Transcript AAMP Self-Guided Training - Michigan State University

AAMP Training Materials
Module 1.3: Profitability of Fertilizer
Shahidur Rashid and Nick Minot (IFPRI)
[email protected], [email protected]
Module Outline
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Objectives
Background Materials
Fertilizer Profitability, Case Studies and Exercises
Fertilizer Crop Model Exercises
Conclusions
Objectives
• Assess farm-level profitability of fertilizer use
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Fertilizer cost components
Output response of fertilizer applications
Profitability of fertilizer use
Risk and the value/cost ratio (VCR)
• Use Fertilizer Response Model
– Evaluate the impact of price and policy changes on fertilizer use,
crop output, and consumer and producer benefits
Background Material
• Review of markets & prices
• From cost curves to the supply curve
Markets and Prices
Market
Price
Process of
exchange
Outcome
Q: What determines the process of exchange?
Demand & Supply
Consumers maximize
satisfaction from what they
buy given their income
Producers maximize their
profits given certain
technology
DEMAND
SUPPLY
PRICE
From Cost Curves to the Supply Curve
Average Total Cost (ATC) is a firm’s
total cost divided by the quantity
produced.
Marginal Cost (MC) is the change in
total cost for a change in output, or the
cost of the “next” unit produced. A
firm’s MC also acts as its supply curve.
The Individual Firm and the Market
Fertilizer Profitability
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Fertilizer cost
Crop response to fertilizer application
Profitability of fertilizer use
Risk and the value/cost ratio
Exercises on fertilizer profitability
Fertilizer cost build ups
Case study of maize profitability
Fertilizer responsiveness on maize
(maize yields (qt/ha)
Ethiopia Fertilizer – Yield Response Elasticities
Key Factors Behind Fertilizer Profitability
Fertilizer Price
Highly
Variable
Output Price
RISK
Current Yield
Weather
Uncertain
Level of Use
Lack of Public Goods
Transaction
Costs
High Prices
Value/cost ratio (VCR)
VCR =
value of increased crop output
cost of fertilizer applied
= P(crop)*Q(additional crop production)
P(fert)*Q(fertilizer applied)
Risk and fertilizer use
• Fertilizer use is highly risky in Africa because of highly
variable weather
• Drought  crop losses
• Drought  heavy financial losses when purchased
inputs (like fertilizer) applied
Risk and VCR
• Rule of thumb: given normal risks, VCR > 2 necessary
for farmers to use fertilizer
• High risk production environments: VCR > 3-4 necessary
for farmers to use fertilizer
Fertilizer Profitability Example
• Elasticity estimate for fertilizer response = 2.6
– Therefore, a 10% increase in fertilizer use  2.6% increase in
yield response
• Average fertilizer use is 80kg/ha, so…
– 10% increase in fertilizer use  8kg/ha additional use of fertilizer
– Cost of additional fertilizer = 8kg * 4 Birr/kg = 32 Birr
• Average yield is 1700 kg/ha. Using our elasticity
estimate,
– Expect a 2.6% increase in additional output  44.2 kg/ha
– Additional value of extra production  44.2 kg/ha * 2.5 Birr/kg =
110 Birr/ha
• Extra revenue due to fertilizer  110.5 – 32 = 78.5 Birr
Profitability Exercise 1
Exercise 1 Data
Maize production per hectare
Maize price
1000 kg
2.67 Birr/kg
Average fertilizer use
80 kg/ha
Fertilizer price
5 Birr/kg
Fertilizer response elasticity
0.3
• Question 1: Given the data above, will it be profitable for
a farmer to increase fertilizer use by 10%
Profitability Exercise 2
Exercise 2 Data
Maize production
1,000,000 MT
Maize price
2.67 Birr / kg
% increase in maize production
6%
% increase in fertilizer use
20%
Fertilizer price
Price elasticity of supply
Average fertilizer use
5 Birr/kg
0.5
80 kg/ha
• Question 2: Suppose the country increases fertilizer use
by 20%, which leads to a 6% increase in maize supply.
If the price elasticity of supply is 0.5, what will happen to
maize price? What will happen to profitability?
Using a Fertilizer Crop Model
• Review
– What is a model?
– Example of a simple model
• Comparative Statics
• Understand fertilizer response curve
• Discuss crop supply and demand
What is a model?
• A model is a set of equations that represents some
aspect of reality and converts data and assumptions into
useful results.
Data
Assumptions
Model
Results
Example of a simple model
Data: Distance from
Livingstone to
Lusaka is 472 km
Assumption: Can drive
at 60 kph on that route
MODEL:
Time = Distance/speed
Results: Time=7.9 hours
Comparative statics
• Running a model repeatedly with some difference and
comparing results
Base data
Base assumptions
Model
Base results
Alternative
data
Alternative
assumptions
Model
Alternative results
Example: If we could increase our speed from 60 to 70 kph, it would take us
15% less time or 6.7 hours.
A fertilizer-crop model
Assumptions: relationship
between fertilizer use and crop
yield, farmer behavior and
elasticity of demand.
Data: current crop production,
crop consumption, crop price,
fertilizer price (before subsidy),
subsidy rate, & fertilizer use.
Model
Results: fertilizer use, crop
production, crop
consumption, & crop price,
given a change in data or
assumptions
Fertilizer response curve
• Yield is positive even
with no fertilizer
• Yield rises with more
fertilizer, but the rate of
increase declines
• Too much fertilizer
will reduce yield
Fertilizer response curve
• a is the yield with no
fertilizer (a>0)
Yield = a + b*F + c*F2
• b determines the
steepness of the curve
at the beginning (b>0)
• c determines how
quickly it turns down
(c<0)
Fertilizer response curve (in value terms)
• If we multiply yield by
crop price, we get the
curve of the value of
production per hectare
• It has the same
shape
Profit
• We can add cost of
fertilizer per hectare
(red line)
• Profit from using
fertilizer is vertical
distance
Fertilizer response curve (in value terms)
• Black box
maximizes yield
• Blue box
maximizes profit
• Red box is where a
risk-averse farmer
might choose to
produce
Fertilizer response curve (in value terms)
• Fertilizer subsidy
lowers the angle of
the red line (dashed
red line)
• This increases
optimum amount of
fertilizer and
increases yield
Fertilizer supply and demand
• Fertilizer subsidy
lowers the retail price
(red lines)
• This increases
fertilizer use from 25
to 33 kg/ha
Crop supply and demand
• Fertilizer subsidy
increases crop
supply (shift to right)
• This lowers price if
non-tradable
Crop supply and demand
• Benefit to
consumers is
reduction in price
multiplied by
quantity consumed
• Benefit to farmers:
is area between
supply curves (red)
below equilibrium
price
Fertilizer Response Exercises (Notes)
• Only yellow cells should be changed
• Generally we want to change the “after” cells so we can
compare “before” and “after” results
• Don’t forget to return changed numbers to their original
values before doing the next exercise.
• The model does not account for rationing, late delivery,
targeting, leakage, rent seeking, or differences between
farmers and regions etc. Nor has it been calibrated
using real-world data. Therefore, it should be
considered a training tool, nothing more.
Fertilizer Response Exercises
1. Evaluate the effect of a new seed variety that is more
responsive to fertilizer.
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Change the “b” coefficient (cell E14) from 25 to 30.
2. What is the effect of a new seed variety that gives a
higher yield without fertilizer, but gives same response
to fertilizer?
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Change the “a” coefficient to 900, but leave “b” and “c” as is.
3. What is the effect of an increase in the crop price on
fertilizer use?
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Change the crop price from US $250 to US $300.
Fertilizer Response Exercises
4. What would be the effect of a program that made
farmers less risk averse?
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Reduce the VCR (Cell E11) from 2 to 1.5
5. What is the effect of a 40% subsidy on fertilizer
utilization? Do farmers use more or less than the
economic optimum? What about 50%? And 60%?
Which gives the largest net impact on the country?
6. Suppose farmers were not risk averse and were
economically rational. What is the net impact of a
fertilizer subsidy?
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Hint: set VCR=1 in before and after columns.
Fertilizer Response Exercises
7. What is the net effect of a 50% fertilizer subsidy if the
administrative costs are 40% of the direct subsidy
costs? How about 50% or 60%?
8. What is the distribution of gains from a fertilizer subsidy
between farmers and consumers? Why is one larger
than the other? What would be the distribution be if the
demand for the crop were highly elastic (e.g. elasticity
of demand=-20)? What kind of crops have a highly
elastic demand?
Conclusions
• In order to simulate impact of fertilizer policies, one needs:
– Data on current use by crop and yield responsiveness
– Estimates of supply and demand elasticities for fertilizer & crop
– Assumptions about farmer decision making process (what is
minimum VCR?)
• Fertilizer demand can be affected by:
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Yield response of crop (maize & rice respond more than cassava)
Yield response of variety (modern varieties respond more)
Price of fertilizer (subsidy or lower price  higher demand)
Risk aversion of farmers (lower risk aversion higher demand)
Crop price (higher price makes fertilizer more profitable)
Conclusions
• Increased fertilizer use causes:
– Increase in supply of crop with benefits to farmers
– Reduced price of crop (if non-tradable) with benefits to consumers
• Distribution of benefits of higher fertilizer use depends on
elasticity of demand for the final output (maize, cotton, etc)
– Inelastic crop demand means price falls more, larger benefits for
consumers, smaller benefits for farmers
– More elastic crop demand means price falls less, smaller benefits
for consumers, larger benefit for farmers
– If tradable crop, price fixed by world markets and no benefits for
consumers, all benefits to farmers
References
• Kelly, V. 2006. Factors affecting the demand for fertilizer in subSaharan Africa.” ARD Discussion Paper No. 23. The World Bank.
Washington, DC.
http://siteresources.worldbank.org/INTARD/Resources/ARD_DP23_
FINAL.pdf
• Morris, M. et al. 2007. Fertilizer use in Africa. The World Bank.
Washington, DC. http://wwwwds.worldbank.org/external/default/WDSContentServer/WDSP/IB/2
007/03/15/000310607_20070315153201/Rendered/PDF/390370AF
R0Fert101OFFICIAL0USE0ONLY1.pdf