Straightening Out the National Fertilizer Policy
The amount of direct subsidies and their resulting impacts will set the rural economy in motion and potentially promote farmers’ welfare. The wellbeing of farmers ensures prosperity for us all.
Fertilizer is an all-important part of cultivation and development in agriculture. Without fertilizer, farmers will only be able to meet their own basic needs while food will be beyond the reach of other communities.
Although the proportion of fertilizer costs to the total business costs of farming is relatively small at just 9-10 percent for paddy (Statistics Indonesia/BPS 2018) and 15-20 percent for hybrid corn, fertilizer is an essential component that determines crop productivity. Any reduction in the use of fertilizer, within certain limits, will also reduce production and vice versa.
The government has been providing subsidized fertilizer since 1969, a very long duration for a policy. The policy aims to make fertilizers available to farmers at affordable prices and increase agricultural production as well as farmers’ incomes. Similar subsidies were also applied from the 1960s to the 1980s in several countries in South Asia, Southeast Asia and Africa.
The fertilizer subsidy policy was adopted on account of the very low use of synthetic fertilizers, a small fertilizer market that raised logistics cost and fertilizer prices, and the dominance of poor smallholder farmers unwilling to take the risk of buying and using synthetic fertilizers.
For instance, in Sub-Saharan Africa, which had a low rate of agricultural production and frequent famines, only 7.1 kilograms/hectare of synthetic fertilizers were used in the 2006-2008 period, far lower than South Asia (129.4 kg/ha), East and Southeast Asia (109.6 kg/ha) and Latin America (104.8 kg/ha) (FAOSTAT 2010).
In Indonesia, based on calculations that the greater part of the volume of subsidized fertilizers went to paddy farmers, fertilizer use in 2021 reached 100.2 kg/ha for each planting season. However, in reality, farmers’ use of synthetic fertilizers far exceeded projections to reach a range of 260-500 kg/ha per planting season, with urea recording the biggest share of 65-68 percent.
The fertilizer subsidy budget in Indonesia increased sharply from Rp 13.96 trillion (2012) for 8.81 million tons of fertilizer to Rp 34.24 trillion (2020) for 10.52 million tons of fertilizer, and then declined to Rp 29.06 trillion (2021) and Rp 25.28 trillion (2022).
So, did the higher fertilizer subsidy budget affect paddy production? The answer is no. Total paddy production in 2012 reached 57.77 million tons of dry unhusked rice (GKG) (D.A. Santosa, 2022, from satellite imagery and international sources), but in 2020 paddy production decreased to just 54.65 million tons of GKG (BPS 2021).
Fertilizer subsidy policy
The fertilizer subsidy will be effective only if the market does not work properly or undergoes a failure. Farmers do not use fertilizers in an optimal manner because they do not understand the profits they could earn and/or they cannot afford to buy fertilizers, or the fertilizer is not physically available.
Under such conditions, most fertilizer businesses will not grow and fertilizer suppliers are unable to achieve economies of scale, even to reduce the high cost of transportation. The fertilizer subsidy can help boost agricultural production and be a starting point for developing the market by increasing input demand on a large scale, which will lower the price of fertilizers. In such a case, the fertilizer subsidy is economically justified.
The fertilizer subsidy certainly cannot last forever. A model of countries affiliated with the Organization for Economic Co-operation and Development (OECD) indicates that subsidies are the most inefficient method of transferring income to agricultural households. Experts point out that apart from the deadweight losses related to various subsidies, a fertilizer subsidy is a very unsustainable fiscal policy because of the high financial and administrative costs.
The subsidized fertilizer policy applied in developed countries distort the market and price and is inefficient. Fertilizer subsidies also encourage excessive and unbalanced use of fertilizer that creates a negative impact on the environment. In several countries, the use of synthetic fertilizers is subjected to tax. Fertilizer subsidies also hamper other efforts, such as the development of biological and organic fertilizers to enhance the efficiency of fertilizer application and crop productivity.
Besides, the high disparity between the price of subsidized and nonsubsidized fertilizer has given rise to the practice of rent seeking, never mind when global fertilizer prices soar. For example, the price disparity between subsidized and nonsubsidized urea has averaged Rp 3,450 so far. Today, when the global prices of urea and nitrogen-based fertilizers have shot up, the price disparity is around Rp 9,000-Rp 10,000 per kilogram, which is highly attractive for some people.
The long-running fertilizer subsidy program, which has lasted 53 years, has created rent seekers attempting to benefit from this policy by entering all points of the supply chain, forming networks and becoming ever more deeply rooted.
The Finance Ministry’s Fiscal Policy Agency records various data, including the subsidized-nonsubsidized fertilizer mix, the extent of the fertilizer shortage that has caused the hike in fertilizer prices, the practice of hoarding fertilizer and switching containers of subsidized fertilizer with nonsubsidized fertilizer.
In many countries that have a fertilizer subsidy policy, various circles play the market to make a profit, both personally and politically. They gain an opportunity to strengthen and maintain electoral and political support through client networks. This practice occurs from the moment the budget is compiled to fertilizer allocation and their distribution to farmers.
In several countries, subsidized fertilizers are purposely distributed to recipients with more political clout, regardless of their relative level of poverty. In addition, the fertilizer subsidy mechanism also weakens competition and efficiency in the provision and use of production inputs.
Various patterns are then developed that can limit beneficiaries’ access to subsidized fertilizers and enable those in control of fertilizer distribution to collect fees/tips, fertilizer leaks by substituting beneficiaries, changing the fertilizer type, and transferring subsidized fertilizers beyond a region, even the national border.
Inequality also affects the beneficiaries of subsidized fertilizers. The larger the land owned, the greater they benefit from the fertilizer subsidy program. Thirty-four percent of farming households that own 0.5-2.0 ha of land enjoyed 69 percent of total subsidized fertilizers, while 66 percent of smallholder farmers received only 31 percent of subsidized fertilizers through the program (processed from SUTAS, 2018). Organic farmers did not even benefit at all from this policy.
Transfer of subsidized fertilizers
Several studies show that most of the fertilizer subsidy is intended for fertilizer companies. Government expenditure on the fertilizer subsidy has been marginal and lower than that of other sectors. The fertilizer subsidy program has a return on investment (ROI) of only 0.53, far lower than the ROI for agricultural research and development (6.9), village roads (3.2), rural education (1.5) and irrigation (1.4) (Druilhe and Barreiro-Hurle, FAO 2012).
Various attempts have been made to improve the subsidized fertilizer system. The government has developed six basic principles for improving the subsidized fertilizer system to promote agricultural production in the country. These six basic principles are accuracy in quantity, type, time, place, quality and price. According to a variety of studies and the reality in the field, these six indicators are difficult to fulfill. Not meeting these indicators has led to the subsidized fertilizer policy being categorized as ineffective.
Several other countries have developed a model known as the SMART subsidy, which means first, specificity. The subsidy specifically targets farmers who cannot afford or reject purchase the input they are entitled to, or the subsidy is given to regions where increased fertilizer use has significantly contributed to increased production.
Second, it must be measurable, which means that the impact of the subsidized fertilizer policy can be measured.
Third, it must be achievable, which means that the goals of the fertilizer subsidy can be achieved.
Fourth is results, which refers to the orientation of results.
Fifth and last is timely, which means that the fertilizer subsidy is implemented in a timely manner.
The wellbeing of farmers ensures prosperity for us all.
Despite the various endeavors, the benefits of the fertilizer subsidy policy have been lower than its cost. According to an IPB University study, the fertilizer subsidy in 2008 were capable of raising value added by Rp 5.2 trillion, but the cost of the subsidy reached Rp 17.5 trillion (IPB, 2010).
A World Bank study also produced similar results, with added value from the fertilizer subsidy totaling Rp 8.3 trillion, but this sum was generated from subsidies worth Rp 15.2 trillion. As such, the fertilizer subsidy policy was deemed economically inefficient.
In Sri Lanka, the efficiency of the fertilizer subsidy program only ranged from 42 percent to 71 percent; in other words, 29 percent to 58 percent of the funds that should have been received by the beneficiaries (farmers) was lost. The study’s results for Indonesia show that subsidized fertilizer deviation and leaks amounted to at least 20 percent, or Rp 6.4 trillion intended for farmers has changed hands every year over the last five years.
Therefore, a new paradigm is needed for the fertilizer subsidy policy by changing from an input subsidy to direct transfers as planting capital and a production incentive. The production incentive can be obtained through the after-sales direct payment program, as concluded in the 2017 National Deliberation on Food. Through this program, the budget of Rp 32 trillion (the fertilizer subsidy average in the last five years) will be distributed to farmers who will collectively receive exactly Rp 32 trillion.
In addition, the production incentive will motivate farmers to increase their productivity, because the greater their output, the greater the incentive they will receive. The amount of direct subsidies and their resulting impacts will set the rural economy in motion and potentially promote farmers’ welfare. The wellbeing of farmers ensures prosperity for us all.
Dwi Andreas Santosa, Head of IPB University Biotech Center and General Chairman of Indonesian Seed Banks and Farming Technology
This article was translated by Aris Prawira