Front Cover
 Table of Contents
 Basic farm level relationships
 Economic and financial factors
 Technical and other factors
 Summary and conclusions

Group Title: demand for fertilizer at the farm level in developing nations
Title: The Demand for fertilizer at the farm level in developing nations
Full Citation
Permanent Link: http://ufdc.ufl.edu/UF00094289/00001
 Material Information
Title: The Demand for fertilizer at the farm level in developing nations
Physical Description: 25 p. : ill. ; 28 cm.
Language: English
Creator: Dalrymple, Dana G.
Publisher: Bureau for Program and Policy Coordination
Place of Publication: Washington, D.C
Publication Date: 1975
Copyright Date: 1975
Subject: Fertilizers -- Economic aspects -- Developing countries   ( lcsh )
Farms, Small -- Developing countries   ( lcsh )
Genre: bibliography   ( marcgt )
non-fiction   ( marcgt )
Spatial Coverage: Developing countries
Bibliography: Includes bibliographical references (p. 22-25).
General Note: "Draft no.3."
General Note: "December 23, 1975."
General Note: Typescript.
General Note: Caption title.
Statement of Responsibility: by Dana G. Dalrymple.
 Record Information
Bibliographic ID: UF00094289
Volume ID: VID00001
Source Institution: University of Florida
Holding Location: University of Florida
Rights Management: All rights reserved by the source institution and holding location.
Resource Identifier: oclc - 434863098

Table of Contents
    Front Cover
        Front cover
        Page i
    Table of Contents
        Page ii
        Page 1
    Basic farm level relationships
        Page 2
        Page 3
        Page 4
        Page 5
        Page 6
        Page 7
    Economic and financial factors
        Page 8
        Page 9
        Page 10
        Page 11
        Page 12
        Page 13
        Page 14
        Page 15
        Page 16
    Technical and other factors
        Page 17
        Page 18
        Page 19
    Summary and conclusions
        Page 20
        Page 21
        Page 22
        Page 23
        Page 24
        Page 25
Full Text

Draft No. 3

December 23, 1975




Dana G. Dalrymple

Agricultural Economist

Bureau for Program and Policy Coordination

Agency for International Development

Washington, D.C. 20523


This paper was prepared at the request of the Consultative Group
on Food Production and Investment (CGFPI) in order to provide background
for a review of the fertilizer question at the group's meeting in
February 1976. A summary of an earlier draft of the paper was prepared
by the CGFPI Secretariat and is to be distributed to members.

Although the literature on fertilizer is extensive, relatively little
of it is devoted to the question of demand at the farm level in the
developing countries. Hence, this paper might be characterized as a
preliminary set of notes and thoughts on an important but somewhat
neglected subject. It is, at most, an introduction.

The paper is, in part, an outgrowth of an earlier report on Evaluating
Fertilizer Subsidies in Developing Countries (AID, PPC, Discussion Paper
No. 30, July 1975, 64 pp.). Readers who desire more general background on
the world fertilizer situation may wish to consult:

-Helen Hughes and Scott Pearson, Principal Issues Facing the
World Fertilizer Economy, Agricultural Development Council,
RTN Seminar Report, March 1975, 11 pp.

-Graham F. Donaldson, "Fertilizer Issues in the 1970's and
Beyond," Development Digest (National Planning Association
for AID), October 1975, pp. 3-17.

The current situation is concisely summarized in:

-Richard B. Reidinger, "The World Fertilizer Situation
and Outlook," World Agricultural Situation, U.S.
Department of Agriculture, Economic Research Service,
WAS-9, December 1975, pp. 28-31.

Those wishing to delve more deeply into some of the economic issues
introduced in the paper may wish to read:

-C. Peter Timmer, "The Demand for Fertilizer in Developing
Countries," Food Research Institute Studies, Vol. 13,
No. 3, 1974, pp. 197-224.

I am indebted to the following individuals who reviewed earlier
drafts and provided helpful comments: Richard Reidinger of the U.S.
Department of Agriculture; Per Pinstrup-Anderson and Paul Stengel of
the International Fertilizer Development Center; Harold Steere of the
World Bank; and David Redding and Donald McClelland of AID.

This paper was prepared while I was on part-time detail to AID from
the Foreign Development Division, Economic Research Service, U.S. Department
of Agriculture.


1. Introduction 1

2. Basic Farm Level Relationships 2
A. The Adoption Process for Technology 2
B. Components of Demand 2
C. The Farmers' View 4

3. Economic and Financial Factors 8
A. Economic Factors 8
1. Prices 8
a. Fertilizer Prices and Consumption 8
b. Fertilizer/Product Price Ratios 10
c. Price Elasticity of Demand 11
2. Risk, Uncertainty, and Policy 12
B. Financial Factors 14

4. Technical and Other Factors 17
A. Technical Factors 17
B. Other Factors 19

5. Summary and Conclusions 20

6. References 22



There has been widespread concern that the recent worldwide fertiliz-
er crisis has led to a tapering off or reduction in fertilizer use in
the developing countries a development which could take the steam out
of the green revolution and limit the needed rate of increase in food

At first, in 1974, the crisis was one of relatively short supplies.
This led to a very sharp rise in prices. But even by paying higher prices,
some developing countries were reportedly unable to obtain normal supplies
of fertilizer. This severe supply shortage now appears to have largely

As of late 1975, international prices have dropped from peak
levels. But as one economist recently noted:

Scattered data indicate that many farmers in developing
countries have yet to benefit significantly from these
international price reductions. In response to tight
conditions and mid-1974 projections showing continued
fertilizer shortages, many of these countries used their
scarce foreign exchange to stock up on fertilizer at prices
so high their farmers cannot afford to use it to produce the
added food they need. At the same time, many of these
countries lack both the internal budgetary resources to
fully subsidize the high fertilizer prices, and the political
ability to quickly raise grain prices to remunerative levels
for the farmer.l/

Current international prices, moreover, are still above pre-1972 levels.
Thus the supply problem of 1974 appears to have given birth to the demand
problem of 1975 and 1976.

The challenge, therefore, is to develop policies and programs which
will increase the demand for fertilizer. As noted above, however, these
tasks are complex and difficult to carry out.2/ The job is made more
difficult because we know so little about the nature of demand for
fertilizer at the farm level in developing countries. And most of what
little information we have is based on the pre-crisis period.

Thus we are faced with the problem of developing appropriate policies
and programs for the developing nations on the basis of very little
information about the recent or current situation at the farm level.
This is obviously a difficult and hazardous position. But at least a brief
review of what little data we have can provide a starting point.


For much of the developing world, chemical fertilizer is a relatively
new factor of production. While fertilizer has generally been used for
many years for export or plantation crops, its use on food crops for
domestic consumption is usually more recent. Hence it may be helpful to
outline some of the key points of the adoption process for technology.
Then we shall move on to a review of the traditional demand factors.
This will be followed by a review of farmers' views of factors influ-
encing fertilizer use.

A. The Adoption Process for Technology

Generally the adoption of a technology follows the S-shaped curve
depicted in Figure 1. Adoption moves fairly slowly at first, then speeds
up, and later tapers off. While the figure suggests that adoption
by 100% of the farmers is eventually reached, this is seldom the case in
agriculture. Numerous restraints physical,biological, or economic -
result in a curve which often tapers off below 100%, particularly in
developing countries.

Scattered empirical evidence suggests that fertilizer has followed
this general pattern.3/ There is,however, a significant further dimension
to the process: partial adoption. Just because a farmer starts using
fertilizer does not mean that (1) he uses it on all his land or crops,
or (2) that he uses recommended levels. In practice, farmers may use
fertilizer on only a portion of their land and then at considerably less
than recommended levels.4/ More complete measures of fertilizer adoption
are clearly needed.

The degree to which the process behind the two decisions (to adopt,
and,if so,how much) may differ is not entirely clear. Perhaps somewhat
different factors are involved. Or perhaps similar factors are involved
but they are weighed differently. In any event, there are well-known
components of demand which would be involved to some (though not an
exclusive) degree.

B. Components of Demand

Demand is the amount of a commodity which will be purchased at a
given place and time at a given price. Obviously certain preconditions
must exist: the product must be available at the right place at the
right time. In the case of fertilizer in developing countries, these
preconditions cannot be taken for granted; in fact they can present very
substantial problems. Assuming them away for the moment, the critical
factor becomes one of price.

In the case of fertilizer, however, the demand is a derived demand.
Fertilizer is not, of course, consumed directly by humans; rather, the
product of fertilizer usage is utilized. Thus fertilizer is important in
terms of its contribution to crop production at the farm level. The
determining factor for the decision maker, the individual farmer, is the
profitability of fertilizer use.




/ /^ Ealv Adoptn



p. 74.


Profitability, however, is determined by a range of factors, of
which price of fertilizer is only one component. The three main factors

(1) The cost of fertilizer.

(2) The price of the crop.

(3) The fertilizer/crop production function.

The first and second can be directly influenced by the government; the
third is a physical response function which is influenced by a myriad of
physical and biological factors (one of the most important of which is
weather). It is the latter that takes the question of profitability well
beyond the traditional province of economists.

At the time the farmer buys fertilizer, only the first factor is known
for certain.* He can only speculate about the likely price he will receive
for his product and the production function. Also, if fertilizer is new
to him, he may not know the optimum type or quantity to use. Thus there
may be a considerable personal risk involved in using fertilizer. Hence
the farmer may decide to use no fertilizer or less than he would if
prospects or his knowledge were more certain.

In any case, prices comprise two out of the three components. And
they may partially compensate for uncertainty about the third. While
prices are key parameters of demand, a distinction must be drawn between
potential demand and effective demand. Potential demand is just that;
to become effective demand it must be backed up with the ability to
pay (purchasing power). This ability is determined by the financial
status of the farmer the degree to which he has, or is able to get,
funds to purchase fertilizer. Since many months can elapse between the
time the fertilizer must be purchased and paid for and the time the crop
is harvested, he may need extensive credit. This need would be partic-
ularly strong for the smaller and poorer farmers.

The third factor, the fertilizer response function, is dependent on
so many factors that it virtually defies complete categorization. Certainly
the crop variety itself would be of basic importance. So would the
appropriateness of the fertilizer formulation. Numerous soil, water, and
weather factors would also be involved. Some of these could be modified
by government research and infrastructure activities; othersmay long
remain beyond reach.

C. The Farmers' View

What has been said to date has certain elements of an armchair economic
analysis. How do farmers view the constraints on fertilizer use? We can

*Even then he could face uncertainties in terms of what he has actually
received; in some cases the fertilizer may be adulturated, short on weight,
or of poor quality.

cite a few scattered studies. The main limitation with them is that they
were conducted before the recent crisis; prices were relatively normal
and hence their importance in the present context would be misunderstood
Moreover, the studies were limited to Asia.

Examination of the results reveals that, in some cases, price factors
were of relatively modest significance as a restraint to fertilizer use.
Frequently the two main elements were viewed as (1) environmental factors
influencing the production function, and (2) financial factors centering
on credit.

This outcome is graphically summarized in Figure 2 which is derived
from a study of rice in 65 villages in six Asian countries in 1970 and
1971. Environment (principally measured by quantity and timing of rain-
fall) was the main constraint. It was followed in second place by a
measure of the quality of irrigation. Credit availability (measured by
proportion of farmers borrowing from formal credit sources) was third,
and price (the nitrogen/paddy price ratio) was fourth.5/

Naturally, the relative importance of the factors varies from country
to country, village to village, and crop to crop.

India. A massive survey in India from 1968/69 to 1970/71 indicated
that the main restraints on fertilizer use on several crops were:6/

Factor Percent

Inadequacy of funds and credit 43.2
Inadequacy of water 38.8
Fertilizer supply problems 3.5
High cost 1.4
Risk 1.3
Excessive rains 0.6
Adversity to change 0.5
Other 21.3

A more detailed analysis was carried out for wheat and rice with a slightly
different grouping of variables. The significant factors influencing
fertilizer use were:

Percent of area irrigated
Percent of area under HYV's
Income level of household

For wheat, percent of area owned was also significant. In neither case was
credit significant; one suspects that the financial influence was reflected
by the income level of the household.7/

A much smaller study in Gujarat in 1969-70 produced results similar
to the larger study noted above; an additional factor, preference for
farm manure was significant:8/

Figure 2.

RICE, ASIA, 1970, 1971*


Average vs.Top 20

Mono-culture vs. Mixed

*Differences between (a) average and 20 highest
users of nitrogen and (b) mono-culture and mixed

Source: Randolph Barker and Teresa Anden;
'Factors Influencing the Use of Modern Rice
Technology in the Study Areas," Changes in
Rice Farming in Selected Areas of Asia, IRRI,
1975, p. 27.

Factor Percent
Baroda Junagadh
Inadequacy of finance 28.0 28.8
Lack of irrigation 23.6 28.8
Preference for farm manure 15.6 21.9
High price of fertilizer/low
prices of crops 12.4 1.4
Imperfect supply arrangement 6.7 6.9
Other 13.7 12.2

Total 100 100

Pakistan. Slightly different results were obtained in a survey
in the Punjab of Pakistan in 1969/70.9/ Farmers who reported that
fertilizer was "not easily available" were asked to give the reasons
why. They responded as follows:

Factor Percent

Price too high 94.7
Unable to get needed
fertilizer on time 75.5
Lack of funds 75.0
Transportation problems 3.4
Other 0.2

Clearly, price appeared to be much more important a constraint than in India.
Several other studies in Pakistan also showed that inadequate credit was
a restraint for fertilizer use.

Korea. In Korea, price of fertilizer was found to be a significant
factor in one phase of study but not significant in another.10/

The picture that emerges from these few studies is that price, during
a period of relatively normal prices, was not stated to be as important a
factor in determining fertilizer use as economists might expect. Instead
environmental factors and income/credit were often of major significance.
Whether the same findings would have been found in other nations is unclear.
And the effect of the recent crisis, when price would have been expected
to become much more critical, is as yet undocumented.


The relative importance of economic and financial factors influencing
fertilizer use varies, but both, as noted, are subject to some degree of
government policy influence.

A. Economic Factors

The principal economic factors relate to price, but other related
influences may also be relevant.

1. Prices

Fertilizer prices themselves are, naturally,the major point of
initial concern. But they must also be considered in relation to agricultural
product prices. Farmers reactions to fertilizer price changes can be
conveniently summarized in terms of price elasticity of demand.

a. Fertilizer Prices and Consumption. Changes in international
fertilizer prices since 1963 are graphically portrayed in Figure 3. It
will be noted that prices of urea declined from the mid 1960's through 1970
and 1971 and then began to increase. The increase became particularly
pronounced in the last half of 1973 and in the first half of 1974. There-
after, prices leveled off and dropped sharply though 1975. Prices of
other fertilizers were somewhat more stable though 1973 and then also
increased sharply (except for triple superphosphate which began to
increase in price in 1972). They also declined sharply in 1975 (except
potassium chloride). In evaluating these fluctuations it is important to
realize that prices were unusually low during the 1968 to 1972 period;
the period prior to 1968 was more normal. Thus price comparisons should
be drawn with the earlier period.

In any case, the figure refers to international prices. Shipping
costs would have to be added to get landed prices in developing countries.
Duties, unloading and distribution costs (which tend to be higher in
developing countries) would have to be added to get local costs. Actual
prices paid by farmers might be inflated by black markets or the need to
pay "gratuities" the prevalence of both increasing in times of shortage.*
On the other hand, fertilizer subsidies have been used in a number of
developing nations and may have moderated price increases.ll/ Thus,
while farm prices undoubtedly increased significantly, it is difficult to
generalize about the precise magnitude.

Concurrently, there appears to have been, as might be expected, a
tapering off in the rate of growth in fertilizer use or even an overall
decline in fertilizer consumption in many major developing nations. In
Indonesia, normally a growth market of 10 to 12% a year, consumption was
stagnant in 1974.12/ Moreover, fertilizer usage dropped 8.7% in India

*While black markets entail higher prices, some farmers may be willing to
pay them in order to bypass government bureaucracy and/or to get the type
offertilizer when they want it. In other words, the black market may
reflect not only a relative shortage of supply but also a deficient
distribution system.

I ~ .,

Export Price Indications

(US$ per

Urea (bagged)
f.o.b. W. Europe

2. Triple Superphosphate .
f.o.b. U.S. Gulf-

3. A.mmonium Sulphate
so . f.o.b. W. Europe

as1 Potassium Chloride (Muriate)
Sf.o.b. Vancouver
aco -



Major Fertilizer' Materials

of product)


Ol i rr i 1 r ni ': .t.u JxT A I" 3o&N- J P M A K J A S 0 N0 '
1fo^ i^i lS,(.4 1%5 Notoo 199 1961 190 1|10ma IR ^2 I Z 113 5
Source: Fertilizer Requirements of Developing Countries Revised Outlook in 1975, World Bank, Report No. 830,
July 1975, p. 15. As updated by H.J. Sandri, Jr., Fertilizer Unit, Industrial Projects Division, November 4, 1975




: !


:---- -~---i

~- --"----



in 1974/75 (April-May) compared to 1973/74; the decline was 3% for nitrogen,
5.8% for phosphate, and 26.5% for potash.13/ Even larger declines have been
reported for the Philippines in 1975. In some cases, fertilizer stockpiles
have been inadvertently accumulated because of the drop in consumption.
While the stagnation or drop in consumption was undoubtedly the result of
many factors beyond price alone, the massive rise in prices cannot be

The preceding consumption estimates refer only to overall disap-
pearance at the national level. We do not know what happened to the
allocation of fertilizer between individual commodities or between
different sizes of farms. Fertilizer would be expected, in general, to
flow to the crop where returns are the highest. Often, as noted earlier,
much is on non-food crops for export. Whether the crisis resulted in a
tilt away from use on food crops for domestic consumption is not known at
this point. We also do not know how the higher prices have influenced
distribution between small and large farms, but we might assume that
consumption has been reduced more on the small farms. A recent World
Bank report states that many "small farmers have been discouraged by the
recent developments from using new seed varieties dependent on high
fertilizer use."14/

The outlook for fertilizer prices is uncertain. To the extent that
they decline further, some of the demand and consumption problems noted
above may be ameliorated. But to the extent that the recent price drop
levels out or prices rise again, the problems will be exacerbated. To be
on the safe side in establishing policies, allowance must be made for
further fluctuations.

b. Fertilizer/Product Price Ratios.15/ The degree to which
fertilizer use is affected is not, of course, entirely influenced by its
cost. As noted earlier, the price of the farmer's product is also of
significance. The relationship between the two can be expressed in terms
of a ratio. Economists usually think of it in terms of the ratio between
the cost of an additional unit of fertilizer and the value of the
additional unit of output. In at least some cases they have found a
close correlation between the ratio and fertilizer application; in one
case the price ratios were found to explain 85% of the variation in
fertilizer application in a group of Asian nations in 1970. In other
cases, the correlation is less evident.16/

Whether the two price elements are of equal weight in the farmer's
mind is unlikely: he knows the cost of fertilizer when he buys it but the
price of the resulting product is generally quite uncertain. To allow for
these and the many other uncertainties that may intervene between time of
application and harvest, a ratio of more than 1 to 1 is usually needed to
encourage use. FAO states that "widespread experience suggests that
benefit/cost ratios for fertilizers below 2.0 or 2.5 (to 1) are usually
insufficient to create a strong impetus for rapid increase in use."17/
In the case of the developing countries the ratio may need to be even
greater, perhaps as much as 3.0 to 1, or even higher.18/

Because of the enormous increase in fertilizer prices during 1974, one
would have expected the ratio to decline. The potential decline could, of
course, have been offset by a rise in food prices but this price rise would


tend to lag behind the increase in fertilizer prices. FAO recently compiled
some comparative benefit-cost ratios (or as FAO now refers to them, value/
cost ratios) for 1973 and 1974. Of 12 cases, from 10 countries, the ratio
declined in 9 and increased in 2, and was variable in 1. When the data
were further broken down by individual crops, out of 54 entries the ratio
declined in 41, remained the same in one, and rose in 12. The number of
crop cases for which the ratio dropped below 2.0 increased from 7 to 17;
of the latter, 10 were in countries where free market prices existed and
7 where government-controlled prices were the rule. Thus for most crops
in most areas, fertilizer use was less advantageous but was still profitable
in terms of the minimal FAO guidelines.19/ Presumably the situation became
more favorable with the drop in prices in 1975.

Price (or value/cost) ratios, however, are only a partial measure of
the profitability of fertilizer use. Data compiled by the International
Potash Institute for six countries in 1972 and 1974 indicate that while
the ratio declined in five countries, net returns remained the same or
even increased.20/ Similarly, FAO data show that in some areas where
ratios have declined moderately, such as in Java, net returns actually

The answer to what might seem a paradox has been suggested earlier;
it lies in the physical response function to fertilizer and in the influence
of other factors. Thus, it is probably true, as OECD stated in 1968:
"no general ratio between cost and return can be laid down as being necessary
to promote fertilizer use in the developing countries as a whole."22/
Numerous other factors are involved, some of which we will discuss in a
subsequent section.

c. Price Elasticity of Demand.23/ If one is concerned solely
with the effect of price changes on the quantity of fertilizer purchased,
the relationship can be conveniently summarized in terms of the price
elasticity of demand.*

As might be expected, the farm demand for fertilizers is relatively
inelastic in the short run and elastic in the longer run. On the basis
of data summarized for 6 countries (5 in Asia) by Timmer,24/ one could
anticipate that:

The immediate impact of a relative price rise of 10% will be
reduced fertilizer consumption of anywhere from 5 to 10%;

In the longer run, if the same relative prices are maintained,
a price increase of 10% might result in a reduction of consumption
from 20 to 30%.

*Price elasticity of demand is the relationship between percentage variations
in prices paid for a product and consequent variations in the quantity
purchased. If price variations of,say, 10% lead to changes in the quantity
purchased of less than 10%, the demand is considered inelastic. Similarly,
if the result of the same price variation is a variation of more than 10%,
the demand is considered elastic. Generally the elasticity of demand in
the short run is less than it is in the longer run.


Several caveats might be introduced here. First, the data were derived
during periods of more normal prices; it would be desirable to have comparable
data for the more recent price period. Secondly, the same relative prices
are not likely to be maintained in the longer run: a decline in fertilizer
use may lead to a drop in food production which, in the absence of greater
imports, will force food prices to rise relative to fertilizer prices,
thus stimulating higher fertilizer application.* Thirdly, the data are
aggregate in nature and the responses of individual groups may vary.

The short and long term relationships noted here are in part related
to the farmer's likely position on the S-shaped total physical product curve
(Figure 4). In areas of long-standing fertilizer use, farmers may have
reached the upper level of the total product curve (e.g. section BC on
curve TP in Figure 4; the marginal product curve declines in this zone).
In areas where fertilizer use is more recent, farmers may be on the
steeper part of the total product curve (e.g. section AB on curve TP). Thus,
the newer adopters are more apt to get a larger response for a given input
of fertilizer than the older adopters (the marginal physical product, curve
MP, is greater).25/ Because of this greater response, as de Guia has put
it, "newer fertilizer users would be less sensitive to fluctuations in
prices than those for whom the use of fertilizer has become routine."26/

While an additional unit of fertilizer may produce a larger physical
response on the farms which have just adopted fertilizer than those which
have utilized it for some time, this effect may be counteracted by other
forces. If, for instance, the newer adopters have a much lower income
level, they are, in the face of price increases, less likely to maintain
the same quantity of fertilizer purchases as the more experienced farmers.
Thus the higher priced fertilizer may be directed into relatively less
productive use on the more established farms. Hence, it seems likely that
high prices for fertilizer will, as Timmer has put it, "hit the poor
farmers and nations with high physical response rates relatively harder"
than the wealthier farmers or nations.27/ For this reason, attempts to reduce
fertilizer prices may be of particular-benefit to lower income farmers.
2. Risk, Uncertainty and Policy

The LDC farmer, as we have noted, faces several types of risk once
he has purchased fertilizer. First, he has to gamble that he will obtain
at least a certain level of output for each unit of fertilizer applied.
Whether he will depends on a wide array of biological, physical, and other
factors. Secondly, he faces the risk of an uncertain price for his product.

*The nature and speed of this response mechanism will be influenced
by the price elasticity of demand for the final product. It has
been suggested that the demand for fertilizer is a derived demand: it
is a function of the demand for the product it is used on. Thus, in
times of crop shortages, prices are likely to rise most for those with
more inelastic demand; this price rise is in turn likely to be reflected
in a more inelastic demand for fertilizer. On the other hand, in times
of crop surpluses, prices are apt to drop most for crops with more
inelastic demands; this feature is also apt to be reflected in a more
elastic demand for fertilizer.




4C-r )

%% VacsimL


Governments can influence both sets of factors, but to do so
requires quite different sets of policies. Modification of the environ-
ment, growing practices, etc., requires a broad range of long-term
agricultural development programs from research to the development of
infrastructure. Price programs can be more easily modified in the short
run, both with respect to fertilizer and product. Yet price adjustments
can reduce only part of the risk and uncertainty. And even if product
prices were adjusted to a favorable level one season, some farmers may
doubt that this will happen again the following season. Hence, as one
economist points out, an uncertain improvement in product prices or small
reductions in the cost of using fertilizer may have less influence than a
definite improvement in the availability of a complementary input, such
as irrigation, or in the varieties of crops commonly grown.28/

Thus, while an appropriate price ratio is usually a necessary condition
for the increased use of fertilizer, it may not be a sufficient condition.
Farmer confidence must be gained. Even then, more is needed, and this
usually involves the broad and complex array of factors influencing the
production function. One policy tool for handling some of the more
extreme forms of production risk would be fertilizer* or crop insurance.29/
A favorable financial situation will also do much to accelerate the
adoption process. We turn to the latter point in the next section.

B. Financial Factors

The importance of financial factors as a restraint to fertilizer
purchases has been noted. Even with a favorable price ratio, farmers
must have the purchasing power to acquire fertilizer. This takes cash,
or in its absence, credit. Both are usually in short supply in devel-
oping countries. The vital role of credit in stimulating fertilizer use
has been outlined in many papers and studies.30/

Credit can be a major factor in the several stages of the adoption
of fertilizer technology from the initial decision to purchase fertilizer
to the decision of how much to apply. While the farmer's own resources
may in many cases be sufficient to finance an initial small purchase,
outside credit may be increasingly necessary as he wishes to step up his
rate of application. In one study in India, for instance, once almost
all farms in an irrigated area had adopted fertilizer, credit availability
was the main factor influencing rates of application.31/

The precise importance of credit, however, tends to vary rather widely.
A recent FAO bulletin stated that "in many countries in Latin America and
Asia, about 70-80% of all fertilizer sales are made on a credit basis"32/

*Farmers might, as suggested by Reidinger, be reimbursed for the cost of
the fertilizer if some natural disaster such as a flood or drought severely
reduced its effectiveness. Reidinger has noted that this might be done
by adding a small charge to the cost of each bag, but because of the
modest funds likely involved, it could also be handled out of government


Yet there are evidently substantial exceptions even in Asia: a recent AID
document has summarized studies in Pakistan which indicate that in 1971
only about 13.5% of the fertilizer was purchased on credit;33/ a similar
figure (14%) was found in Bangladesh.34/ The low proportions may have
simply represented low levels of fertilizer use and/or limited availability
of credit. In the case of Bangladesh, it was noted that the purchase may
have been partly financed by farm income earned in subsidiary occupations.
It is thought that the role of institutional credit has subsequently
increased in Pakistan. In other nations, the role of traditional credit
may well have long been substantially greater.

The capital or credit restraint is generally considered to be most
severe on small farms. These farms, by their very nature (1) have few
capital resources (and hence limited collateral) to start with, (2) have
limited access to institutional or commercial sources of credit,* and
(3) often have to pay considerably higher rates of interest.35/ An
Indian study cited earlier revealed that inadequate funds and credit were
reported more frequently on small farms (than for large farms) as a reason
for not using fertilizer:36/

Farm Size Frequency Cited
hectares percent -

0 2.5 47.9
2.5 8.5 38.7
8.5 + 6.3
All 43.2

Similarly, a survey in Pakistan in 1969/70 revealed that smaller farmers
most often reported that funds were not available for fertilizer purchase:38/

Size of Holding Non-Availability
of Funds
acres percent -

2.5 7.5 81.6
7.5 12.5 77.6
12.5 25.0 79.2
25.0 50.0 47.4
50+ 40.0
All 75.0

Thus there is some reason for believing that small farms are relatively
capital short and that this limits fertilizer use.

There is also the possibility that the potential capital requirements
of small farms could be higher on a per unit of land basis than larger
farmers. Smaller farmers, in part of necessity, often till their land more

*As a result, the larger farms may actually use a relatively larger amount
of credit for fertilizer purchases than do small farmers. This was found
to be the case in a survey in South Korea in 1972.37/


intensively. They may grow more intensive crops and raise them more
frequently (multiple cropping ratios are typically higher on small than
large farms). Thus they might be able to utilize larger quantities of
fertilizer per unit of land.* Hence it was found in one study in India that
in the face of improved technology, the small farms were not only capital
starved, but "their capital requirements increase relatively more compared
to the medium size and large farms."39/

Therefore the increased availability of credit to small farmers, in
many cases, might increase levels of fertilizer use. Several studies have
suggested a positive linkage between the level of credit use and the level
of fertilizer use on small farms. A previously cited survey in Pakistan
in 1969/70 found that farmers in the 2.5 25 acre range who reported
sufficient credit availability used higher rates of application of
nitrogen (+35.2%) and dwarf wheat.40/ Similarly, in Guatemala, increased
fertilizer use was associated with greater levels of credit use on small
farms (0 to 10 ha.)41/ Simply increasing the quantity and conditions of
availability of credit does not, of course, automatically mean that it
will actually be used to buy fertilizer.

Moreover, it is not easy to say what the best method for increasing
capital supplies to small farmers would be. Simply increasing the quantity
of normal institutional types of credit may help the medium to large farmers
more than the small farmers. The conditions under which credit is obtained
may have to be changed also. Many techniques have been tried.** And
recently several countries, including Pakistan and the Philippines (es-
pecially under its Masagana 99 program) have attempted to increase small
farmer credit for fertilizer purchases. Evaluation of the techniques
involved and the success of such programs, while an important task, is
beyond the scope of this paper.

Clearly, credit is often a major factor in influencing the decision
to use fertilizer, and probably more importantly, in determining the level
of application. But while credit is important, its role may sometimes be
over-dramatized. It is part of the more general problem of inadequate
capital, and this is only one factor in the farmer's decision-making
process. Hence, the simple provision of credit is seldom a panacea. Still,
the availability of credit, especially for small farmers, may do much to
facilitate the adoption and increase the levels of use of fertilizer.

*Higher levels of application were in fact found on small farms in a
recent survey of fertilizer demand in Asia.42/

**Some of these techniques involve tying the credit to the purchase of
fertilizer. In Brazil, loans were made for fertilizer purchases at
interest rates well below the rate of inflation. In the wheat production
program bank financing was contingent upon the wheat grower using
certain minimum amounts of fertilizer. This program, however, did not
necessarily reach the small grower.43/ In Guatemala, subsidized credit,
was available to farmers only if they purchased a specified amount of
fertilizer. In some regions, at least, this program may not have
stimulated an efficient use of fertilizer the low rate led farmers
to apply fertilizer to corn in La Maquina even though the response was
very low.44/



Economic and financial factors play important, but not exclusive roles
in determining the demand for, and use of, fertilizer. Technical factors
may be of major significance. The key role of environment factors, partic-
ularly water supply, was noted earlier. Other factors of a social and
infrastructure nature may also be important in some cases.

A. Technical Factors

Technical factors affect the profitability function through their
influence on yields. While the technical factors are usually thought of
in terms of the general biological and physical forces influencing plant
growth, it is important to realize that (1) factors such as water supply
have a significant impact on the effectiveness with which fertilizer
is utilized by the plant, and (2) the composition, form, and time of
application of the fertilizer itself can be of vital influence on its
efficiency in a given situation. Some of these technical forces, as
suggested earlier, are beyond control; others are clearly subject to

There is a tendency to overlook the importance of technical factors
in stimulating fertilizer use. This is particularly true in times of
extreme price rise. Yet,some have kept them in view. During the recent
crisis, the International Rice Research Institute stated that:

In the intermediate run [5-10 years]...we anticipate that
adequate fertilizer supplies are likely to be available
and that the major task will be to encourage increased
use of fertilizer other than through higher food grain
prices. The redirection of rice research toward the
goal of greater efficiency in fertilizer use, and the
continued emphasis on research in areas such as pest
and disease resistance, water management, and drought
tolerance will lead to more efficient use of available
supplies and enhance the demand for fertilizer.45/

And in certain countries in the recent past, such as Brazil, technical
factors such as the lack of responsiveness to fertilizer have been
considered the main bottlenecks to increased use.46/ Both cases suggest
a need for more basic and applied research on fertilization.

For many years, one of the limitations on the increased use of
fertilizer on wheat and rice was the plant itself. Added fertilizer
simply did not result in very significant increases in yield and beyond
a certain point could lead to decreased yields. The additional nutrients
largely went into stalk growth; when the stem got too long, it was
susceptible to lodging or falling over. In the early 1960's, new semi-
dwarf varieties of wheat and rice were developed which had relatively
short and stiff stems. As a result, the plants could make use of heavier
applications of fertilizer. The differences in yield response between
native and high-yielding varieties are depicted in Figure 5. In two of




Rice and Wheat

Figure 1. Generalized curve for the response of rice to nitrogen
applications in the dry season

50 100 150

Figure 2. Generalized curve for the response of rice to nitrogen
applications in the wet season.

(Y *172 27.99X C 087X2)

/ (Y vl145l 2ex -OlaX2)

50 100 150 200
Figure 3. Generalized curve for the response of wheat to nitrogen

Source: High-Yielding Cereals and Fertilizer Demand, TVA, 1970, Bulletin
Y-4, pp. 6, 7, 8.


the three cases depicted, yields for a given level of input were higher
at all levels of fertilizer application; in the third case they were
higher at all but the lowest levels. While the yield responses would be
expected to vary, the HYV's generally represented a more productive use
of fertilizer. In some cases, the increased fertilizer use proceeded the
adoption of the HYV's (such as the Punjab in India),47/ but in most
instances the subsequent increase in fertilizer use paralleled the increase
in HYV's.

Other inputs are also needed. The most important is irrigation.
Irrigation plays a multifaceted but highly interrelated role; it (1)
stimulates increased plant yields (complementing the effect of fertilizer),
(2) may encourage multiple or more intensive cropping (increasing the
need for fertilizer), and (3) reduces the risk of yield fluctuations.
The latter is particularly important for smaller farmers because of the
financial risk represented by the cost of the fertilizer. It has been
suggested that the net returns for fertilizer use have to be twice as
high in rainfed areas as in irrigated areas in order to induce farmers to
use fertilizer.48/ Uncertainty is,of course, not completely eliminated
with irrigation -- irrigation systems in LDC's are often inadequate --
but it does reduce a major risk element and thus increases the probability
that the investment in fertilizer will pay off. Additional inputs enhancing
fertilizer use include insecticides and fungicides or production practices
which reduce yield uncertainty.

It is also important that fertilizer be designed or selected for local
crops and growing conditions. And it must be applied in the right way at
the right time. There are numerous stories (though little documentation)
of fertilizer misuse in LDC's. Proper application cannot be taken for
granted where fertilizer use is often a relatively recent phenomenon and
where little may be known about its proper selection and use.

The importance of technical factors was underlined in a recent study
of fertilizer demand in Asia. The study indicated that differences in
the fertilizer response function provide the major explanation for the wide
gap in fertilizer application. In turn, the spread of modern varieties
appeared to be the dominant factor for shifting the function (except in
Thailand). The demand for fertilizer, in fact, was found to be more
inelastic when modern varieties were included. Irrigation was also of major
importance. The significant contribution of these factors led the researcher
to conclude that "their relative costs vis-a-vis changing the fertilizer-
rice price ratio should be considered in designing policies to raise
fertilizer applications on rice farms." The choice may, in large part,
depend on the time horizon available.49/

B. Other Factors

Although the list of factors influencing fertilizer use is already long
and involved, it is not by any means complete. Many others might be noted.
The social structure of the society, for instance, will influence farm size
and the ownership and tenancy conditions. These in turn will modify fertil-
izer purchases, either directly or indirectly (through, for instance, credit
availability). Infrastructure -- such as the availability of transportation,
communication, and storage facilities -- will influence the availability and


cost of fertilizer, as well as the market and price for farm produce.
Improved input and output marketing facilities may have to accompany
increased fertilizer use. Educational levels and the effectiveness of
the extension service will influence farmer awareness of fertilizer and of
most effective methods for its use. We will make no effort to pursue such
matters further here. But certainly they should be considered in any
comprehensive analysis of the demand for fertilizer.


If food production is to be increased in the developing nations in the
future, fertilizer use (among other things) must be increased. This will
require an increase in both fertilizer supply and demand. Considerable
attention has recently been given to the problem of increasing supply. Much
less consideration has been given to the equally important need to increase
the demand for fertilizer at the farm level.

It has often been assumed that fertilizer demand problems can be solved
simply by increasing fertilizer supply and reducing price. The recent
fertilizer crisis may have reinforced this opinion. What started out as a
supply problem soon led to a weakening of demand for fertilizer, partic-
ularly among smaller and lower income farmers, which was reflected in lower
consumption. Recent declines in fertilizer prices may lead to a strengthening
of demand but minor drops may hot have quite the restorative powers that
some might wish.*

While fertilizer price is unquestionably a major factor in determining
fertilizer demand, other factors are also involved. Indeed, delineation
of the full range of factors influencing fertilizer demand at the farm level
is a complex task. It is also one which has received all too little study.

Still, it is evident that the key factor affecting fertilizer use at
the farm level is profitability. This is determined by fertilizer price,
the price of the product, and a myriad of physical and biological factors
influencing yield. Profitability in turn determines the potential demand
for fertilizer a potential which may vary between various food and non-
food crops.

*A recent example was provided in a report by the U.S. agricultural attache
in India:

The Minister of Agriculture and Irrigation has indicated the
possibility of a further reduction in the price of fertilizers
in order to stimulate fertilizer consumption during the coming
Rabi season. Recent reports indicate that fertilizer offtake
did not pick up in the current kharif season to the extent
expected following the small reduction in prices of some of the
fertilizers effected during July 1975. Also, there are reports
of accumulation of stocks with some of the manufacturers.50/


To transform potential demand into effective demand requires purchasing
power; this in turn may create a need for credit, especially among small
farmers. Potential demand is also diluted by the risks and uncertainties
involved in using fertilizer; these may reduce application rates below
optimum levels.

Some of these factors may be significantly influenced by government
policy and provide a substantial inducement to fertilizer use; others are
more intractable. The simple adoption of one approach, such as the lowering
of fertilizer prices, may be necessary but not sufficient. A number of
actions a package of them may be necessary to increase fertilizer use
on the desired crops.

The mixture of technical and price policy actions may be strongly
influenced by the time horizon available. Price and credit policies may
be more readily adjusted in the short run. Technical actions normally
require a medium to long term time span. The unfortunate result is that
immediate rather than longer run actions are often emphasized.

To some extent, partial answers may be found outside the field of
chemical fertilizer. Greater use might be made of organic and biological
forms of fertilizer. Other techniques are possible. While potentially
important and useful, these approaches are not likely to substitute for
chemical fertilizer in the near future. Much of the answer, rather, is
to be found in the improvement in the nature and use of present technology.

If the right combination of efforts is to be made with chemical fertil-
izer, however, much more needs to be known about the demand situation at
the farm level. The increase in use requires, as a recent AID loan paper
put it, "a better understanding of the socio-economic factors which influence
fertilizer purchase decisions of farmers with differing resources at their
command."51/ Moreover, much more needs to be done in the way of designing
appropriate types of fertilizers for LDC use and in selecting appropriate
types and mixtures for the individual farm or farm region.

A major resource for this task has been introduced in this process by
the establishment of the International Fertilizer Development Center (IFDC)
near TVA in Alabama. This group will be concerned with these questions.
And it will seek to carry out its development work through international and
national research organizations. IFDC,(could develop a potent new force
in cooperation with FAO's ongoing fertilizer program with industry, which
could do much to encourage more productive fertilizer programs by
developing nations.

These international and national efforts will, however, require addi-
tional funding in the years ahead if they are to carry out their important
task. If only a fraction of the funds spent on fertilizers by or for the
LDC's had been directed to concurrent economic and technical research
programs, some of the problems we now face might have been mitigated. It
is to be hoped that such resources are forthcoming so that we can face
future challenges in a more enlightened manner.



1/ Richard B. Reidinger, "The World Fertilizer Situation and Outlook,"
World Agricultural Situation, U.S. Department of Agriculture,
Economic Research Service, WAS-9, December 1975, p. 29. Also
see: Fertilizer Requirements of Developing Countries Revised
Outlook in 1975, World Bank, Report No. 830, July 1975, pp. 14,
16, 17; Ann Crittenden, "World Fertilizer Shortage Past, Poor
Countries ar& Still Hungry," New York Times, October 20, 1975.

2/ I have discussed these matters in detail in Evaluating Fertilizer
Subsidies in Developing Countries, AID, Bureau for Program and
Policy Coordination, Discussion Paper No. 30, July 1975, 64pp.

3/ See, for example: Teresa Anden and Randolph Barker, "Changes in
Rice Farming in Selected Areas of Asia,"IRRI, December 1, 1973,
Figure 11; H. Ali Chaudhari, et al., "Gujranwala, Punjab [Pakistan],"
in Changes in Rice Farming in Selected Areas of Asia, IRRI, 1975
pp 234, 235

4/ Some of the studies bearing on this point are summarized by Dana
G. Dalrymple and William I. Jones in "Evaluating the Green Revolution",
AID Bureau for Program and Policy Coordination, processed draft,
June 1973, pp. 37-40.

5/ Randolph Barker and Teresa Anden, "Factors Influencing the Use
of Modern Rice Technology in the Study Areas," Changes in Rice
Farming in Selected Areas of Asia, IRRI, 1975, p.27

6/ Fertilizer Use on Selected Crops in India, National Council of
Applied Economic Research and the Fertilizer Association of India,
New Delhi, September 1974, p. T-127, Table 126. (The study covered
a national sample of 4,118 rural households).

7/ Ibid., pp. 51-52.

8/ Arun S. Patel, Fertilizer Use in Gujarat; A Micro View, Sardar
Patel University, Dept. of Economics, 1973, p. 133, Table 6.1
(The sample in Baroda District included only 38 farms; that in
Junagadh District only 15 farms.)

9/ Max K. Lowdermilk, "Diffusion of Dwarf Wheat Production Technology
in Pakistan's Punjab," Cornell University, Ph.D. dissertation, 1972
p.269(fn.l), p. 276. (As partially reproduced in Small Farmer Credit:
HYV in Pakistan, AID, Spring Review of Small Farmer Credit, Vol. 14,
February 1973.)

10/ Bai Yung Sung, "The Demand for Fertilizer in Korea," University
of Minnesota, Ph.D. dissertation, March 1974, pp. 39,41, 127.
(Significant results were obtained in a cross section analysis
for 1972 but not for a time series analysis for the 1960-72
period; the latter may have partly due to a small degree of
fluctuation in administered prices.)


11/ Distribution costs and the incidence of black market prices have
been summarized by Dalrymple, op. cit., pp. 18-20. Subsidies
are of course, the more general subject of the bulletin.

12/ Crittenden, op. cit. (summarizing data provided by Dr. Paul Stengel
of the International Fertilizer Development Center).

13/ Production and Consumption of Fertilizer, Annual Review, 1974/75,
Fertilizer Association of India, New Delhi, August 1975, p.iv.

14/ Fertilizer Requirements, op. cit., p. 16.

15/ This section is largely summarized from Dalrymple, op. cit., pp 21-24.

16/ Walter P. Falcoln and C. Peter Timmer, "The Political Economy of
Rice Production and Trade in Asia", Stanford University, Food
Research Institute, May 1973, p. 11.

17/ Provisional Indicative World Plan for Agricultural Development,
FAO, 1970, Vol. I, pp. 199-201.

18/ Fertilizer Requirements, op. cit. p. 16; C. Peter Timmer, "The
Demand for Fertilizer in Developing Countries," Food Research Institute
Studies, Vol. 13, No. 3, 1974, p. 198.

19/ 'Economics of Fertilizer Use Under Conditions of Limited Supplies
and High Prices," FAO, Agricultural Services Division, Agricultural
Inputs Economics Unit (March 1975), pp. 3-5. (Prepared for the
FAO/FIAC Working Party on the Economics of Fertilizer Use.)

20/ Data compiled by the International Potash Institute, Berne, March 14,
1975, for the FAO/FIAC Working Party on Economics of Fertilizer
Use (Point 6 of the agenda of the meeting of March 17, 1975), 3 pp.

21/ "Economics of...," op. cit., p. 4.

22/ Supply and Demand Prospects for Fertilizers in Developing Countries,
OECD, Development Center, Paris, 1968, p. 68.

23/ This section is also largely summarized from Dalrymple, op. cit.,
pp. 25-29.

24/ Timmer, op. cit, pp. 204.

25/ Ibid. p. 212..

26/ Eric 0. de Guia, A Comparative Study of Fertilizer; Distribution
Systems in Five Developing Countries, OECD, Development Center
Studies, 1972, p. 13.


27/ Timmer, op. cit., p. 212.

28/ Gunvant M. Desai., Growth of Fertilizer Use in Indian Agriculture,
Cornell University, International Agricultural Development
Bulletin 18 (June 1971), p. 21.

29/ See P.K. Ray, UThe Role of Crop Insurance in the Agricultural
Economy of the Developing Countries," Monthly Bulletin of
Agricultural Economics and Statistics (FAO), May 1975, pp. 9-16.

30/ See, for example, "Fertilizer Use: Spearhead of Agricultural
Development," The State of Food and Agriculture, 1963. FAO,
pp. 159-161; Supply and Demand Prospects, 2p. cit., p. 68; Timmer,
op. cit., p. 210. A Number of Indian studies bearing on this point
are briefly summarized by N.L. Agarwal and R.K. Kumawat,
"Green Revolution and Capital and Credit Requirements of the Farmers
in Semi-Arid Regions of Rajasthan," Indian Journal of Agricultural
Economics, January-March, 1974, p. 67.

31/ Michael Schluter, The Interaction of Credit and Uncertainty in
Determining Resource Allocation and Incomes on Small Farms, Surat
District India, Cornell University, Dept. of Agricultural Economics,
Occasional Paper No. 68, February 1974, p. 26

32/ H.J. Mittendorf, The Scope for Improving Fertilizer Marketing and
Credit Systems in Developing Countries, FAO, Rome, 1974, p.8

33/ "Pakistan-Agricultural Inputs Loan," AID, Islamabad, Project Paper,
February 4, 1975, p. 49.

34/ "Bangladesh: Ashuganj Fertilizer Loan Project," AID, Dacca, Loan
Paper, (November) 1974, Annex 2, p.8

35/ "Fertilizer Use...," op. cit., p.161; Supply and Demand...,
op. cit., p.68; "Pakistan Agricultural Inputs Loan", op. cit.,
(October 15, 1975), p.27.

36/ Fertilizer Use on Selected Crops in India, op.cit., p. T-127,
Table 126.

37/ Sung, op. cit., pp. 146, 180

38/ Lowdermilk, op. cit., p. 269. The sample included 219 farmers. Within
the size category, the preparation was almost identical for the smallest
farms, those from 2.5 7.5 acres.

391 Agarwal and Kumawat, op. cit., p. 72.

40/ Lowdermilk, op. cit., p. 268, Table 55.

41/ Samuel R. Daines, et al., Guatemala Farm Price Analysis, AID, Bureau
for Latin America, Sector Analysis Division, Analytical Working
Document No. 10, April 1975, p. 72 (Tables 61 & 62).


42/ Cristina Crisostomo David, "A Model of Fertilizer Demand of the
Asian Rice Economy (A Macro-Micro Analysis)," Stanford University,
Food Research Institute, 1975, Summary taken from the author's Ph.D.
dissertation of the same title, p.16.

43/ Richard L. Meyer and Charles L. Wright, "Fertilizer Development and
Brazilian Agricultural Development, Ohio State University, Department
of Agricultural Economics, August 1974, pp. 2-4.

44/ Letter from Per Pinstrup-Anderson, Director, Agro-Economic Division,
International Fertilizer Development Center, Florence, Alabama,
November 25, 1975.

45/ "The Implications of the World Fertilizer Situation for New Rice
Technology," IRRI, June 1974, pp. 1, 12.

46/ Meyer and Wright, op. cit., p. 10.

47/ Chaudhari, op. cit., pp. 234, 235; Anden and Barker, op. cit.,
Fig. 12.

48/ Supply and Demand Prospects ..., op. cit., p. 66.

49/ David, op. cit., pp. 8, 29, 31, 38, 41-43.

50/ Foreign Agricultural Service Report No IN-5992 from New Delhi,
November 5, 1975, p.3.

51/ "Pakistan Agricultural Inputs Loan," op. cit., p. 11.

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