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Fertilizer supply chain in Ethiopia:
structure, performance and
policy analysis
Johanes U.I. Agbahey (1), Harald Grethe (1), Workneh Negatu (2)
(1) Agricultural and Food Policy Group, Universität Hohenheim, Germany
(2) Centre for Rural Development Studies of Addis Ababa University, Ethiopia
In Ethiopia, less than 40% of farmers use fertilizer and those who do, apply rates significantly be-
low those recommended. This low fertilizer use is primarily due to prices being two to three times
higher than prices on the world markets. Reducing the price of fertilizer requires a sound un-
derstanding of the product´s supply chain. This study investigates whether fertilizer is delivered
to farmers in an efficient way and at the lowest possible costs using an institutional economics
framework. It was conducted in the Arsi zone and relied on secondary data as well as primary data
collected through interviews. The findings point out the presence of several formal and informal
institutions regulating the market. A market monopoly at each stage of the supply chain and a
striking correspondence between the central organization of the chain and the rise in left-over
stocks were observed. This pinpoints the imperfect structure of the chain and a misallocation of
resources locked up in fertilizer stockholding. In order to improve the demand estimation pro-
cedure, this study suggests that incentives should be instituted to enhance the reliability of the
information transferred along the process. Additionally, expert knowledge used in the process
should be well documented, stock inventories should not be limited to central warehouses and
stockholding needs to be reduced.
Key words: supply chain, fertilizer, monopoly, cooperatives, Ethiopia
Introduction
Increased agricultural productivity in Sub-Saharan Africa1 (SSA) requires a range
of measures including crop protection innovations and improved agronomic husband-
ries, but also the appropriate use of fertilizer2 and improved seeds (Vanlauwe et al., 2014;
Howard et al., 2003). Although none of these measures is likely to be effective if imple-
mented in isolation, fertilizer is a critical input (Zerfu & Larson, 2010). An increase in,
and efficient use of, fertilizer has great potential to increase crop yields and improve land
productivity (Barbier, 2000). Additionally, fertilizer use in SSA is very low and inadequate
1 Sub-Saharan Africa refers to all countries that lie south of the Sahara, except the Republic of South-Africa.
2 Fertilizer in this paper refers to inorganic fertilizer.
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to compensate for the nutrients removed in harvested crops (Yamano & Kijima, 2010).
Indeed, the average fertilizer use intensity from 2000 to 2003 in SSA was 9 kilograms
of nutrients per hectare (kg/ha), whereas it was 86 kg/ha in Latin America, 104 kg/ha
in South Asia and 142 kg/ha in Southeast Asia (Crawford et al., 2006). In high income
countries (Western Europe and USA), fertilizer use intensity is up to 288 kg/ha on average
(Hernandez and Torero, 2011). Therefore, potential productivity gains can be achieved
by increasing fertilizer use in many parts of SSA without adverse environmental conse-
quences (Mwangi, 1996).
Fertilizer use in Ethiopia, as in most SSA countries, is very low due to several con-
straints. Matsumoto and Yamano (2009) summarized these constraints pointing to two
groups. The first group is the market-based constraints, which suggest that farmers do
not use fertilizer because of a relatively high fertilizer to crop price ratio. The second
group, the non-market-based constraints, emphasizes farmers’ lack of knowledge about
fertilizer as well as land degradation, which lowers the returns to fertilizer application.
In the Ethiopian case, although non-market constraints play a role, Dercon and Chris-
tiaensen (2011) clearly showed that the crucial point is market constraints. They dem-
onstrated that over time the fertilizer-to-output price ratio has increased substantially.
Thus, the search for effective and sustainable policies to promote fertilizer use in Ethio-
pia should involve measures to lower this price ratio. This means either reducing ferti-
lizer purchasing prices or increasing farm gate output prices, or both (Namazzi, 2008).
This study focuses on the potential for reducing fertilizer prices at farm level. Previous
studies found farm gate prices of fertilizer in Ethiopia to be two to three times higher
than prices on world markets (Gregory & Bumb, 2006). However, none of these studies
analyzed the structure of the supply chain for fertilizer in Ethiopia, in order to point out
the constraints resulting in the observed high prices.
The structure of the fertilizer market in Ethiopia has changed over time. After its in-
troduction in the country in 1967, fertilizer importation and distribution was controlled
by the government company known as the Agricultural Input Supply Corporation (AICO)
and later renamed Agricultural Inputs Supply Enterprise (AISE). This state monopoly
prevailed until the fall of the central planning in 1991 (Matsumoto & Yamano, 2009).
Subsequently, the market was liberalized and private companies became involved (Spiel-
man et al., 2010). However, in 2001, the private companies exited the market because
of strong competition from companies subsidized by regional governments which en-
tered the market in 1996 (Demeke et al., 1997). By 2005, facing an increasing deficit in
their budget due to subsidies granted to their regional companies, regional governments
decided to support agricultural cooperatives who were expected to be more efficient in
delivering fertilizer to farmers. From 2006 onwards, cooperative unions (CU) became
dominant actors of fertilizer import and their market share reached 75% in 2007/2008
(IFPRI, 2012). However, in 2008, the Ethiopian federal government decided to coordinate
all fertilizer import through only one company, in order to benefit from economies of
scale by purchasing in bulk and save foreign currency (World Bank, 2011). The selection
of the sole importer would be done every year by representatives of previous importers.
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Since the “sole importer” policy has come into force, the AISE has been awarded the
position of importer every year, leaving the cooperatives with the role of fertilizer distri-
bution (IFPRI, 2012). Consequently, there is an implicit monopoly at each stage of the
supply chain. Along with the new policy, government offices play a major role by regulat-
ing the chain, fixing marketing margins and prices, and monitoring the AISE and the
cooperatives. Thus, the chain is centrally-organized although it involves both state and
non-state organizations. This new structure has not yet been assessed. This paper using
the framework of institutional economics first describes the institutions involved in the
chain and then investigates the efficiency of the chain in delivering fertilizer to farmers
in a timely manner and at the lowest possible costs. The paper is structured as follows.
Section 2 provides a detailed description of the theoretical framework and the methods
used in this study. Section 3 presents the findings and is followed by the discussion in
Section 4. Finally, section 5 draws on the most important conclusions and derives policy
options.
Theoretical framework and Methods
Theoretical framework
In this section, theories which discuss the role of the state in organizing the market
are reviewed. Chang (2002) used the term "interventionist" for theories justifying state
intervention, such as welfare economics and Keynesian economics. These theories sup-
port state involvement in the markets in order to correct the so-called “market failures”.
In their eyes, free markets as defined by neoclassical economics may not deliver a so-
cially optimal resource allocation (Nedergaard, 2006). Thus, active state intervention is
required to provide public goods, fight unemployment, reduce externalities and break
monopolies (Chang, 2003). A fundamental criticism of these theories is that they see a
market failure as a static rather than a dynamic outcome. Additionally, they ignore the
impact of present state intervention on future developments of the market (Tanzi, 2011).
In fact, the application of these theories in many countries over much of the past century
showed that active state involvement to correct presumed market failures has often re-
sulted in state monopolies and overly large public spending (Krueger, 1991).
In contrast to interventionist theories, neo-liberal theory supports a minimal state.
The main argument is that the state is run by self-interested politicians and bureaucrats
who have a partial attitude towards interest groups (Nedergaard, 2006). Thus, the as-
sumption of an impartial and omnipotent state made by interventionist theories is not
realistic. Neo-liberals support a minimal state based on the existence of "government
failures" such as corruption, state monopoly, lack of infrastructure facilities and regula-
tory capture (Krueger, 1991). Although neo-liberals acknowledge the existence of market
failures, they argue that government failures outweigh them. However, the underlying
assumptions behind the neo-liberals' definition of state, market, institutions and poli-
tics, as well as their relationships is problematic from both theoretical and practical per-
spectives (Chang, 2002). In the 80’s and the 90’s many developing countries performed
poorly due to the often schematic application of these theories through neo-liberal ad-
justment programs (Chang, 2009; Wolford et al., 2013).
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A third group of theories dealing with the role of the state is institutional econom-
ics. Within this field the market as well as the state are viewed as only two institutions
among many others. Other institutions making up the whole system range from formal
institutions such as law to informal institutions such as social conventions and their
enforcement mechanisms that govern the behaviour of individuals in the society. From
an institutional economics perspective, both market and governmental failures may not
matter as much, as long as other institutions can regulate the economic system (Chang,
2002). In fact, market performance is determined by the institutional framework because
institutions define and enforce the economic rules of the game (North, 1995). Therefore,
to assess the functioning of the market, one needs to understand the institutions and
organizations that are engaged. The core of the theory that demarcates it from the clas-
sical and neoclassical schools is the shift of the ultimate unit of economic investigation
from individual behaviour and exchange of commodities to individual action defined as
trans-action (Commons, 1931). Transactions occurring in the market are not seen here as
a mere exchange of commodities but as the alienation and acquisition of property rights
defined by society norms and working rules. The major contribution of institutional eco-
nomics is the introduction of transaction costs into economic thinking (Eggertsson, 2013).
The cost of exchange (transaction cost) depends on the institutions of a country (Coase,
1998). In most developing countries where transaction costs are high, the institutionalism
framework is more able to address questions of structural change and economic develop-
ment (Hodgson, 2000).
In this study we adopt the institutional economics framework acknowledging that
in Ethiopia, a country with high transaction costs, institutions play a significant role in
determining the performance of the fertilizer market. Within the institutionalism frame-
work, there are two streams: the old and the new institutionalism. The two streams can
be differentiated based on whether the neoclassical paradigm of given individual moti-
vation needs to be rejected or simply modified (Rutherford, 1995). The old institutional
economics is associated with the works of authors such as Thortstein Veblen, John Com-
mons, Wesley Mitchell, Geoffrey Hodgson and John Galbraith. For them, individuals
and their preference functions should not be taken as given because they are mutable
(Hodgson, 1998). Institutions shape individual motivation, conceptions and preferences,
while individuals’ interaction form institutions. Thus, institutions have both an upward
and downward causation on individuals. The constitutive nature of institutions assumes
that they embody certain values, such that individuals working under them internalise
these values and change their individual motivation. Operating in the public sphere for
instance would lead to internalising non-selfish values (Chang, 2002). A major criticism
of the old institutional economics is the lack of a systematic and rigorous theory (Coase,
1998). Moreover, as the individual rational choice and the utility maximizing behaviour
assumptions are dropped, the analysis becomes more complex and less open for model-
ling (Hodgson, 2000).
In contrast to the old institutionalism, the new institutional economics builds on ne-
oclassical theory. It adopts the assumption of individuals maximizing a given utility func-
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Fertilizer supply chain in Ethiopia: structure, performance and policy analysis
tion subject to constraints, which include institutions. However, it abandons the instru-
mental rationality assumption (North, 1995). New institutional economists acknowledge
that individuals do not always behave rationally and that institutions, norms and ideolo-
gies play a major role in choices made by economic agents. Furthermore, they argue that
institutions determine transaction costs that result in imperfect markets. Therefore, the
perfect and efficient market found in the neoclassical economics mainstream can only be
observed if there is no institution and hence no transaction cost; which is usually not the
case in the real world. Leading authors associated with the new institutional economics
stream include Ronald Coase, Oliver Williamson, Steven Cheung, Douglas North and
Harold Demsetz. A major criticism of the new institutional economics is the assumption
of given individual preferences and motivation. The framework only considers a one-
way causation from individuals to institutions. Individuals can change institutions but
institutions cannot change the intrinsic motivation of individuals. Individual behaviour
can be temporarily changed by institutions through punishments and rewards but the in-
dividual self-seeking motivation, preferences and utility functions are taken for granted
(Eggertsson, 2013).
Against the theoretical difference between old and new institutionalism we adopt
in this study the common thread of the two approaches which is the recognition of insti-
tutions as the driving force of market performance. Moreover, the fact that institutional
economics recognize that market and government failures may occur, but their damaging
effect on market efficiency will depend on the institutional framework, makes this area par-
ticularly suitable for this study. In fact, the current design of the supply chain of fertilizer
in Ethiopia is likely to generate both market failures (monopoly) and government failures
(regulatory capture). Accordingly, we will investigate the presence of such failures and
subsequently assess the extent to which they affect the chain efficiency.
Methods
The method used is supply chain analysis. The supply chain is the sequence of
sourcing and marketing functions (Springer-Heinze, 2007). It refers to a series of de-
cision-making processes and flows of products, information and money along a con-
tinuum from the good’s import to its final use (Van der Vorst et al. 2007; Beamon 1998).
This approach fits well in our theoretical framework as it recognizes the chain as the
result of the interaction of many institutions that need to be identified and their roles and
relationships well described in order to understand the structure of the chain. Supply
chain analysis is comprised of two main stages: (1) mapping the chain, (2) measuring
chain performance.
Mapping the chain means to visually represent it. For this purpose, the chain func-
tions, the main institutions and organizations need to be identified at micro, meso and
macro levels. For this study, organizations are conceptualized as the actors (individu-
als, firms, associations, unions) that are engaged in the fertilizer market. Institutions are
conceptualized as the rules and norms that shape the relations and transactions between
the actors. Micro level actors include chain operators and operational service providers.
Chain operators are those who perform the basic functions of the chain. They become
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the owners of the product at some stage of the chain. Operational service providers are
actors who support the basic functions of the chain or perform these functions on be-
half of chain operators. Meso level actors are those providing regular support services
or representing the common interest of micro level actors. They perform activities that
benefit several chain operators simultaneously. Macro level actors are those who develop
the framework in which the business activity takes place or have an indirect influence on
the chain (Springer-Heinze, 2007). In this study, the chain performance was assessed
in terms of efficient and effective distribution, price gap and price competitiveness. Ef-
ficiency in this context refers to whether the chain organization is able to work with an
adequate level of stock and low inventory costs. Effectiveness relates to whether farmers
are provided with fertilizer on time and whether they are satisfied with fertilizer quality.
Price competitiveness and price gap assessment refer to whether fertilizer is procured
and delivered at the lowest possible costs. Following the assessment, the results were
discussed in the light of the institutional economics framework.
Research area and study units
The selection of the research area was based on a five-stage stratified selection
technique. First, one administrative region was purposively selected, according to four
criteria: (1) potential for agricultural production, (2) significant fertilizer consumption
and fertilizer use intensity, (3) long history of fertilizer use and (4) availability of data.
According to these criteria, Oromia region emerged as the most suitable region for the
study. Second, the Arsi zone was purposively selected within Oromia region according to
the same criteria. The Arsi zone is a major agricultural area with most farmers having a
long fertilizer use history. At the third stage of sampling, two CUs were selected in the
Arsi zone according to their date of creation in order to be able to collect over an extended
period of time series data of fertilizer prices. Thus, Hitosa union (created in 1992) and
Gaalamaa union (created in 1993) were selected. At the fourth stage, one district was
selected from those supplied by each CU. Hitosa district was selected for Hitosa union
and L. Bilbiloo district for Gaalamaa union. In the fifth stage, two Primary Cooperatives
(PC) were purposively selected in each district. In Hitosa district, Xaddoo Shoorimaa and
Boruu Jawwii PCs were selected. In L. Bilbiloo district, Bekoji and Cibaa Mikaa’elaa PCs were
selected. Figure 1 shows the research area on the map.
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Fertilizer supply chain in Ethiopia: structure, performance and policy analysis
Figure 1. Map of the study area (Source: author's own illustration).
Samples were selected for the different actors (importers, wholesalers, retailers and
farmers). As described above, two CUs and four PCs were selected, respectively for the
wholesaler and the retailer samples. As for the farmer sample, 20 farmers were randomly
selected among each of the PC’s clients. As the study was focused on fertilizer and PCs
were the sole retailers, farmers were randomly sampled from those coming to the PCs to
purchase fertilizer. This approach was used to sample farmers who effectively use ferti-
lizer. The samples of the study units are summarized in the Appendix.
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Data collection and data processing
Secondary data and primary data were used. Secondary data were collected through
literature screening and from different databases. In the field, primary data were col-
lected with questionnaires and interview check lists. Interview data were mainly used in a
quantitative way to derive some averages presented in the text. Moreover, the information
retrieved from the interviews was used to understand the functioning of the chain and
to provide a background for the discussion of the results. The analyses were conducted
in SPSS 16 and Microsoft Excel. The chain mapping was done during the field stay and
the results were discussed with the actors and subsequently refined. Regarding the price
competitiveness, time series data on retail and world prices of DAP and urea were col-
lected. As retail prices were in the local currency, the Ethiopian Birr (ETB), the official
nominal exchange rates were used to convert the retail prices in each year to the US dollar
(USD).
Results
Fertilizer supply chain functions
There are four major functions along the supply chain of fertilizer in Ethiopia:
(1) import planning and inventory control
(2) import execution and domestic supply of fertilizer
(3) marketing and distribution
(4) final use.
Import planning begins with the assessment of fertilizer demand. It is a bottom-
up approach. At sub-district level, extension workers referred as Development Agents
(DA) collect farmers’ requirements, which are then gradually aggregated at district, zone
and region levels by the respective Bureaus of Agriculture (BoA). The final aggregation
at national level is carried out by the Agricultural Inputs Marketing Directorate of the
Ministry of Agriculture (AIMD/MoA). However, in practice many manipulations occur in
the process and other considerations are often taken into account. The interviews con-
ducted during the field research showed that some DAs do not collect actual fertilizer
requirements from farmers but instead report figures based on their own guesses. This
makes the BoA at the upper level reluctant to use data reported by the DAs for demand
aggregation. The Oromia regional BoA used to estimate the regional fertilizer demand
based on home experts’ guesses. In 2012, for instance, they assumed that farmers used
50% of recommended application rates over the total farmland expected to be cropped.
Although experts’ guesses may match reality in some cases, the overall demand estima-
tion procedure is flawed and opaque as the base for the guesses as well at the level of the
DAs as at the level of the BoA is not well documented. Inventory control is limited to cen-
tral warehouses. The recorded stocks are deduced from the estimated national demand
to generate the net import requirement.
Once the net fertilizer import requirement is estimated, the AISE in collaboration
with the AIMD/MoA prepares the tender documents, which are reviewed and approved
by an inter-departmental committee before being floated. Usually, 16 to 22 international
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companies buy the tender documents and 6 to 8 offer prices for each fertilizer product.
The bids are opened and evaluated by the inter-departmental committee. Thereafter, the
successful bidders are made-known and contractual agreements are signed. Thus, the
AISE provides the port of Djibouti with all documents required for customs clearance and
follows up fertilizer delivery to the port. When the supplier’s ship reaches Djibouti, the
AISE settles a letter of credit with the Commercial Bank of Ethiopia (CBE), a governmen-
tal bank, so that 90% of the contract value is transferred to the supplier’s bank account.
The remaining 10% is transferred after the fertilizer has been transported to central ware-
houses in Ethiopia and the actual quantity supplied known. Fertilizer arrives at Djibouti
in bulk. Then, the supplier bags it into 50 kg sacks and loads it on to trucks contracted
by AISE. At the port, the quality of the fertilizer supplied is inspected by a neutral service
before the loading on trucks.
With the prevailing policy, CUs are the wholesalers and the PCs the retailers. Ac-
cordingly, the AISE transports the fertilizer from Djibouti port to central warehouses,
where CUs receive and store their quotas of supply. Then, CUs with the support of the
zonal BoA organise the transportation of the fertilizer from central warehouses to PCs
according to the quota allocated to each PC. When the supplies reach the PCs, their
managers inform farmers of the availability of fertilizer. Smallholder farmers represent
92,5% of total fertilizer consumed in Ethiopia over 1995-2012. In addition to smallholder
farmers, the AISE directly supplies fertilizer to commercial farms, state-owned farms
and research institutions. Moreover, in areas where there is no PC, the AISE is mandated
to supply fertilizer to farmers.
Fertilizer supply chain institutions and organizations
Actors, transactions and rules at micro level
Two groups of actors are involved at the micro level: the chain operators and the op-
erational service providers. Chain operators include international suppliers, importers,
wholesalers, retailers and farmers. International suppliers of fertilizer are companies
which often source fertilizer from Saudi Arabia, Morocco, China, Russia and Ukraine.
The international suppliers transact with the importer. That transaction follows inter-
national law and is based on formal contracts which prescribe the conditions for aliena-
tion and acquisition of property rights over the physical product (fertilizer) as well as the
conditions for the transfer of credit (title to money). The selection of the international
suppliers also follows specific rules of public procurement.
The selection of the sole importer also follows specific rules aimed at creating equal
opportunities for all previous importers to be selected. However, in reality there is a bias
towards the state company AISE, which is more trusted by the organizations (AIMD/
MoA, CBE, interdepartmental committee) supervising the procurement process. In addi-
tion, the AISE employees are civil servants and are thus assumed to supply public goods
and not seeking to maximize profits. This creates a biased competition with the former
private importers. Also at the retail level, there is a biased competition between coopera-
tives and private dealers. According to Ethiopian law, agricultural cooperatives should
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aim to help farmers increase their yields and incomes by pooling their resources to sup-
port collective service provision and economic empowerment. Thus, cooperatives do not
seek profits and receive support from the government. As a result, every year the AISE
has been awarded the sole importer position, private dealers exited and CUs are the only
wholesales while the PCs are the only retailers. The rules governing the transactions of
the physical product between the AISE and the cooperatives follow a top-down approach
as AISE supplies CUs with quotas of fertilizer attributed to them by the BoA and similarly,
the CUs supply the PCs with quotas attributed to them as well. Farmers are the last own-
ers of the product. They purchase from the PCs on a cash basis. Farmers in the study area
purchase on average 197 kg of DAP and 68 kg of urea. Only 25% of farmers use urea while
all use DAP. The fertilizer use intensity over total farmland is on average 115 kg/ha for
DAP and 37 kg/ha for urea. Combining DAP and urea makes the fertilizer use intensity
152 kg/ha (roughly 76 kg/ha of nutrients). Fertilizer use in Ethiopia at national level over
time is depicted in Figure 2. This figure shows a steady upward trend for both DAP and
urea. In addition the figure illustrates an increasing share of urea in the total fertilizer
use. That share increased from 5% in 1974 to 37% in 2012.
Figure 2. Fertilizer consumption in Ethiopia, 1971-2012 (Source: MoA, 2013).
Operational service providers are: transporters, banks, regional Governments, re-
gional, zonal and district Cooperative Promotion Agencies (CPA) and zonal BoA. Trans-
porters play an important role by moving the fertilizer from Djibouti port to the PCs.
The rules governing the transactions between transporters and their counterparts are laid
down in formal contracts stipulating the amount of fertilizer to be moved and the time
frame. Furthermore, transporters are selected through a tendering procedure conducted
by the AIMD/MoA for fertilizer to be transported between Djibouti port and central ware-
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houses and by the BoA for fertilizer to be transported from the central warehouses to the
PCs. Banks are also key actors of the fertilizer supply chain. The CBE through formal
credit instruments pays both the international suppliers and the AISE. It also makes the
fertilizer available to cooperatives on credit guaranteed by the budget of regional govern-
ments. To supervise the credit recovery, regional governments mandate the regional CPA,
which interacts with the CUs and the PCs through its lower divisions. Although in some
regions there is still a 50% credit programme on fertilizer for poor farmers, this is no
longer the case in the study area. PCs sell only on a cash basis to farmers. Thus, PCs pay
back CUs and CUs pay back the CBE, which clears the credit. Figure 3 illustrates actors
and their relations at micro level.
Figure 3. Fertilizer supply chain at micro level (Source: author's own illustration).
Actors, transactions and rules at meso level
Four groups of support service providers operate at the meso level along the chain:
research institutions, MoA’s departments, CPAs and BoAs. Several research institutions
are involved in the development of the fertilizer market in Ethiopia. The leading institu-
tions are IFPRI and the Ethiopian Development Research Institute (EDRI). Their interac-
tion with the actors at micro level is less formal. They formulate policy options that are
submitted to the actors who operate at the micro level. In some cases, they are mandated
with formal contracts to assess specific stages of the chain and to formulate policy rec-
ommendations. Two departments of the MoA are involved in the fertilizer market: the
extension department and the AIMD. The extension department is involved through the
DAs who are in charge of building farmers’ capacity on fertilizer use and of collecting
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farmers’ demand for fertilizer. The interaction between the DAs and the farmers is regu-
lated by both social institutions (norms and values) and educational institutions (training
and knowledge dissemination). The AIMD is responsible for estimating national ferti-
lizer demand and for allocating fertilizer supplies to the regions. The CPAs offer audit
service and training to enhance cooperatives’ capacity on fertilizer management. They
are also part of the Input Coordinating Unit, which decides on margins to be allocated to
both PCs and CUs. This coordinating unit also selects the central warehouses where fer-
tilizer is supplied by the AISE. Furthermore, the unit is in charge of allocating fertilizer to
CUs and PCs. It also nominates the CUs that attend the national annual fertilizer procure-
ment planning meeting. The BoAs are involved in estimating fertilizer demand and are
also part of the Input Coordinating Unit described above. In addition, they regulate the
fertilizer market, track illegal dealers and monitor the quality of the fertilizer supplied.
Actors, transactions and rules at macro level
Actors at the macro level include the federal government, regional governments,
public agencies, ministries and both international and multilateral organizations. The
federal government defines the policies at national level. The Ministry of Finance and Eco-
nomic Development is responsible for depositing the local currency equivalent amount
of foreign exchange required in the treasury account. It approves the credit guarantee
requested by regional Governments from the CBE. Much of the government involvement
in the chain is about setting the rules and regulating the transactions between the ac-
tors at lower levels. The Agricultural Transformation Agency (ATA) is a public agency
established in 2010 to support the existing actors to promote change in the agricultural
sector. The ATA is running four main reforms, which will have a strong impact on the
fertilizer market. The first is the Ethiopian Soil Information System, which is expected
to provide a detailed picture of the nutrients that are deficient in Ethiopian soils. The
second is the opening of four fertilizer blending plants which will supply fertilizer on
demand, according to the results of the soil analysis. The third is the opening of two
fertilizer manufacturing factories to locally produce fertilizers. Soil exploration has al-
ready started to source locally raw materials for the various fertilizers to be produced.
The last reform is the new fertilizer financing system that should better connect farmers
and cooperatives to microfinance institutions and remove the existing credit guarantees
(ATA, 2013). Some international agencies such as USAID and IFDC are active on fertilizer
market development in Ethiopia. They mostly interact with government bodies through
international or bilateral agreements to channel funds and technical support to the actors
at micro level.
Chain performance assessment
Chain efficiency
The level of stocks in Arsi zone over time, as depicted in Figure 4a, shows that there
has been a dramatic increase in left-over stocks in recent years. Although the level of
stocks was relatively stable until 2008, the graph shows that it started to increase slowly
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between 2009 and 2010 and then sharply afterwards. This shows a striking correspond-
ence between the rise of the stocks and the implementation of the sole importer policy
alongside the government control of the entire chain. This correspondence is confirmed
by the interviews conducted with the CU and PC managers who highlighted that fertilizer
stocks started to increase during the last restructuring of the chain, which resulted in
theimposing of quotas that were related to neither their marketing capacity nor the farm-
ers’ requirements. Fig. 4b shows that in relative terms, stocks exceeded half of the total
fertilizer supplied in that year. This situation is not just limited to our study area. In fact,
data collected from AISE revealed that at a national level, left-over stocks were 42% of
total available DAP and 50% for urea in 2012. Fig. 4b also points out the decreasing trend
in the share of fertilizer consumption relative to estimated demand. In 2012, the amount
of fertilizer consumed was just half of the estimated amount.
Figure 4. Fertilizer market performance in Arsi zone, 2004-2012. (Source: Arsi Zonal Bureau of Agriculture, 2013).
Chain effectiveness
In the study area, the majority of farmers report that they received fertilizer on time.
Only 1.2% of them reported late delivery as a major constraint. Although, only 2.5% of
them reported the low quality of the fertilizer supplied as a major constraint, most of
them reported this as a secondary constraint. Actually, they complain about receiving
old stocks of fertilizer, whose quality in their opinion is lower than the quality of the new
supplies.
Price competitiveness
The major constraint reported by 87.5%3 of farmers is high fertilizer prices. In this
section we investigate price competitiveness by comparing the AISE’s prices at Djibouti
port and world market prices. The study focuses on two supply agreements that were sig-
3 8.8% of farmers said they face no constraint.
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ned in October 2011 and January/February 2012, while the product was delivered respecti-
vely in January 2012 and in May 2012. As international suppliers try to anticipate fertilizer
prices at delivery time when submitting their bids, the prices at contract agreement time
are compared to world prices not only at the time of contracting, but also at delivery time
(Table 1). Since available world prices are free on board (fob) prices, while the AISE uses
cost and freight (cfr) prices, the average difference between cfr and fob prices was added
to cfr prices. This difference includes the costs of freight and the loading in trucks at the
port. This average difference was estimated to 95 USD/MT in 2012 by IFPRI.
Contract date
AISE cfr price at Djibouti
(USD/MT)a
World price at contract
date (USD/MT)
Delivery date
World price at delivery
date(USD/MT)b
Difference between cfr
& fob prices (USD/MT)c
AISE loss at world price
of contract date (USD/
MT)
AISE loss at world price
of delivery date (USD/
MT)
DAP 10/2011
02/2012
733
648
631
517
01/2012
05/2012
530
553
95
95
7
36
108
0
Urea 10/2011 586
470
487
368
01/2012
04/2012
368.4
493.4
95
95
4
7
122.6
-118.4
Table 1. AISE procurement and international price of fertilizer, 2011-2012 (Source: IFPRI, 2012; AISE, 2013; WB, 2014).
a: MoA / AISE (IFPRI, 2012)
b: World Bank Commodity prices (World Bank, 2014)
c: Fertilizer Weekly estimate (IFPRI, 2012)
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Comparing AISE’s procurement prices and world market prices at contract dates
shows that for the two procurement periods prices given to the AISE were slightly higher
than prices on world markets for both DAP and urea. Weighting prices with quantities
imported4 gives an average of 13 USD/MT paid by the AISE above world market prices at
contract dates, which is equivalent to about 2% of the weighted world price at the time
of contract. Considering world market prices at delivery dates, the results show that the
AISE paid substantially higher rates than world market prices for the first tender and
lower than world market rates for the second tender. Weighting prices with quantities
imported gives an average of 66.7 USD/MT paid by the AISE above world market prices at
delivery dates, being equivalent to about 14% of the weighted world price at delivery time.
Price gap assessment
Between 1971 and 2012, the price gap between world market and retail prices of fer-
tilizer were on average 67 USD/MT for DAP and 40 USD/MT for urea. In relative terms,
the price gap makes up respectively 40% and 62% of the retail price for DAP and for urea
(Figure 5). This price gap can be further divided into international and domestic costs.
International costs make up respectively 22% and 13% of the retail price for DAP and for
urea. These costs include international freight, bank charges for letters of credit, clear-
ing and transit costs, quality inspection fees, transportation costs between Djibouti and
Ethiopia, AISE margin, bagging and spillage costs. The domestic costs are respectively
16% and 49% of the retail price of DAP and of urea. They include loading and unloading
costs, warehouse rents, bank interest, transportation costs between central warehouses
and PCs, CU and PC margins and a margin associated with the stocks. This margin is
calculated as the difference between the price of the new supply and the initial price of
the stocks supplemented with the storage costs. The final retail price is in fact a weighted
average of the price of the new supply and the price of fertilizer in stock. The margin for
AISE, CUs and PCs is fixed by the MoA. In 2012, the margin was set at 0.84 USD/MT for
AISE, 3.09 USD/MT for CUs and 3.95 USD/MT for PCs. The marketing margins for all ac-
tors involved in fertilizer distribution put altogether represented about 3.2% of the price
gap for DAP and 3.9% of the price gap for urea in 2012.
4 DAP: 350,000 MT and 210,000 MT respectively in the first and second periods; Urea: 250,000 MT and 78,000 MT
respectively in the first and second periods.
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Figure 5. Composition of retail price of DAP and urea, averages from 1971-2012.
(Sources: World Bank, 2014; AISE, 2013; EDRI, 2013; PC, 2013).
Discussion
The study shows that several institutions both formal and informal regulate the
fertilizer market in Ethiopia. Formal rules such as public procurement procedures and
written contracts regulate the transactions in many cases and enforcement mechanisms
through supervision of the procurement implementation as well as national and interna-
tional laws are present. Informal institutions such as societal norms and customs regu-
late the day-to-day interaction between the different actors. The key actors in the fertilizer
market are: the state, agricultural cooperatives, research institutions and international
organizations. The study points out that the recent centrally-organized structure of the
chain has resulted in some government and market failures. Explicitly, there is a state
monopoly over fertilizer importation but also a cooperative monopoly over fertilizer dis-
tribution. Nevertheless, the study did not find any evidence the AISE nor the cooperatives
abuse their monopoly position. In fact, the price competitiveness assessment shows that
the import price paid by the AISE is only 2% above world-equivalent price at contract
agreement time. The price difference between contract agreement time and fertilizer de-
livery time is higher by about 14%. However, this price difference is highly subject to price
volatility that is a typical feature of international fertilizer markets. In addition to price
competitiveness, the price gap assessment shows that most of the price gap is related
to unavoidable transaction costs such as: transportation costs and clearing and transit
at the port. The marketing margins received by the AISE and the cooperatives forms a
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small fraction of the price gap (3-4%). In a nutshell, margins between retail and import
prices of fertilizer in Ethiopia are competitive. As reported by Heisey and Norton (2007),
these margins in Ethiopia compare favourably with other African countries, though are
still higher than in Asian and Latin American countries. Similarly, Rashid et al. (2013)
showed that fertilizer prices in Ethiopia are significantly lower than in neighbouring
Kenya, Uganda, Rwanda and Tanzania. An explanation for such "low" prices is the state
control over prices and marketing margins. Such control restricts the self-interest behav-
iour of fertilizer dealers (AISE and cooperatives). Moreover, in terms of quantity, both
the AISE and the cooperatives are subject to imposed quantities of fertilizer they should
import and distribute. Thus, despite their monopoly they cannot restrict quantity in order
to maximise their monopoly gains.
The study did not find any evidence of large-scale corruption or collusion between
the AISE and the international suppliers to seek financial gain during fertilizer procure-
ment. In fact, the process of tender floating and bid opening seems transparent and is
supervised by an inter-departmental committee. These examples are in line with the
theoretical background of institutional economics, arguing that market and government
failures may not matter as much, as long as other institutions beside the state and mar-
ket are involved in the market regulation. In the case of fertilizer in Ethiopia, we saw
that strict rules for public procurement and enforcement mechanisms via laws play a
significant role in regulating the market. Additionally, the absence of corruption and
payment-seeking behaviours can be explained from the old institutionalism perspective
by the internalization of publicly-oriented values by individuals working for the AISE, the
cooperatives and the Ministries. From the new institutionalism perspective, this can be
interpreted as a response to the punishments and incentives created by the law in force in
the country. However, a psychological analysis is needed to clarify the real motives of in-
dividuals that could explain the behaviour observed and provide support to either the old
or the new institutionalism explanation. Such analysis is beyond the scope of this study.
Although there is no evidence of market failures in terms of corruption or monopo-
lygains, the study points to imperfections in the demand estimation procedure. The ar-
bitrary assumptions made by both the DAs and the BoA officers in charge of estimating
demand, instead of reporting and relying on farmers’ actual requirements are the driving
factor behind the exponential increase in left-over stocks of fertilizer. The introduction
of complex assumptions, tools and guesses in the estimation of fertilizer demand by the
home experts of the BoAs can be analysed from the new institutional economics perspec-
tive as a way for BoA officers to maximize their utility by increasing their influence over
the process. Similar analysis has been made by Nedergaard (2006), when analysing the
common agricultural policy (CAP) of the EU. He postulated that the complexities intro-
duced in the CAP are a way for the EU bureaucrats to maximize their utility by increasing
their influence over the process and expanding their career possibilities as well as their
power base.
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The increasing stocks of fertilizer lead to two consequences. First, farmers are not
happy when supplied with old stock fertilizer, as they believe new supplies would be
more effective. Although our discussions with experts did not point out a decrease in
fertilizer effectiveness due to long storage periods, this perception of farmers needs to
be addressed through awareness campaigns. Second, and probably the most important
problem related to keeping large stocks, is that the storage costs are transmitted to the
retail price the next year, making fertilizer more expensive for farmers. As argued by IF-
PRI (2012), the current level of stocks of about 50% of total supply far exceeds the optimal
level of reserves that is needed and which should be no more than 10% of the supply. In
order to show the order of size of economic losses, IFPRI (2012) calculated that the re-
sources diverted in managing fertilizer stocks could have supported more than 130.000
productive safety net programme beneficiaries. Therefore, there is an urgent need to
reduce the stock levels. Doing so will also requirea change in the demand estimation
procedure, which considers only stocks at central warehouse level. The stock inventory
should be conducted both at central warehouse and cooperatives’ warehouses levels and
be incorporated in the import need estimation.
Conclusion
Fertilizer is a key input in boosting agricultural production in Ethiopia. Hence, in-
creasing its use in the country has been targeted as a strategic goal. To achieve that goal,
the government has implemented over time various policies on the fertilizer market. The
last policy shift was characterized by the state control of the chain, a control over prices
but also the involvement of non-state organizations such as agricultural cooperatives in
the chain. In this study, we analysed the structure of the chain in the light of an institu-
tional economics framework and assessed the chain performance through effectiveness,
efficiency and price competitiveness indicators. The findings showed that several formal
and informal institutions regulate the fertilizer market. Both market and government
failures were observed but they did not affect the performance of the market as much
because the institutions in place have shaped the behaviour of the individual actors, espe-
cially those working in the public sphere, in such a way that they do not seek to maximize
personalgains. The supply chain of fertilizer was found to be effective in supplying farm-
ers in a timely manner. However, the chain efficiency could be improved and fertilizer
price be lowered by reducing stocks and storage costs as well as improving the demand
estimation process.
In fact, the study pinpoints a striking correspondence in rising stocks and the state
control of the chain. These rising stocks are explained by the arbitrary assumptions guid-
ing the demand estimation process. Therefore, the study suggests improving the current
approach by firstly setting incentives and punishments to make sure that farmers’ actual
requirements are reported by the development agents. Secondly, at the level of the bu-
reaus of agriculture, experts’ knowledge (which we recognize as useful) should comple-
ment and not replace field information about farmers’ actual requirements. Assumptions
made when aggregating national fertilizer demand should be based on well documented
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information and not rough estimates. Thirdly, the estimation of the import requirement
should consider stock inventories at both central warehouse level and cooperative level.
The stockholding policy should target no more than 10% of fertilizer supply as reserves,
in order to avoid locking up scarce resources into fertilizer stockholding. Finally, this
study could be extended in two directions. First, a psychological analysis is required to
determine whether the unselfish behaviour we observed in the public sphere was due to
internalizing altruism values or was dictated by incentives and punishments created by
the institutions. The second direction is to analyse how the different policy settings (state
control and liberal market) that occurred over time on fertilizer markets have affected
price for fertilizer in Ethiopia.
Acknowledgements
Comments and suggestions by two anonymous reviewers are gratefully acknowl-
edged. Funding for this research was provided by foundation fiat panis and the German
Academic Exchange Service (DAAD). Comments and suggestions by Jonas Luckmann,
Bamlak Alamirew and Francis Shitawa are gratefully acknowledged. Research for this
paper was conducted between the Food and Agricultural Policy Group of the University
of Hohenheim and the Centre for Rural Development Studies of Addis Ababa University.
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Union District Primary Cooperatives
(PC)
Sub-district Number
of farmers
surveyed
Hitosa Hitosa Xadoo Shoorimaa PC Gondee Fichama 17
Union Jango Kilisa 2
Debeya Adere 1
Sub-total 20
Boruu Jawii PC Boneya Edo 8
Jawi Cilaloo 8
Oda Jila 2
Boruu Cilaloo 2
Sub-total 20
Gaalamaa L. Bilbiloo Bekoji PC Dawa Bursa 9
Union Bekoji Negoso 7
L/Diimaa 3
Koji Ketara 1
Sub-total20
Cibaa Mikaa’elaa PC Cibaa Mikaa’elaa 20
Sub-total 20
TOTAL 80
Appendix: Summary of study units. Source: Field survey, 2013.
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