into various arrangements with small-scale input agro-dealers and retail chain stores in addition to ADMARC and SFFRFM outlets.

8.3. Overall input purchase and use

There are difficulties in estimating the overall purchases and use of fertilizers due to lack of consistent data on commercial sales of fertilizers. However, we use import figures to estimate fertilizers available for commercial sales after accounting for subsidized fertilizers. The official import data include fertilizers for both estates and smallholder farmers. Figure 8.3 shows the trends in imports, disaggregated between subsidy fertilizers and fertilizers available for commercial sales, using industry data from 2004 to 2006 (School of Oriental and African Studies et al., 2008) and NSO import data from 2007. The trend in the fertilizers available for commercial sales after subtracting the subsidy from imports shows a marginal increase between the 2004/5 and 2005/6 season and a sharp decrease in 2006/7.1

After falling in 2006/7, the trend from 2007/8 is for increasing availability of commercial fertilizers in addition to increases in total imports of fertilizers. However, available commercial fertilizer in 2010/11 is still below the 2004/5 level (the year before the commencement of the subsidy programme). A small reduction in subsidized fertilizer between 2007/8 and 2008/9 is associated with a substantial increase in the quantity of fertilizer available for commercial sales in 2008/9. There is a decline in importation of fertilizers and availability of commercial fertilizers in 2009/10 but an increase in imports and available commercial fertilizers in 2010/11 while the subsidy levels remained (p.173)

Impacts on input market development

Figure 8.3. Fertilizer imports and fertilizer use, 2004/5–11/122

Sources: National Statistical Office (2009)—Statistical Year Book Data Set; Dorward and Chirwa (2011c) and School of Oriental and African Studies et al. (2008).

unchanged. The decline in 2009/10 is also associated with a sharp decline in the previous season’s price for burley tobacco. Chirwa et al. (2011a) note that 2008/9 prices for burley were significantly low towards the end of the marketing season compared to three previous seasons. This might have led to reduced demand for commercial fertilizers.

Interestingly, available commercial fertilizer in 2010/11 was more than subsidized fertilizer. The subsidy programme in the 2010/11 season excluded tobacco fertilizers, and the increase in the available commercial fertilizers may reflect lower displacement due to the focus of the programme on maize fertilizers. As noted in School of Oriental and African Studies et al. (2008), the subsidy on tobacco fertilizers had higher displacement than the subsidy on maize fertilizers. Then, in 2011/12 there is another drop in imports, subsidized fertilizers, and available commercial fertilizers. Tobacco was also excluded in 2011/12 but the decline in available commercial fertilizer may be partly due to the collapse of tobacco prices in 2010/11 season which led many smallholder farmers to abandon tobacco production in the 2011/12 season. The 2011/12 crop estimates show that tobacco production was expected to decline by more than 36%. Except for bad years for tobacco, these results show that there has been an overall increase in fertilizer importation and an increase in the fertilizers available for commercial use, suggesting that after an initial decline the subsidy programme might have stimulated fertilizer use. (p.174)

Table 8.1. Household survey estimates of total seed purchases (‘000 metric tons)

Subsidized

Unsubsidized

Total

Season

Hybrid & OPV seed

Legume seed

Hybrid & OPV seed

Legume seed

Hybrid & OPV seed

Legume seed

2007/8

1.7

-

4.3

-

6.1

-

2008/9

4.7

-

5.4

-

10

-

2009/10

5.4

0.9

3.6

1.6

10.9

2.5

2010/11

8.2

1.6

4.8

2.8

15.9

4.4

Note: Estimates based on NSO population estimates.

Data on overall purchases and use of seeds are not readily available. However, national estimates from household surveys show that the quantity of hybrid maize seeds used increased. Table 8.1 shows that total hybrid and OPV maize seeds use has increased by 160% between 2007/8 and 2010/11 season, while legume seeds use almost doubled between 2009/10 and 2010/11 largely due to increased levels of seed subsidization.

8.4. Developments in the fertilizer markets

8.4.1. Changes in competition in fertilizer procurement

The introduction of the Farm Input Subsidy Programme has attracted a number of entrepreneurs in the fertilizer import sector. Figure 8.4 presents the trend in the number of firms that participate in the procurement of fertilizers under the subsidy programme. There are two parastatals involved in the procurement of fertilizers, ADMARC and SFFRFM, but only SFFRFM has been active in the bidding while ADMARC has benefited from uncompetitive allocation as a parastatal, except in 2011/12 where it also participated as a bidder. There are increasing trends in both the number of private sector bidders interested in procuring fertilizers and the number of bidders who were awarded contracts to supply subsidy programme fertilizers, particularly from the 2009/10 season. The number of interested private bidders increased from 24 companies in 2009/10 to 65 companies in 2011/12. The subsidy programme has over time attracted new companies whose traditional business is not importation of agricultural inputs. Similarly, the number of successful awards of contracts has also increased from 10 private companies in 2009/10 to 20 private companies in 2011/12. Some of the new companies, as well as the more established ones, have had links with different political parties, and (p.175)

Impacts on input market development

Figure 8.4. Number of bids and awards in fertilizer procurement, 2008/9–11/12

Source: Logistics Unit (2008, 2009, 2010, 2011, 2012).

these may have affected their participation in the programme. With respect to parastatals, SFFRFM has always participated and succeeded in the supply of subsidy fertilizers while ADMARC has only been awarded contracts to supply in the 2009/10 and 2011/12 agricultural seasons. However, what is not clear is whether the new entrants in fertilizer imports are also importing fertilizers for commercial sales.

Apart from the entry of other players in the supply of fertilizers under the programme, there have also been notable exits, such as the National Association of Smallholder Farmers of Malawi (NASFAM), Rab Processors, and Yara who participated in 2006/7 but have not since continued to participate in the programme (Kelly et al., 2010). Yara closed down its international representation in Malawi, turning over an exclusive right to import Yara fertilizers to Agricultural Resources Limited. These exits are therefore only in (p.176)

Impacts on input market development

Figure 8.5. Value and value share of subsidized fertilizers supplied by sector, 2007/8–11/12

Note: The figures are new procurement during the season.

Source: Logistics Unit (2008, 2009, 2010, 2011, 2012).

subsidized fertilizers; the firms have continued to supply fertilizers in the market on commercial basis.

Figure 8.5 shows the share of fertilizers supplied to the programme by the private firms and parastatals in terms of value of supplies. Panel (a) shows large annual variations in the value of fertilizer purchases by the private sector between 2007/8 and 2010/11. In panel (b), however, there is a steady increase in the share of the value of supplies accounted for by the private sector, increasing from 71% in 2008/9 to 95% in 2010/11, but falling to 78% in 2011/12. In monetary terms, the highest realized value to the private sector occurred in 2008/9, amounting to $203.75 million, consistent with the high volume procured by the private sector but also reflecting high international fertilizer prices. (p.177)

8.4.2. Changes in competition in the fertilizer retail market

There are several kinds of players in the fertilizer retail market including importer-managed outlets, cooperative-managed outlets, chain stores and supermarkets, agro-dealers, and parastatals’ unit markets (Kelly et al., 2010). The participation of the private sector in the retail marketing of subsidized fertilizers has been the most difficult aspect in relation to the development of the private input markets across the country. As noted above, the private sector was allowed to redeem fertilizer vouchers only in the 2006/7 and 2007/8 seasons.

In the 2006/7 season, a total of 174,688 metric tons of subsidized fertilizers was sold to smallholder farmers with ADMARC and SFFRFM sales accounting for 72% of fertilizer sales and the private retailers accounting for 28% (School of Oriental and African Studies et al., 2008). The private sector continued to participate in retail of subsidized fertilizers in 2007/8, with the innovation of a remote market premium. According to Logistics Unit (2008), ‘in certain extension planning areas (EPAs) within the districts where private sector involvement had been limited in the previous year, it was agreed to pay the retailers an additional sum of either 100MK or 200MK per voucher depending based on last year’s sales figures for each EPA’. Kelly et al. (2010) find that the ‘remoteness’ premium encouraged the private sector to provide inputs in more locations in 2007/8 than in the previous season, although there was no evidence that such outreach was on a medium to long term basis.

Those in favour of private sector participation in fertilizer subsidy retail sales point to several benefits, including efficiency, freeing government resources, facilitating a strategy for promoting input markets in remote areas, broadening of choice of and competition between outlets for smallholder farmers, and reducing transaction costs and costs of queuing. However, opponents of private sector participation in the subsidy fertilizer retail market argue that the private sector cannot be trusted as they may be exchanging coupons for other merchandise rather than fertilizers in the absence of an audit system,3 the available stocks held by private sector firms cannot be verified, that there is a high incidence of fraud in the private sector, and that private sector sales make it difficult to control the cost of the subsidy programme. These arguments were cited as grounds for the government’s decision to exclude the private sector from retail sales of subsidized fertilizer from 2008/9 onwards.

Counter-arguments are that there is also evidence of fraud and corruption by some parastatal sales clerks, and that effective cost control should be achieved through control of coupon issue—as has been achieved from the (p.178) 2009/10 season (although difficulties are also illustrated by major problems with excess seed costs in 2010/11 as a result of problems in detecting large numbers of counterfeit seed vouchers).

8.4.3. Fertilizer sales trends: evidence from household surveys

The household surveys shed light on the trends in the commercial sales of fertilizers among smallholder farmers. Figure 8.6 shows the various retail channels from which households reported purchasing their commercial fertilizers in the 2006/7, 2008/9, and 2010/11 seasons. The proportion of households accessing private company market outlets for commercial purchases has increased significantly from about 6% in the 2006/7 season to about 30% in 2010/11. This increasing trend is also evident in the use of club or farmer cooperatives as a source of commercial fertilizers. The purchase of fertilizers on a commercial basis from parastatals has been falling, from 18% in 2006/7 to about 13% in the 2010/11 season. These figures suggest that commercial sales of fertilizers have flourished in the presence of the subsidy programme. Although, the private sector has been excluded in the retail of subsidized fertilizers, the subsidy programme might have stimulated demand for commercial fertilizers, thereby promoting private sector development.

Impacts on input market development

Figure 8.6. Sources of households’ commercial fertilizer purchases, 2006/7–10/11

Source: Computed by authors based on AISS1, AISS2, and AISS3.

(p.179)

The evidence on household use of different marketing channels for purchase of commercial fertilizers in Figure 8.6 is also supported by information on the average volumes of commercial fertilizers purchased by households, shown in Figure 8.7. On average, the volume purchased from traders has fallen significantly from about 50 kg in 2006/7 to about 10 kg in 2010/11. Sourcing fertilizers from relatives or neighbours increased, but this may be fertilizer that could either have been subsidized and resold or received through remittances. There is an increase in average volumes purchased from the local market initially, but this declined between 2008/9 and 2010/11. There is a declining trend, however, in average commercial purchases from parastatals (ADMARC and SFFRFM). The increasing trends in the volume purchased from farmer cooperatives and private company outlets suggest positive private sector market development. For instance, in the 2006/7 season, households purchased on average 9 kg of commercial fertilizers, but this increases to 42 kg in 2008/9 and 60 kg in 2010/11, despite fertilizer price increases. This further suggests that the subsidy programme may have helped in stimulating commercial demand for fertilizers, and certainly has not depressed it over the longer term, as private marketing activities have continued to flourish in the medium term.

Impacts on input market development

Figure 8.7. Mean quantities of commercial fertilizer purchases per household, 2006/7–10/11

Source: Computed by authors based on AISS1, AISS2, and AISS3.

(p.180)

Interestingly, although the international fertilizer price almost tripled in the 2008/9 season (Dorward and Chirwa, 2011c), there was an increase in the purchase of commercial fertilizers from private company retail shops. This is also consistent with the lower estimated displacement in 2008/9 season (Ricker-Gilbert and Jayne, 2010a). Similarly, Chirwa et al. (2011d), using a matched panel, note general increases in the purchase of commercial fertilizers between 2008/9 and 2010/11 among poor and non-poor households and a decrease in average subsidy fertilizers received by households.

These positive changes in private sector market development are also consistent with earlier studies. For example, Kelly et al. (2010) note that the perceived number of retailers selling only fertilizers increased, while those selling both seeds and fertilizers fell between the 2006/7 and 2008/9 agricultural seasons, although community surveys revealed little change in the number of input suppliers. Nonetheless, there were also a number of exits from seed and fertilizer markets during the period. Similarly, a higher proportion of retailers revealed that their business performance in terms of sales and profits had increased between 2007/8 and 2008/9 (Kelly et al., 2010).

8.4.4. Displacement of commercial fertilizer sales

The Farm Input Subsidy Programme could have several impacts on the input market system depending on the scale, targeting, and other implementation modalities. On the one hand, a poorly-targeted large-scale programme results in displacement of commercial sales and introduces disincentives for private investments in input markets. On the other hand, a well-targeted programme can stimulate additional demand for commercial fertilizers among subsidized households by improving the productivity and profitability of their farming activities and their ability to finance fertilizer purchases. The displacement effects are a function of targeting among other factors such as fertilizer prices and prices of agricultural produce: where subsidized fertilizers are provided to farmers that can afford commercial purchases, the displacement of commercial sales is likely to be high, thereby depressing incremental production. Thus, poor targeting, in which better-off farmers also tend to be recipients of subsidized fertilizers, may lead to substantial displacement of commercial sales by subsidized sales, resulting in a reduction of production and welfare impacts of the subsidy programme.

The relative promotional and displacement effects are examined in Table 8.2 which shows the quantity of subsidized and commercial fertilizers acquired by households in the 2009/10 and 2010/11 seasons by IHS2 poverty status (2002/3 and 2003/4) compared with commercial fertilizers in the IHS2. Among poor households the average quantity of subsidized fertilizers (p.181)

Table 8.2. Quantity of subsidized and commercial fertilizers by IHS2 poverty status (kg)

Years with subsidy access

Poor households in 2003/4

Non-poor households in 2003/4

Subsidy

Commercial

Subsidy

Commercial

N

2009

2010

2003/4

2009

2010

N

2009

2010

2003/4

2009

2010

0

4

0

0

82

58

55

11

0

0

691

132

128

1

17

3

12

37

61

79

18

10

17

123

246

250

2

15

44

20

176

126

92

13

32

17

221

157

181

3

18

52

36

68

29

80

23

35

44

174

98

99

4

22

59

50

130

54

70

22

49

39

79

141

151

5

37

51

38

52

31

51

37

54

40

162

72

102

6

114

70

66

72

40

51

112

75

74

116

61

63

All

227

54

47

78

48

61

236

53

49

165

100

109

Source: Computed by authors based on IHS2 and FISS3 data.

declined from 54 kg in 2009/10 to 47 kg in 2010/11, while commercial fertilizers increased from 48 to 61 kg. A similar trend is observed among non-poor households, and may be related to economy-wide impacts of the programme. The data also shows that both poor and non-poor households supplement subsidized fertilizers with commercial fertilizers, but among the poor the higher the number of seasons a household benefits from the subsidy, the lower the supplementation with commercial fertilizers. No consistent pattern emerges with respect to non-poor households that are subsidized.

A comparison of the 2009 and 2010 commercial purchases with the 2003/4 purchases shows a mixed picture among different households. On the one hand, among the category of poor households, only those that have had access to the subsidy in seasons 1 and 3 are on average purchasing more in 2010 than in 2003/4. On the other hand, among the non-poor households, only for households that have had access to the subsidy in seasons 1 and 4 do we witness purchases above the 2003/4 levels. This suggests some crowding out of commercial fertilizer sales due to the subsidy programme, although the decline in commercial purchases also occurred among households that have never received subsidized fertilizers. However, it should also be noted that the average prices of commercial fertilizers substantially increased from 37MK per kg in 2003/4 to 97MK per kg in 2010/11, an increase of 162% over the period; this might have dampened the demand for commercial fertilizers.

School of Oriental and African Studies et al. (2008) using national fertilizer sales data and taking into account the price effects, estimated displacement rates of 20% and 42% in 2005/6 and 2006/7, respectively, without any allowance for the effects of fertilizer and maize or tobacco price changes (p.182) on demand. The displacement rates were substantially higher for tobacco fertilizers compared to maize fertilizers. Using household survey data and a matched sample of smallholder farmers, Ricker-Gilbert et al. (2010) note that the proportion of smallholder farmers purchasing commercial fertilizers fell from 40% in 2003/4 to 16% in the 2006/7 season. The regression results, from a double hurdle model allowing for fertilizer and maize or tobacco price changes, revealed a displacement rate of 22%, with 18% among poorer households and 30% among non-poor farmers (Ricker-Gilbert et al., 2010). Using a similar model, Ricker-Gilbert and Jayne (2010a) estimate an average displacement rate of 3% in 2008/9.

Chirwa et al. (2011d), using household data for 2002/3, 2003/4, and 2010/11 seasons, find that for a matched sample of households that bought commercial fertilizer in the 2002/3 and 2003/4 seasons, a 1% increase in subsidized fertilizers led to a 0.39% reduction in commercial sales, but this fell to an elasticity of –0.15 (or a net displacement rate of 15%) for the whole sample of panel households who bought commercial fertilizers in either of the seasons. The decrease in the elasticity suggests that the subsidy programme does not only have displacement effects, but also promotional effects when one accounts for households that did not initially purchase commercial fertilizers.

The displacement rates in the seed market tend to be higher, although there is also anecdotal evidence suggesting that the subsidy programme is stimulating demand for improved maize seeds. School of Oriental and African Studies et al. (2008) note that in 2006/7 one of the major suppliers of improved seeds reported a sales increase of 52% over 2005/6 levels, with many suppliers qualitatively indicating improvements in sales. Kelly et al. (2010) also find evidence of the positive impact of the subsidy programme on seed sales in the 2007/8 and 2008/9 agricultural seasons. In addition, a large proportion of retailers surveyed were in favour of the continuation of the seed subsidy: 95% of those that participated and 76% of those that did not participate in the 2008/9 agricultural season (Kelly et al., 2010). However, Mason and Ricker-Gilbert (2012) find that a 1 kg increase in subsidized seed acquired by the household reduces commercial improved maize seed purchases by 0.56 kg in Malawi (a displacement rate of 56%), higher than in Zambia where the displacement rate is 49%. Improved seeds are substantially cheaper than subsidized fertilizers, and relatively more households can afford to buy commercially thereby increasing displacement rates relative to the displacement rates in fertilizer markets. However, it must be recognized that estimation of both fertilizer and seed displacement rates involves difficulties in categorization of some purchases as subsidized or unsubsidized. This is likely to be particularly difficult for seeds, where purchases of recycled hybrid seed may be difficult to distinguish from purchases of new seed. (p.183)

Table 8.3. Number of seed suppliers to the subsidy programme, 2006/7–11/12

Seed type

2006/7

2007/8

2008/9

2009/10

2010/11

2011/12

Hybrid maize

3

3

3

4

3

5

OPV maize

5

5

4

4

4

6

Tested bean

-

-

-

4

2

5

Tested groundnut

-

-

-

4

4

10

Soya bean

-

-

-

2

2

3

Pigeon pea

-

-

-

1

1

5

Cow peas

-

-

-

1

1

1

Cotton

-

-

2

-

-

-

Number of firms

6

6

8

8

9

12

Note: Some firms supply more than one type of seed, so the total number of firms is not the total for the columns.

8.5. Developments in the seed market

8.5.1. Changes in competition in the seed market

The private sector has, from 2006/7, consistently participated in the distribution and retailing of seeds under the subsidy programme, as noted above. Improved maize seeds and legumes have been made available to the programme by the private sector in all years, though the retailing of seeds under the programme was implemented from the 2006/7 season. This has meant players in the seed value chain—including seed producers, agro-dealers, and supermarkets—have been participating in the subsidy programme. Previous evaluation reports such as School of Oriental and African Studies et al. (2008) and Kelly et al. (2010) have pointed to the positive impact of the subsidy programme in promoting private sector businesses in input provision.

In terms of the structure of the seed industry, there have been some limited changes in the number of seed growers, but the major changes in the structure seem to have occurred at retail level. Table 8.3 provides the distribution of firms supplying various seeds to the subsidy programme and shows that the number of firms supplying seeds has increased from 6 in 2006/7 to 12 in 2011/12. Two new growers entered into the market in 2009/10: Seed Tech supplying maize hybrid and OPV, and National Association of Smallholder Farmers of Malawi (NASFAM) supplying groundnut seeds (Logistics Unit, 2010). In 2010/11 the number of firms supplying seeds to the programme increased to nine, with the exit of Agricultural Input Suppliers Association of Malawi (AISAM) and entry of Panthochi supplying OPV maize seeds and Peacock supplying tested groundnut seeds to the programme (Logistics Unit, 2011). In 2011/12, 12 companies supplied seeds to the programme with (p.184) the re-entry of AISAM, ASSMAG, and Seed Tech and a new entry, Pindulani (Logistics Unit, 2012). Although the number of firms has increased over the years, Kelly et al. (2010) note that this has not resulted in competitive pricing as the supply prices to the programme are negotiated between STAM and the government: this competition has just broadened the choice of seeds for the farmers.

Nonetheless, the seed industry is highly oligopolistic, with new entrants just providing fringe competition. Data from the Logistics Unit shows that the two largest suppliers of seeds to the subsidy programme account for 71% of maize voucher redemption and the three largest suppliers account for 87% of maize voucher redemptions. Similarly, in the legume seed market, the two and three largest suppliers to the subsidy programme account for 65% and 75% of voucher redemptions, respectively.

There is, however, an increase in the level of competition at retail level in terms of the number of competitors in the local communities. Kelly et al. (2010) find that agro-dealers reported a 15% increase in competitors between 2005/6 and 2008/9, while distributors reported a 3% increase in the number of competitors. However, community surveys revealed that only 22% of the communities believed that the number of seed sellers accessible in their community had increased, while 57% maintained that the numbers had remained the same between 2006/7 and 2008/9 (Kelly et al., 2010).

8.5.2. Trends in subsidized seeds sales

As described in Chapter 5, under the subsidy programme, smallholder farmers are provided with maize seed vouchers and flexible vouchers that they can use to purchase legume seeds. In 2007/8 and 2008/9, flexible vouchers were also allowed for maize seed redemption, but they have been restricted to legumes since the 2009/10 season. Table 8.4 presents the size of the seed component of the subsidy programme, which provides indicators of private sector participation. In terms of coupons redeemed, maize is the main component and when flexible vouchers were also accepted for maize seeds a high proportion of them were also redeemed for maize seeds. One reason for this was the problem of availability of legume seeds in the earlier seasons of the programme (School of Oriental and African Studies et al., 2008).

On average, the programme has distributed to smallholder farmers 5840 MT of hybrid maize seeds, 1,837 MT of OPV maize seeds and 2,256 MT of legume seeds per year. As discussed in Chapter 5, there has been a steady increase in hybrid seeds obtained by smallholder farmers since 2007/8 until a fall in 2011/12. The volume of OPV maize seeds dropped substantially in 2008/9 but then increased steadily from the 2009/10 season. The consequent value of private seed business promoted directly by the subsidy amounted on (p.185)

Table 8.4. Size of the seed component of the subsidy programme, 2007/8–11/12

Variable

2007/8

2008/9

2009/10

2010/11

2011/12

Coupons redeemed (N)

Maize coupons

1,603,302

1,561,329

1,614,070

1,988,066

1,376,216

Flexi coupons—maize

518,264

929,382

-

-

-

Flexi coupons—legumes

142,043

87,228

1,142,738

1,310,420

1,245,172

Seeds distributed (MT)

Hybrid maize seeds

2,944

4,532

7,619

8,521

5,586

OPV maize seeds

2,597

833

1,033

2,129

2,591

Legume seeds

-

-

1,551

2,727

2,490

Cost of seeds ($ millions)

Maize seeds

8.18

11.94

17.171

23.237

16.487

Legume seeds

0.99

0.63

2.837

7.147

6.734

average to US$19.1 million per year over the five agricultural seasons (excluding farmer top up payments for hybrid maize). Figure 8.8 shows the values and value shares of this seed business and the increasing share of legumes in the cost of the seed supplies obtained by smallholder farmers from the subsidy programme. This reflects substantial improvements in the availability of legume seeds in the market under the programme, such that legumes accounted for nearly 30% of the seed component in the 2011/12 season compared to only 5% in the 2008/9 season.

With respect to the relative cost of maize seeds and legume seeds (Figure 8.8(b)), there is an increasing share of legumes in the cost of the seed supplies obtained by smallholder farmers from the subsidy programme. With the increase in the number of seed growers providing legume seeds, the trend reflects substantial improvements in the availability of legume seeds in the market under the programme, such that legumes accounted for nearly 30% of the seed component in the 2011/12 season compared to only 5% in the 2008/9 season.

8.5.3. Seed purchases, use and preferences: evidence from household surveys

The role of the private sector in the marketing of seeds can be deduced from household survey data obtained in the 2006/7, 2008/9, and 2010/11 seasons. Figure 8.9 shows the use of various market channels to access improved maize (p.186)

Impacts on input market development

Figure 8.8. Values and value shares of subsidized maize seed sales, 2007/8–11/12

Source: Computed based on Logistics Unit (2008, 2009, 2010, 2011, 2012).

seeds (hybrid and OPV) by households in the survey years.4 The parastatals, ADMARC and SFFRFM, are the main retail markets from which smallholder farmers obtained their improved seeds, with about 70% of farmers utilizing these outlets. With respect to private outlets, use of private companies by households to obtain improved seeds has been increasing from 10% of households in 2006/7 to 17% in 2010/11. There is also increasing use of relatives or neighbours as a source of improved seeds, from 4% of households in 2006/7 to 13% in 2010/11. These sales through relatives or neighbours could be of recycled seeds or remittance seeds offered for resale or subsidy seeds offered for resale. (p.187)
Impacts on input market development

Figure 8.9. Households accessing improved maize seeds by retailer, 2006/7–10/11

Source: Computed by authors based on AISS1, AISS2, and AISS3.

With respect to quantities of seeds bought commercially or using the seed subsidy vouchers, Figure 8.10(a) shows first for total hybrid and OPV seed purchases and then for each type separately an average decline per household of commercial purchase and an increase in subsidy purchase between 2008/9 and 2010/11. The 2010/11 figure also reflects the increase in the number of seed coupons provided under the programme compared to the 2008/9 season. Farmers are also purchasing more hybrid maize seeds both commercially and under the subsidy programme compared to OPV maize seeds. While commercial purchases of OPV maize seeds have remained the same, for hybrid maize seeds commercial purchases declined from an average of 2.1 kg in 2008/9 to 1.6 kg in 2010/11 per household. In both cases of hybrid and OPV maize seeds, there is an increase in subsidy redemption. These declining trends suggest that the subsidy programme is crowding out commercial purchases, as discussed above with regard to displacement estimates, although the overall use of improved seeds has been increasing.

With respect to the relative participation of state and private retailers between 2008/9 and 2010/11, Figure 8.10(b) shows that there was a substantial decline in average purchases of commercial seeds through private retailers but a greater increase in subsidized seed purchases by households. Similarly, average commercial purchases of hybrid maize seeds fell but average subsidized purchases of hybrid maize seeds increased. In contrast, average purchases of commercial seeds from state marketing outlets marginally declined (from 0.16 kg to 0.07 kg) between 2008/9 and 2010/11 largely due to a fall (p.188)

Impacts on input market development

Figure 8.10. Volumes of improved maize seeds purchased per household, 2008/9 and 2010/11

Source: Computed by authors based on AISS2 and AISS3.

in hybrid maize purchases. Although, the proportion of households accessing the private market system is small relative to households accessing state markets, as observed above, the average purchases of seeds per household purchasing is higher from private market outlets than from parastatal outlets. Agro-dealers have played an important role in facilitating access to inputs in rural areas. Chinsinga (2011) notes that with FISP there has been an increase in the number of seasonal agro-dealers, a situation that has been supported by the practice of seed companies who collect the unsold inventories from contracted agro-dealers during the off-peak FISP period.

There has been a proliferation of maize seeds varieties in the market, which has broadened the choice for farmers. However, under the subsidy programme this (p.189)

Table 8.5. Inputs actually obtained against those wanted by farmers in 2010/11(%)

Inputs obtained

As wanted

Other inputs wanted

Hybrid maize

OPV maize

Soya

Groundnut

Beans

Hybrid maize

84

13

1

0

0

0

OPV maize

58

40

0

2

0

0

Soya

56

0

0

0

35

9

Groundnut

94

0

0

0

2

4

Beans

85

0

0

0

15

0

choice is constrained by the availability of preferred seeds and seed varieties in different markets and times when farmers require the seeds. Table 8.5 illustrates the seed preferences by farmers in the 2010/11 season. For maize seeds, there is higher preference for hybrid maize seeds with 84% getting the hybrid variety they wanted and 13% getting alternative hybrid varieties. This preference for hybrid maize is also reflected in the 40% of those that got OPV seeds but wanted hybrid seeds. Lunduka et al. (2012) find that farmers prefer hybrid maize seeds in Malawi due to high yields and their drought tolerance, while OPV maize seeds are preferred due to their early maturity. Among the legume seeds, farmers tend to prefer groundnuts and bean seeds and a higher proportion of them got what they wanted. The higher preference for groundnut seeds is also reflected in the additional 35% that got soya seeds who wanted groundnut seeds.

There are regional variations in seed preferences, but most farmers in different regions usually got the seeds and the seed varieties that they wanted (Dorward and Chirwa, 2011a).These figures suggest that hybrid maize seeds are the preferred maize seeds for smallholder farmers. The differences between what was obtained and what farmers wanted were, however, noticeable for legume seeds, with groundnut seeds being most in demand, but due to scarcity many farmers having to opt for soya seeds. Groundnuts and bean seeds are the legume seeds most wanted by smallholder farmers.

8.6. Challenges and opportunities of private sector participation5

The participation of the private sector in the input subsidy programme is challenging but can also provide opportunities for improving the implementation and efficiency of the programme. For instance, on the one hand, (p.190) major challenges are the exclusion of the private sector from the retailing of subsidized fertilizers and policy inconsistency in its role in the subsidy programme. On the other hand, however, private sector participation could provide opportunities for achieving multiple development objectives and for improving efficiency in the implementation of the programme.

8.6.1. Challenges in private sector participation

Several challenges have been experienced with regard to the roles of the private sector in the implementation of the subsidy programme. First, the timing of the award of tenders, particularly for supply of fertilizers to the programme, has been a major source of difficulty, as discussed in Chapter 5. The longer the time between submission of tenders and the awards of tenders the more likely the prices are to change and this can lead to protracted negotiation about supply prices for fertilizers. There have been cases in which companies awarded tenders have been unable to supply at the tender prices due to increased costs of supply. However, there is evidence that this has improved over time. Kelly et al. (2010) note that most stakeholders in 2008/9 were of the view that the announcement of tenders improved but the tenders were awarded late. Dorward et al. (2010b) argue that the delays in award of tenders increased private sector risks as both the prices of fertilizers and fuel had risen dramatically in the period between June 2006/7 and June 2008/9.There have been improvements in the timing of announcement of tender awards more recently (Dorward and Chirwa, 2011c).

Second, there is often a problem of trust between the private sector and the government and this has contributed to the continued exclusion of the private sector in the retailing of subsidized fertilizers. The lack of trust emerges from both sides. From the government side, there are some in government that believe that private sector firms with their profit motive are likely to exploit their engagement to the detriment of smallholder farmers and public welfare. Chinsinga (2011) documents some of the profit and quick-gain motives of some of the agro-dealers in input supply markets. There have been allegations, based on anecdotal incidents reported in the media but not substantiated, that some private sector retailers were accepting fertilizer coupons in exchange for non-fertilizer items. This reinforced the views of those sceptical of the private sector that the private sector was unable to self-regulate its behaviour in the programme. Others have also argued that when the private sector was involved in the retailing of subsidized fertilizers, there was high incidence of tips paid by farmers. However, Kelly et al. (2010) find that the incidence of tips and malpractices was higher in parastatals than in private sector retails, although the differences were not statistically significant, and the incidents of accepted fake vouchers were higher in parastatals outlets. (p.191) Furthermore, even with exclusion of the private sector in subsidized fertilizer retailing, smallholder farmers still report an increased incidence of tips from ADMARC and SFFRFM outlets (Dorward et al., 2010b; Dorward and Chirwa, 2011c). The mistrust of the private sector is also exacerbated by the absence of an audit system on the stock movement of inputs as a way of detecting malpractices. From the private sector’s point of view, the government’s inconsistent decisions on private sector participation in retail of subsidized fertilizers, and delays in making inclusion or exclusion decisions, characterize policy instability, creating uncertainty for private input market development. This was particularly the case in 2008/9 when a decision was made about private sector involvement and contracts for inclusion provided, but the government reversed the decision without prior notice (Kelly et al., 2010). By the time the government had made the decision to exclude the private sector, the private companies had already stocked their retail shops in readiness for redemption of vouchers.

Third, the subsidy programme has attracted new entrants that were hitherto uninterested in the fertilizer business, particularly from domestic companies, some just created to bid for contracts to supply fertilizers to the programme (Holden and Tostensen, 2011). Some of these companies were highly connected to the political establishment, but when awarded contracts they had difficulties in fulfilling their deliveries. For non-established agricultural input suppliers, their main interest is the short-term gains from participation in the programme rather than the medium to long-term development of the input supply market. Chinsinga (2012a) notes that most of the contracts in the provision of transport services were awarded to companies politically linked to the ruling party. Logistics Unit (2012) notes that although it became clear in the 2011/12 programme that some of the suppliers were unlikely to supply, the government continued to grant extensions and the final deliveries occurred in February 2012 instead of the end of October 2011. The existence of vested interests is one reason for non-compliance with the terms of the fertilizer supply. Although there have been improvements in the timing of deliveries, late deliveries were evident and this problem has been attributed to the lack of penalty clauses in the contracts (Dorward et al., 2010b; Dorward and Chirwa, 2011c; Logistics Unit, 2011). Large numbers of new entrants in seed sales may also be associated with poor service to farmers (Chinsinga, 2011) and in 2010/11 may have contributed to the use of large numbers of fake vouchers in subsidized purchases.

Fourth, in the seed component of the subsidy programme, there is some collusive behaviour of seed suppliers in deciding the supply price of seeds offered to the programme. Although the subsidy programme has attracted a number of players in seed production and supply, the pricing arrangement is tantamount to collusive pricing due to the desire by the government to (p.192) have a uniform top up for farmers (Kelly et al., 2010).There is no competitive tendering in the seed supply to the subsidy programme, in contrast to the fertilizer supply system, although in recent years, a variable ‘top up’ payment by farmers on subsidized hybrid seed packages has provided some competition and benefited some smallholder farmers. Thus, in 2010/11, seed companies were allowed to apply a discretionary maximum farmer payment of 100MK per maize seed voucher topping up the government redemption value of 1,650MK, and all hybrid seeds providers applied the maximum top up while only one OPV provider made a top up charge (Logistics Unit, 2011, 2012).

Finally, there is evidence that the payment system used by the government for supplies and services rendered to the programme by the private sector is inefficient. Logistics Unit (2012) reports some companies waiting six months to be paid after delivery of fertilizer supplies. Similarly, seed companies had outstanding invoices for three months in the 2010/11 season (Logistics Unit, 2012). The Logistics Unit final weekly report for the 2011/12 programme indicated that the government still owed seed companies, fertilizer companies, and transporters for supplies and services provided during the 2010/11 subsidy programme. These delays in payment are likely to lead to the high supply price of inputs and services as suppliers factor in the risk of delayed payments in their prices.

8.6.2. Opportunities from greater private sector participation

Greater involvement of the private sector in the subsidy programme not only promotes private sector development in input markets but can also improve efficiency in the implementation of the programme. There are several ways in which the private sector can play a positive role in input market development. First, increased involvement of the private sector provides the opportunity for increasing the efficiency of implementation of the programme. This can be achieved by increasing the number of outlets from which smallholder farmers can redeem their input coupons and broadening their choice of markets. The increase in the competition may consequently improve the quality of services at market outlets and reduce the incidence of tips at the markets. Kelly et al. (2010) note that although the incidence of tips was not significantly different between parastatals outlets and private sector outlets, smallholder farmers were more likely to ‘never pay tips’ in private sector outlets. The increase in the number of outlets can also reduce the opportunity cost of queuing—a phenomena that has been evident in the programme.

Second, the involvement of the private sector can also encourage private investment in rural input markets. This requires consistency and transparency in the government’s decisions to build the confidence needed for investment. There are also opportunities for designing future private sector (p.193) participation on the basis of performance-based indicators, such as verifiable expansion of retail outlet coverage. Alternatively, the private sector could bid to supply specific quantities of subsidized fertilizer in under-served areas identified by the government. These areas could be served directly by the private companies or through private company sub-contraction to agro-dealers. As the analysis above has shown, private sales of fertilizers have flourished suggesting an increased demand for fertilizers, but it is not clear whether this has also facilitated the expansion of the private sector into poorly served areas. Such performance rewards, combined with increased demand for fertilizers, could provide the incentives needed for the private sector to invest in more input market infrastructure on a permanent or seasonal basis.

The third area in which the subsidy can exploit opportunities of private sector involvement is storage facilities. With the exclusion of the private sector from subsidized fertilizer retailing, all the programme fertilizers have to be delivered at one of three SFFRFM depots for uplifting to SFFRFM and ADMARC markets. The exclusion of the private sector has thus created pressure on storage facilities at both the depots and parastatals unit markets. This has introduced inefficiencies and increased the incidence of stock-outs in unit markets. Logistics Unit (2012) notes that the shortage of storage space in markets in the critical early months of the programme in 2011/12 meant that although 63% of total annual fertilizer supply was available in the central depots, only a little over 60% of this was uplifted to unit markets. The limited storage capacity of SFFRFM depots in the past years of private sector exclusion from subsidized fertilizer retailing has led to congestion (Logistics Unit, 2011, 2012), a situation that could be alleviated by more involvement of the private sector in retail markets.

Fourth, better methods of targeting that reduce displacement and therefore increase demand for commercial purchases could help in input market development. In Chapter 10 we discuss some targeting options that have the potential to reduce displacement and the practical difficulties associated with these options. Fifth, improvements in the timing of coupon distribution, that is distributing earlier, can help farmers to plan for commercial purchases and thereby help commercial sales and encourage investment in input markets. Earlier distribution of coupons can bolster input sales as those that do not receive coupons and those that receive coupons but want to top up would be certain about their commercial purchases. In this case, involvement of the private sector could also offer opportunities for earlier purchase of inputs by farmers and hence more effective yield gains. Finally, there are also opportunities that may arise with the use of electronic vouchers, which could enable the private sector to invest in an electronic system resulting in shared costs, benefiting both government and private suppliers. (p.194) x

8.7. Summary

This chapter set out to review the impacts of the subsidy programme on the development of the private sector in farm input supply. The private sector has played a major role in the subsidy programme since 2006/7. It continues to play an increasing role in the importation and procurement of fertilizer for the subsidy programme, but was only allowed to retail subsidized fertilizers in the 2006/7 and 2007/8 seasons, and agro-dealers were excluded even then. Otherwise, the retailing of subsidized fertilizers has been monopolized by the two parastatals, ADMARC and SFFRFM. In the seed sector, however, various players in the seed value chain, including agro-dealers, have been allowed to participate in seed production and retailing of subsidized improved maize seeds and legumes, and indeed the production and distribution of subsidized seeds has been managed entirely by the private sector.

Overall, although the subsidy has had some negative impacts on private sector development in the form of short-run displacement of unsubsidized commercial sales, in the medium to long term it appears to have been catalytic in raising the demand for fertilizers and improved seeds. In the fertilizer markets, the private sector is increasingly the main supplier of fertilizers to the programme, and their exclusion from the retail market for subsidized fertilizers does not appear to have dampened demand for commercial fertilizers in the medium term. In the seeds market, the increase in the seed subsidy from 2009/10 seems to be crowding out commercial sales. However, like the fertilizer market, in the medium to long term the massive seed subsidy may stimulate demand for improved seeds as farmers witness the benefits of technology adoption. In addition, there is an increase in the number of private sector players in both the fertilizer and seed markets, although exits, especially in the fertilizer market, are evident. However, the challenge is to translate the increase in competition into reasonably priced inputs and high quality services offered to smallholder farmers in under-served areas.

There are benefits from expanding the role of the private sector, in reducing programme costs, increasing efficiency, and alleviating problems of storage capacity in parastatal markets. However the involvement of the private sector will require mutual trust among stakeholders, systems of transparency and accountability, and policy consistency and credibility. These conditions could create an environment that is conducive to private sector investment in input markets. As the demand for commercial fertilizers increases, assuming current trends continue, there may be scope for a gradual reduction in the subsidy programme. However, this will require strategic investment in input markets by the private sector to sustain such demand and a strategic approach to programme graduation, an issue we discuss later in Chapter 11. (p.195)

While the volume of subsidized fertilizers has been falling from its peak in 2007/8, the growing demand for commercial purchases by smallholder farmers should also provide incentives for private companies to strategically position themselves by expanding their networks in under-served areas. One way this could be achieved might be by developing sustainable partnerships within the agro-dealer network that exists in rural areas. There is also scope for increasing private participation in the fertilizer retail market through performance-based contracts to supply under-served areas.

Nonetheless, it is important to continuously monitor the impact of the subsidy programme on private sector markets and to monitor the integrity and efficiency of the private sector in input supply. As we argue later in Chapter 11, improving the efficiency and competitiveness of input suppliers is one of the conditions that can facilitate graduation from the subsidy programme, at household, area, and national levels. In particular, periodic surveys tracking programme effects on smallholder farmers’ commercial purchases and on input markets should generate useful information for evidence-based decision making about private sector roles and government engagement with and policy for input market development. An important element of this engagement should be the monitoring of market efficiency through analysis of market structure (considering the number and characteristics of players, their market power, and vertical restraints), behaviour in the market, and resultant benefits in terms of efficiency that promotes smallholder development and welfare.

Notes:

(1) Industry data on total fertilizer sales from 1998 to 2006 as reported in School of Oriental and African Studies et al. (2008) are not consistent with NSO import data over the same period, and are on average around 80,000 MT per year higher. If this continues from 2007 then commercial sales from 2007 would be around 80,000 MT higher than indicated in Figure 8.3. It should also be noted that annual estimates on sales may not be accurate due to carry forward of stocks, but these should average out over two or more seasons.

(2) ‘Commercial supply’ estimated by subtraction of subsidy from imports for 2007/8 and thereafter.

(3) There were anecdotal claims in the media that some farmers were obtaining iron sheets in exchange for fertilizer coupons in some private sector input outlets.

(4) For each market channel, we compute the proportion of households using the market channel, and due to multiple uses of markets by some households the total for the year is more than 100%.

(5) This section draws heavily on Chirwa and Dorward (2012).