BENEFITS AND CHALLENGES OF FERTILIZER SUBSIDY FOR SMALLHOLDER FARMERS IN ETHIOPIA

Abstract

The study tries to assess the trends and profitability of fertilizer use and analyzes the effects of increasing trend of fertilizer costs on three main cereals namely Teff, Wheat, and maize for four main cereal producing regions of Tigray, Amhara, Oromiya and SNNPR based on secondary data. Instability in prices creates uncertainty that can adversely affect the decisions of smallholder farmers to apply fertilizer to their crops. This study has presented a range of measures of profitability, and all points to fertilizer indeed being profitable. Many of the value-cost ratio (VCR) estimates in the literature and computed for this study are greater than 2.0. This high VCR is required primarily due to the high risks involved in rainfall-dependent agriculture and volatile output markets. If these risks are mitigated, fertilizer will be profitable as long as VCR is greater than 1.0. As a follow up to the VCR analysis, an assessment has been conducted for overall benefit-cost analysis of lowering fertilizer prices by 15%. The results suggest that such a scheme will result in subsidy bill of Birr 1,042 million. However, the benefits through increased production will be 1,347 million. In other words, a 15% reduction in fertilizer will give a benefit cost ratio of 1.29 suggesting overall social gains from the scheme. Fertilizer subsidies for smallholder farmers need to be contemplated with caution, with a clear consideration of the costs and benefits compared with conventional best practice of addressing market failures directly and using social policies to address social objectives with respect to poverty and food insecurity. The effect of fertilizer price on fertilizer consumption improvement is supported by simple correlation and regression techniques. The findings show that fertilizer use has a significant positive effect on the value of production.