AN ANALYSlS oF THE PERFORMANCE OF FERTILIZER DISTRIBUTION SYSTEM :.;2{3_j._?_.j;}}__ - . IN wEsT PAKISTAN ,;.%Sj"11‘:;;g; Thesis for the Degree Of Ph D MICHIGAN STATE UINIVERSITY; , is??? MUHAMMAD ASLAM CHAVUDHARY * - ‘‘‘‘‘ ' ‘ g1971 » 11* * ............ ------- This is to certify that the thesis entitled AN ANALYSIS OF THE PERFORMANCE OF FERTILIZER DISTRIBUTION SYSTEM IN WEST PAKISTAN presented by Muhammad Aslam Chaudhary has been accepted towards fulfillment of the requirements for Ph.D. Agricultural degree in Economlcs Major professor J 113 RARY L MichIL, tan 353” Uni versit'i @3772 MMW/ Date I 7 0-7639 TJUUH 31999‘ 1 2 06 .7 MAR 2 6 2008 ABSTRACT AN ANALYSIS OF THE PERFORMANCE OF FERTILIZER DISTRIBUTION SYSTEM IN WEST PAKISTAN BY Muhammad Aslam Chaudhary This study analyzed the existing system of fertilizer distribution and its efficiency in responding to the various institutional and economic forces includ- ing a rapidly expanding demand for fertilizer in West Pakistan. A theoretical analysis of the farm input markets in less develOped countries helped to identify the variables affecting the operation of the fertilizer market. An evaluation of the performance of the fertilizer market channel for ownership and control on the basis of the following criteria was carried out: 1. Exchange mechanisms Operating at various levels of the vertical segment of the market channel. 2. Progressiveness. 3. Channel efficiency. 4. Channel coordination. Muhammad Aslam Chaudhary The analysis indicated that the current system of channel organization did not satisfy the above criteria as well as the norms of effective competition. In order to improve the overall performance of the distribution system, it was suggested that the existing system of allotment, quotas, fixed marketing margins, and regulated fertilizer prices be replaced by a system relying on the free adjustment of the market forces of fertilizer supply and demand. A transfer of ownership from public to pri- vate enterprise should take place in order to promote the internal growth of fertilizer distributing firms, inter- firm competitive strategy, and to reduce bureaucratic inefficiency. An alternative privately organized oligo- polistic fertilizer channel structure was proposed to attain the objectives of: (1) improved resource allo- cation, (2) stimulation of technological progress, (3) market coordination, and (4) product suitability. The study specifically explored the reasons under- lying three interrelated phenomena of: l. Volatility of fertilizer imports. 2. Unavailability at the farm level at desired time. 3. Complementarity between fertilizer use and other farm inputs. An analysis of the variables affecting the structure of fertilizer supply tended to support a Muhammad Aslam Chaudhary hypothesis that inefficiencies in the fertilizer distri- bution system accrue from the volatility of fertilizer imports. A similar analysis relating to the reasons accounting for the variation of growth rates in various agricultural regions of West Pakistan indicated a positive correlation between the level and intensity of fertilizer use and the availability of complementary farm inputs. A strategy of fertilizer distribution in five designated regions through a chain of distribution centers and sub-centers was proposed to improve the physical flow of fertilizers and to ensure greater local availability. The systems of fertilizer transportation and warehousing need coordination at various levels of the distribution system to reduce temporal delays and spatial variations in fertilizer supply. An examination of the existing processes of fertilizer allocation showed that the two major sources of conflict in the system of allotment, quotas, and fixed prices were: 1. The allocative function of the government in relation to fertilizer distribution agencies. 2. The role of economic planning in restricting the operations of fertilizer distributors. An analysis of the existing system of comprehen- sive control on fertilizer prices indicated that it was difficult to supervise and that it should be replaced by a Muhammad Aslam Chaudhary pricing system with relatively relaxed market exchange rules and relying more on a free market operation. AN ANALYSIS OF THE PERFORMANCE OF FERTILIZER DISTRIBUTION SYSTEM IN WEST PAKISTAN BY Muhammad Aslam Chaudhary A THESIS Submitted to Michigan State University in partial fulfillment of the requirements for the degree of DOCTOR OF PHILOSOPHY Department of Agricultural Economics 1971 Dedicated very affectionately to my parents ii ACKNOWLEDGMENTS I wish to express my sincere appreciation to all members of my committee: IDoctors, Lester V. Manderscheid, Chairman; Robert D. Stevens, and Paul W. Strassmann for their helpful comments and suggestions which helped to improve the analysis and clarify the presentation of this dissertation. Special thanks are‘due to my Academic Advisor, Dr. Lester V. Manderscheid who served as Chairman of the Committee and made a critical review of the first drafts of the thesis. His probing criticisms and perti- nent comments were appropriately blended with remarks of encouragement and optimism. I also wish to acknowledge the financial assist- ance obtained under W.P.A.U.—W.S.U. Pakistan Project with- out the financial support of which it would have been impossible for me to continue my education. iii TABLE OF CONTENTS LIST OF TABLES . . . . . . . . . . LIST OF FIGURES. . . . . . . . . . Chapter I. INTRODUCTION . . . . . . . . II. III. Statement of the Problem. . . . Objectives of the Study . . . . Hypotheses to be Examined . . . Research Procedure. . . . . . Organization of Thesis . . . . ON THE THEORY OF FACTOR MARKETS FOR AGRICULTURE FOR LESS DEVELOPED COUNTRIES Introduction. . . . . . . . Theoretical Framework. . . . . Marketing and Economic Development Operation of Factor Markets. . . Price Policy. . . . . . . . SUPPLY AND DEMAND FOR FERTILIZERS . Introduction. . . . A Brief Overview of the History of Fertilizer Use in West Pakistan. Supply of Fertilizers. . . . . Indigenous Fertilizer Production . Supply of Imported Fertilizers. . Demand for Fertilizer. . . . Availability of Irrigation Water . Irrigation Water Supply by Tube Well Development . . . Provision of Agricultural Credit . Land Tenure as a Determinant of Fertilizer Consumption. . . Development of Improved Crop Varieties Conclusions . . . . . . . . iv Page Vii ix H l—‘OkDCDIb- FJH l3 l4 18 21 35 41 41 43 46 48 71 78 80 84 87 95 104 108 Chapter Page IV. CHANNEL ORGANIZATION AND MARKET STRUCTURE . 110 Introduction . . . . . . . 110 The Organization of Fertilizer Market Channel . . . . . . 111 Analysis of the Fertilizer Market Channel . . . . . . . . . . 116 Criteria for Channel Performance . . . 122 Impact of Fertilizer Imports on the Distribution System . . . . . . . 127 Fertilizer Distribution System of West Pakistan in Retrospect . . . . . . 131 The Proposed System of Fertilizer ' Market Channel Organization . . . . 160 Conclusions . . . . . . . . . . 172 V. PHYSICAL DISTRIBUTION SYSTEM . . . . . 174 Introduction . . . . . . . . 174 Regional Pattern of Fertilizer Consumption. . . . . . . . . . 175 Strategy of Fertilizer Distribution . . 187 Transportation Needs . . . . . . . 196 Estimation of Warehouse Requirements for Fertilizer in West Pakistan . . . . 204 Conclusions . . . . . . . . . . 210 VI. THE PROCESSES OF FERTILIZER ALLOCATION . . 211 Introduction . . . . . . 211 The Allocative Functions of the Government . . . p. . . . . . . 213 Conflicts in the Process of Fertilizer Allocation . . . . . . . . 219 The Processes of Fertilizer Allotment Versus Private Producers . . - . . 223 Conclusions . . . . . . . . . . 225 VII. TERMS OF SALE AND PRICING PRACTICES . . . 226 Introduction . . . . . . . . . . 226 Vertical Price Structure . . . . . . 228 Terms of Sale. . . . . . . . 230 An Evaluation of the Current System of Fertilizer Pricing . . . . . . . 233 A Proposed Fertilizer Pricing Policy . . 235 An Analysis of the Fertilizer Black Market . . . . . . . . . . . 237 Chapter Provision of Fertilizer Subsidy. . . . The Welfare Effect of Fertilizer Subsidy. Conclusions . . . . . . . . . . VIII. SUMMARY AND CONCLUSIONS . . . . . . . Summary. . . . . . . . . . . . Conclusions and Implications of the study 0 O O O O O O O 0 O O 0 Evaluation of Hypotheses . . . . . . LIST OF REFERENCES . . . . . . . . . . . APPENDICES. . . . . . . . . . . . . . Vi Page 240 247 251 252 252 256 261 269 276 LIST OF TABLES Page United States Fertilizer Prices Relative to Prices Received by Farmers for Farm PrOductS O O O O O O O O O O O 53 Effect of Economies of Size on the Pro— duction Cost of Urea . . . . . . . 56 Economies of Scale in Ammonia Production . 57 Effect of Idle Capacity on the Production cost Of urea. O O O O O O O O O 59 The Costs of Bulk Versus Bagged Ferti- lizer Shipments per Metric Ton. . . . 76 Canal Water Charges for Different Crops . 83 Increase in Crop Yields Due to Additional Water Use. . . . . . . . . . . 86 Various Sources of Agricultural Credit for Farmers . . . . . . . . . . 91 Agency-Wise Breakdown of Agricultural Credit During the Second and Third Five Year Plans. . . . . . . . . 92 Requirements for Agricultural Credit on the Basis of Farm Size . . . . . . 94 Quantity of Nitrogen Applied, Net Profit, and Rate of Return at Optimal Levels of Nitrogen Application Using Local Prices of All States . . . . . . . . . 108 Inter-Agency Allocation of Fertilizers. . 145 Comparative Regional Demand Projections for Fertilizer in West Pakistan . . . 179 Vii Page Regional Pattern of Fertilizer Supply in 1974-75 0 O O O C C O O O O 184 Foreign Exchange Costs of Fertilizer Imports . . . . . . . . . . . 187 The Structure of Rail and Road Fertilizer Freight Rates . . . . . 198 Region-Wise Distribution of Warehousing Capacity up to 1974—75 . . . . . . 207 Costs of Supplying Warehouse Space by 1974-75 . . . . . . . . . . . 209 Incidentals on Various Types of Fertilizers. . . . . . . . . . 231 Rate of Subsidy on Fertilizer Sales . . 245 Benefit-Cost Ratios of Fertilizer as Applied to Wheat and Rice in West Pakistan. . . . . . . . . . . 248 Inter-District Variation of Growth Rates in Agriculture and Fertilizer Use per Acre, 1960-65 . . . . . . 268 Assumptions Underlying the Regional Demand for Fertilizer in West Pakistan. 276 Nitrogenous Fertilizer Consumption per Capita and per Acre in Selected Countries . . . . . . . . . . 277 viii 3.10. LIST OF FIGURES Credit-Constrained Optima in the Use of Fertilizer . . . . . . . . . . The Pattern of Growth in Fertilizer Use in West Pakistan . . . . . . . . Adjustment of Fertilizer Supply and Demand at Subsidized Price. . . . . The Existing and Proposed Sites of Fertilizer Plants in West Pakistan . . High Barriers to Entry for a New Private Entrant . . . . . . . . . . . Economies of Size and Scale Effect for a New Private Firm . . . . . . . . Index of Seasonal Variation . . . . . A Case of Cash Tenant Versus Owner- Operator. . . . . . . . . . . Crop Share Lease System Under Which Tenant Pays the Input Costs . . . . A Case of Tenancy Under Which Both the Landlord and the Tenant Share the Input Costs. . . . . . . . . . Distribution of Cultivated Acreage by System of Tenure . . . . . . . . Production Functions for Four States in India and the United States . . . . Fertilizer Distribution Channel for Ownership and Control in West Pakistan. ix Page 27 45 48 63 69 69 79 97 99 100 102 107 114 Figure Page 4.2. Direct and Indirect Methods of Fertilizer Delivery . . . . . . . 130 4.3. Organizational Chart of the Department of Agriculture. . . . . . . . . 134 4.4. Organizational Chart of West Pakistan Agricultural Development Corporation . 137 4.5. Flow of Fertilizer Through the Distri— butive Outlets of Rural Supply Credit Corporation. . . . . . . . . . 146 4.6. Flow of Sales Revenues and Advance Order Placement . . . . . . . . 149 5.1. Various Fertilizer Regions of West Pakistan. . . . . . . . . . . 178 5.2. A Diagram of the Optimum Location of the Spatial Monopolist . . . . . . 190 5.3. The Diagram of Spatial Monopoly. . . . 192 5.4. Space Islands Under Conditions of Spatial Monopoly . . . . . . . . 193 5.5. Market Extension by the Use of a Distribution Center . . . . . . . 195 7.1. The Formation of Fertilizer Black Market . . . . . . . . . . . 238 7.2. Fertilizer Subsidy and Consumption in West Pakistan (1953-67). . . . . . 243 7.3. The Welfare Effect of Fertilizer Subsidy . . . . . . . . . . . 249 CHAPTER I INTRODUCTION In spite of a significant structural change that has taken place during the last two decades in the economy of Pakistan, agriculture continues to contribute almost one-half of the gross national product. As a basic sector, agriculture tends to dominate all forms of economic activity in one way or the other. Agricultural raw materials and farm products account for nearly 75 percent of the total foreign exchange earnings.l No less than 85 percent of the population lives in rural areas and most of it is directly or indirectly dependent on agriculture for its livelihood.2 Severe pressure of population and subdivision of holdings has led to a continuous decline in the size of farms to the current average of 6.4 acres which is one-forty-seventh of the average in the United States and one-sixteenth of the average in Britain.3 ‘ 1Government of Pakistan, Planning Commission, The Iflird Five Year Plan (1965-60), June, 1965, pp. 110-15. 2Ibid., p. 116. 3Malik Khuda Buksh, "Agricultural Progress in Pakistan," unpublished paper read at an International COnference held by Rockefeller Foundation, 1969, p. 13. l Vt West Pakistan faces almost similar conditions. As much as 20 percent of the land area of this region is cultivated which is estimated to be around 46 million acres of land.4 The average size farm in West Pakistan is slightly higher than the national average. The culti— vated land-man ratio of 0.9 acres and the per capita income of Rs 1.28 or about 27 cents per day enables an average West Pakistani to have food containing 2100 calories per day.5 Almost 25 percent of the cultivated area remains fallow.6 The causes may vary from scarcity of irrigation water, uncertainty in rainfall, lack of modern farm practices to inadequacy of soil fertility. A major reason accounting for low crop yields and vast areas of fallow land is the low level of fertility in the/P soil. The continuous depletion of plant nutrients removed from the soil by constant cultivation of land for cen- turies accompanied by inadequate replenishment of these nutrients by traditional organic manure has resulted in extremely low levels of soil fertility. Apart from other high productivity inputs, a major single farm input that can accelerate the rate of agricultural growth and relieve h 4Government of West Pakistan, Bureau of Statistics, Planning, and Development Department, Statistical Handbook 2£_West Pakistan, 1967, Table 4, p. 5. 51bid. 61bid. the ever-increasing pressure of population on land gener- ated by a rapid rate of population growth is chemical fertilizer. While almost all possibilities of expanding the agricultural land through extensive cultivation of mar- ginal and, in some cases, sub—marginal land seem to have been tapped, agricultural land has received an extra squeeze from increased industrialization and urbanization. At present, the basic need is to introduce land-saving technology that may bring about a right-ward shift in the agricultural supply function as well as effect a transfer of surplus labor, land, and capital for non-agricultural uses. Fertilizer use can well create the possibilities of increased multiple-cropping, changing the crop rotation, and increasing the density of plants. Ibach in the United States, indicates that one ton of N-P-K can substitute for 9.4 acres of land at 1960-64 average crOp and fertilizer prices.7 He further indicated that without previous use of fertilizer, one ton of fertilizer can substitute for 600 hours of labor with an initial zero level of fertilizer application.8 7D. B. Ibach, Fertilizer Use in the United States, USDA Economic Research Service, Agricultural Economics Report No. 92 (Washington, D.C.: Government Printing Office, 1966). 8Heady, gt 31., Roots of the Farm Problem (Ames, Iowa: _Iowa State University Press, 1966), pp. 117-29. Substitution of inorganic fertilizers for supply inelastic cultivable land is necessitated by the fact that it is a low-cost and relatively elastic input as compared to traditional organic manure which is presumably of high cost and inelastic in supply response. Since fertilizer use tends to interact with research, institutional inputs and a number of non-conventional inputs that tend to induce a significant shift in the crop potential through inter- action effects, it may well be hypothesized that the mar— ginal value product of a unit of capital invested in intensifying the use of modern inputs on cultivated lands is much higher than from bringing additional acres of land under cultivation in West Pakistan. An essential charac- teristic of modern farm inputs is their low price and capacity to yield a higher level of permanent income stream as compared to traditional inputs. Thus, it is the divisibility and close complementarity with improved crop varieties and the potentiality to yield quick returns that gives fertilizers an edge on other farm inputs. Statement of the Problem Increased fertilizer use has been a major factor in increasing crop yields in many of the technologically advanced countries. In the United States alone, almost one-half of the increase in crOp yields from 1940 to 1955 can be attributed to the intensive use of fertilizers.9 The contrast among various countries in pounds of nitrogen used per acre of cultivated land and per head of the total population is very prominent. The United Kingdom uses twenty-eight times as much nitrogen per acre of land as Pakistan; Japan twice as much as the United Kingdom, and the Netherlands nearly twice that of Japan.10 It has been noted that in spite of intensive use of agricultural inputs in developed countries, the marginal rate of return from investment in fertilizer has continued to be substantially higher than those from investments in other farm inputs. In the United States, a recent study showed that the ratio of the value of marginal product—to—unit cost for fertilizer is 5.0, 4.2, and 4.0 times as high as that for labor, land, and buildings, respectively, and similar other farm inputs in the agricultural sector.11 Previous studies carried out in the United States indicate a persistently high marginal product—to-unit ratio of fertilizer which is an indication of a relatively higher rate of innovation and technical 9Zvi Griliches, "Sources of Measured Productivity Growth: U.S. Agriculture, 1960-66," Journal of Political Economy, LXX, Nos. 1—4 (1963), 331—46. 10See Table A—2. llGian S. Sahota, Fertilizer in Economic Develop- ment: An Econometric Analysis (New York: Frederick A. Praeger, Publishers, 1968), pp. 165—88. change in the production, distribution, and use of fertilizer.12 It is apparent that those inputs will be increasingly used that have a higher benefit—cost ratio relative to others over the time horizon of individual producing units. The importance of fertilizer use in enhancing the productivity of agricultural sector in Pakistan can be assessed from the fact that it ranks second only to irri- gation water as an explanatory variable for increased agricultural growth. Harvard economic advisors working with the Pakistan Planning Commission attributed 25 per- cent of the gross value added in crOp output to increased fertilizer use during the second five year plan (1965-70). In addition to the general continuously rising demand for fertilizers in the Western part of Pakistan, emergence of new highly fertilizer responsive dwarf varieties has in- cluded a major shift in the level of crop output. Conse- quently, it has lead to a considerable expansion in the demand for fertilizer. Fertilizer use is expected to rise further, if the momentum of farm output in a single-shift equilibrium process is to be maintained. With the existing fixed indigenous fertilizer production capacity and a right-ward shifting demand for fertilizer, a rising volume of imports will be required in order to maintain a stable g 12Haldore Hanson, West Pakistan Agricultural Growth, Miscellaneous Report No. 22 (East Lansing, Michigan: .Michigan State University, 1967), pp. 23-27. and remunerative fertilizer price level. On the other hand, in view of the scarcity of foreign exchange and un- certainty in the timing of fertilizer imports with the seasonal pattern of domestic demand for fertilizer, a major emphasis of the government of Pakistan has been to develop indigenous fertilizer production capacity. Apart from a number of developments that have taken place in the fertilizer market, the major diffi- culty arises in regard to making fertilizer available to the farmer in desired quantities and at the required time and place. A number of issues that need investigation are whether or not the existing system of fertilizer distribution is responsive enough to the changed environ- ment in the fertilizer market of West Pakistan sign of interrogation. How far the administrative and organi- zational inefficiencies, the structure of fertilizer supply and demand, or fertilizer policy itself stand in the way of bringing fertilizers within effective reach of farmers? What are the reasons underlying the emergence of black— market prices in the various areas of West Pakistan? For the private sector, the barriers to entry may be too high because social returns from fertilizer distri- bution and market expansion are much higher than private returns. Whereas a public-supported system of distri- bution may be too slow in effectiveness and accomplish too high a cost, the task of market expansion of fertilizers. The uncertainty in availability and in- accurate timing of fertilizer imports give rise to the need for linking fertilizer producing plants and the importing agencies with the internal marketing system so as to make fertilizer readily available to the farmer at the local level. The fertilizer distribution system should be dynamic and efficient enough so as to adequately replace or modify the existing administratively determined system of fertilizer distribution. It is not the attempt to execute a major shift from command approach to market approach, but to suggest a balance between the two ap- proaches in a manner that may pave the way for an eventual progressive and profit-motivated system of fertilizer distribution. This study is, therefore, undertaken to improve the physical flow of fertilizers through various institutions currently existing in West Pakistan and to suggest ways of removing the bottlenecks arising from the interaction of the forces of supply and demand with the distribution of fertilizers and how the distribution system reacts to them. Objectives of thgygtudy 1. To develop a relevant theoretical analysis concerning the development, operation, and interaction of product and factor markets for agriculture in less developed countries and identify the variables that may be relevant to the development of the fertilizer market in West Pakistan. To examine the variables affecting the structure of supply and demand for fertilizers in West Pakistan and their impact on the fertilizer distribution system. To examine the existing fertilizer market channel and to propose an alternative system of channel organization and physical distri- bution. To describe the existing practices of ferti- lizer allocation by the government to various fertilizer distribution agencies and to examine any conflicts arising from the allocative policy of the government. To examine the existing system of fertilizer pricing and to suggest an alternative pricing policy. Hypotheses to be Examined A number of hypotheses that will be analyzed in the light of available evidence are given below: 1' Apart from favorable fertilizer response and economic environment fertilizer use depends upon the physical availability of this farm input at the local level. 10 2. Uncertainty and the variability of fertilizer imports account for major inefficiencies in the distribution of fertilizer in West Pakistan. 3. Diversity in the growth rate of various agricultural regions of West Pakistan may, in part, be attributed to the level of fertilizer use per acre. Research Procedure With the recent shift in the orientation of agri- cultural factor markets in less developed countries from an almost complete dependence on on-the-farm resources to off-the-farm sources of inputs, the need for research on the operation of input markets has received added emphasis. Except for a few studies conducted with the objective of a broad analysis of input-related markets, the field of fertilizer markets has remained unexplored. This study has been undertaken with a view to examining the various economic forces operating in the fertilizer market of West Pakistan, and to make some value judgments on the efficiency of the fertilizer distribution system. The research approach employed in this study is economic engineering and institutional. In this method an analysis of the market channel will be conducted to examine the physical flow of fertilizers from industrial Producer to the farmer-consumer. The marketing process 11 will be broken down into various individual stages of productive activity and interrelationships between the various marketing variables will be examined. Institutional approach will also be used to examine the role of government in influencing the be- havior of market participants through its fertilizer as well as price policy. Available secondary data will be used to support or refute the arguments in the analysis. The major limitation of this study, however, remains the lack of specific disaggregated data in order to conduct an indepth analysis of the various aspects of fertilizer distribution system. Organization of Thesis A theoretical framework concerning the operation of factor and product markets in agriculturally less developed countries will be laid out and a course of action for the transformation of traditional agriculture through reorganization of input markets will be recom- mended. This is followed by a description of the struc- ture of the fertilizer industry and instability of ferti- lizer imports. An analysis of a number of non-economic strategic factors that in one way or the other determine the demand for fertilizer is included. An examination of the fertilizer market channel in its historical per- spective is presented and transformations in the market Channel configuration are delineated. An analysis of the 12 fertilizer market channel with a View to examining the behavior of market participants is presented. In addition, utilizing the current system of fertilizer distribution as a starting point, an alternative growth-oriented regional marketing system with consideration towards the provision of marketing services has been put forth. An economic model relating to the spatial and temporal structure of fertilizer demand up to the year 1974-75 has been formulated. An analysis of the pro- jected demand and supply patterns for fertilizer is made and an assessment of the impending requirements of ferti- lizer imports, transportation, and warehousing needs is conducted and a course of action is suggested for the development of indigenous fertilizer production capacity. The role of government as an important variable affecting the performance of the fertilizer distribution system is examined and poligy suggestions for the gradual withdrawal of government from a comprehensive control over the distribution and allocation functions to the replace- ment of private enterprise are made. An analysis of the process of emergence of blackmarket prices and effective- ness of fertilizer subsidy in promoting the use of ferti- lizer is delineated. Based upon foregoing analysis, recommended actions are outlined for the improvement of the performance of the fertilizer distribution system in West Pakistan. CHAPTER II ON THE THEORY OF FACTOR MARKETS FOR AGRICULTURE FOR LESS DEVELOPED COUNTRIES Introduction A very common phenomenon that characterizes the economies of developing countries is the inadequacy of traditional market structures to dynamically adjust and respond to the distributive and organizational needs of modern, non—farm technical inputs. The purpose of this chapter is to present a broad analysis of the variables that tend to affect farmers' decision-making environment and go towards promoting the growth of product and factor markets in less developed countries. It presents the operation of farm input markets in the dynamic and develop- mental context where the institutional,economic,and policy issues are presumed to be interrelated. It focuses on the changes that must accrue in the product and factor markets as a result of the lift-off in agricultural economy from static equilibrium into dynamism. Its main objective, however, is to provide an initial setting for the analysis and operation of the fertilizer market in West Pakistan. 13 14 Theoretical Framework A theoretical classification, on the basis of a broaci comparison of agricultural conditions in under- deveJJoped countries can be made in terms of traditional and nuodern agriculture. Traditional agriculture may occur in a ‘Nide variety of institutional forms ranging from highlgy communalized systems to small farms organized arouuid.the family unit under a wide range of physical econcnnic and cultural factors, all of which affect re- sourcxe use. A common characteristic of traditional agri- mflinxre may be viewed as a chronic state of low-level equilgibrium in agriculture that subsists on a traditional factoq: market. Schultz's concept of traditional agri— culture is that: - . . traditional inputs have been so extensively Used by farmers that the motives for holding and acnquiring agricultural factors as sources of income STZIeam have remained constant for a long time. So "ulch so that the marginal preferences and motives §C>I acquiring agricultural factors as sources of lrlcome seem to have arrived at an equilibrium. The Inéirginal productivity of these sources being viewed 3&3 an investment in permanent income streams and the Inarginal savings assumed to have reached zero.13 In thfii expost sense, traditional agriculture can be viewed asana equilibrium at which agriculture arrives over a long perlcki of time. In the process of reaching this type of equl-1-:i_brium, the stock of traditional material factors of prodthation are the principal variables. Traditional ___‘_~_¥ A r' 13T. W. Schultz, Transformation of Traditional 196ZCNJlture (New Haven, Conn.: Yale University Press, I pp. 11-75. ‘ ._ 15 agriculture may involve a variation in the size and composition of the reproducible material factors of pro- duction that may change because of investment or dis- investment without involving any qualitative or techno- logical changes in the traditional inputs. A breakaway from this static agricultural system can be attained by the provision of low—priced and high- yielding inputs that may precipitate a state of dynami- cally shifting equilibrium. The transformation of tra- ditional agriculture essentially involves the restructuring 0f farm input markets that requires the use of off-farm inPUts instead of on-the-farm inputs. A traditional factor market typically represents a relatively inelastic supply 0f traditional inputs and high-priced sources of permanent income streams. The rate of return to marginal investments is 50 low that it may barely cover the marginal input cost. The process of accumulation in the stock of traditional farm inputs and declining marginal productivity of invest— ment act as a disincentive to marginal savings such that an ecEmilibrium gets established between savings and in- vest'Ine—nt or between the demand and supply of agricultural factOrS_ Under such conditions, a recombination of the factors at the disposal of farmers will not bring about a Significant change in farm output. A rise in the value Of farm products could raise the marginal returns to agri- C . . . . ultural factors and induce some additional 1nvestment. ‘ 16 It is likely to be a short-run phenomena that may affect the farm income through farm price variations due to weather which can be described as oscillations around the chronically low state of equilibrium. The cumulative effect of the various negatively operating factors is, at best, a slow rate of increase in output, rising total costs, and declining incomes due to growing pressure of population on land in traditional agriculture. Agriculture modernization on the other hand, Gets underway through shifting production functions result— ing in an increase in the productivity of resources already in use and also the development and substitution of supply elastic inputs for relatively supply inelastic traditional inputs. It is the consequent shifts in production possi- bilities and expansion in the ability to absorb produc- tively a much greater quantity of inputs which most dis- tingui shes modern agriculture from traditional agriculture. The process of transition from traditional agri- culture to modern agriculture essentially involves a dynamic interaction of the more or less self-contained subsistence agriculture with the modern factor market to get a continuous supply of non-conventional high- produc'tivity inputs and with the product market to barter away the marginal increments in farm marketable Surplus. An expanding role of the exchange economy makes f . . . arm decision makers increa51ngly rely on price Signals 17 and information processes of the market. This is charac- terized by output response which depends not only on weather but also on the profitability of new inputs, which in turn, is dependent upon the cost of inputs and the prices of farm commodities being produced. The con- tinuous shifts in farm productivity may, however, be fed by a stream of new inputs embodying new technical knowl- edge which pass through a complex of linkages of research stations, suppliers, and distributors in which marketing assumes an important role. The allocation of farm inputs is, however, depen- dent upon the rates of return from different inputs and is subject to price variations in both factor and product markets. The intensity of interaction increases with the modernization of agriculture, as against subsistence agri- culture which often operates in the role of a barter economy with a very limited use of cash. A small amount of marketable surplus does not significantly influence the functioning of very thinly connected embryo factor and product markets. Thus, agricultural development brings about complexity in interrelationships as well as internal growth of those markets. The process of change from simplicity to complexity, from static equilibrium to a dynamic one, and reorganization of the marketing system indicates that an important share of the difference in income levels among farming areas can be attributed to 18 conditions in input markets. Schultz very aptly remarks that: Economic growth from the agricultural sector of a poor country depends predominantly upon the avail- ability and price of modern agricultural factors. The surplus of these factors in a very real sense hold that key to such growth.14 Once the process of modernization has been initiated, the supply of labor in a low-income agricul- ture becomes subject to moderately rising marginal cost with the assumption that there is no such labor which has zero marginal productivity. On the other hand, modern technology allows the substitution of relatively supply elastic inputs for labor and land the supply schedules of these modern reproducible material factors can, however, be made to shift downward by increasing the production capacity of farm input supply plants and through the development of cost-reducing technology. Thus, it is the interrelationships of shifting production functions and increasing input supplies which places great emphasis on the supply of new technical inputs in agricultural modernization. Marketing and Economic Development The marketing system can be described as a complex pattern of institutions and physical facilities which relate human beings and things in the transfer of goods 14Ibid., p. 123. l9 and services. A basic function of the marketing system is the effective transmission of consumer demand changes through the market channel to producers. Distortions in prices and related information flows through the exchange system can lead to under—utilization and misallocation of resources thereby limiting the overall supply response. Improvements in the distribution system may, therefore, reduce cost—increasing inflationary pressures that tend to originate from output supply inelasticities and insti- tutional rigidities which are associated with the mal- functioning of factor markets and low mobility of resources in under-developed countries. According to Grunwald: . . . this means roughly that the supply of goods and services does not expand and its composition does not adjust at a rate sufficient to meet not only a rising demand but also changes in the pattern of demand without serious price pressures.15 The exchange system and related market processes assume greater importance as a traditional agrarian society is transformed into a modern industrial society. The increased urbanization which accompanies economic growth increases the proportion of population dependent upon a system of commercial production and distribution. Changes in the demand plus a rapid population growth create additional pressures on the production and distri- bution system. Only a flexible system will be able to 15Richard H. Bolton and John K. Gahbraith, Market- ing Efficiency in Puerto Rico (Cambridge, Mass.: Harvard University Press, 1955). 20 respond to these demand changes, whereas the institutional rigidities of most developing countries prevent this de- gree of flexibility. Improvements in the distribution system would permit more responsiveness to demand changes and hence, relieve some of the inflationary pressures pre- sent in the food distribution system of these countries. W. W. Rostow observed these structural changes taking place in developing countries and noted the serious distortions that have appeared, because of failures in the marketing system for food and non—food products. One of these distortions is the existence of import-substituting industries producing consumer goods for rich urban 16 The characteristic small size of these markets classes. which grow slowly do not attract new capital for expansion, causing industrial growth to slow down after its initial take—off. Another distortion is the widening gap between urban and rural income, because of slower growth rate in the agricultural sector. Such an income gap provides in- centives for large-scale migration from rural to urban sectors, can help correct structural distortions, and create a self-reinforcing process of agricultural and industrial expansion. The critical sequence of events which can induce market development consists of several steps which may be seen schematically for the three interrelated 16W. W. Rostow, View From the Seventh Floor (New York: Harper and Row, 1964). 21 sectors (urban food distribution, urban industrial pro- duction, and rural production). Thus a balanced develop- ment effort becomes necessary in view of the intersectoral relationships between agriculture and non-agriculture. J. C. Abbot set down the following conditions needed for market demand to exercise its full incentive effect on production:17 1. Reasonably stable prices, i.e., without dis— continuous intra- or inter—seasonal Changes, at a remuner- ative level. Unless farmers have confidence that prices will bear some minimum relationship to costs, they will hesitate before incurring additional work or expense to increase their output or raise its quality. 2. Adequate market channels and facilities. The marketing system should insure that growing urban demand, stabilized prices, and differentials for quality at the processing or consuming level are actually reflected in profit incentives to the producer and not lost in the route . Operation of Factor Markets The process of transformation of traditional agri— culture essentially involves the introduction of a new factor of production which has a two—fold effect in bring- ing about a shift in the structure of relative prices in 17J. C. Abbot, "The Role of Marketing in the Development of Backward Agricultural Economies,“ Journal of Farm Economics, XLIV (May, 1962). 22 the product and factor markets. The immediate effect of the use of this non-conventional input will, therefore, be to increase farm productivity that will tend to alter the price ratios of different agricultural products. Since, development is not proportional to the increase in the out— put of all agricultural commodities, the products that did not enjoy an increase in farm productivity will find that their relative prices increased substantially. A right- ward shift in the supply function of the individual farm commodity will lead to a resource transfer from the agri- cultural sector to the non—agricultural sectors, because of a disequilibrium between the farm and non-farm prices and emergence of newly unemployed or underemployed re- sources which may have a higher opportunity cost in non- agricultural sectors. The adverse terms of trade for agriculture may arise, because of a dramatic increase in the marketable surplus, the inherently competitive structure of agriculture itself and a whole range of public policy measures that may aim at diffusing the benefits of new technology to urban consumers at large. Questions related to the farmer, urban consumer interests, and price policy will be discussed later. A similar shift may occur in the input market, because of a change in the marginal productivities of given inputs. It will result in a rightward shift in the demand for new high productivity inputs, thereby, altering 23 the production plans of farmers, effecting a shift in farmers' reinvestment coefficient, raising farm income, and bringing about a change in the consumption habits and saving patterns of farmers. Given the assumptions of perfect knowledge, rational decision-making, and farmers' expectations about the future, they will maximize their outputs by equating the marginal rates of return from various farm inputs. From an individual farmer's point of view, it would represent a change in the distribution of economic effort and in the mix of his total product. The extent to which the demand for new input will expand depends upon the output and substitution effects arising from its relative price change. In addition, it will depend upon the availability of substitute and comple- mentary inputs, the output elasticity of new input for the production of a particular crop, and price elasticity of demand for that commodity. Cost—price relationships in the production of various farm commodities determine the amount of resources that a farmer will be willing to allocate. Generally, low levels of price elasticities of demand for agricultural output are likely to be reflected in declining prices yielding lower returns to farmers, unless some price support system is evolved, export out- lets are sought, alternative uses of the surplus farm Commodities are found out, or measures are taken to reduce the costs of input supply and attain input conversion efficiency. 24 The technological change in the form of development of new inputs is unlikely to shift production functions and cost schedules for all crops equally. Thus, one of the concomittants of rapid technological change is the alter- ation in cost-relationships and consequent changes in relative levels of production and prices. Technical change in factor markets, on the other hand, tends to increase the efficiency of input use by raising the profitability of a given input. Under given demand conditions, the benefits of new technology will result in increased yields, rising farm income, an increase in the attractive- ness of investment, and an enlarged pool of capital. The benefits of new technology will be in proportion to total production and not in proportion to gross level of increase in marketings. Thus, the benefits of new technology will be diffused equally between the lower income and higher income cultivator. If the market price drops somewhat, in response to increased production, the proportional effect of this technical change in raising real income would be greater for the lower income cultivator than for the higher income cultivator. In a similar context, Boulding having reviewed the United States experience, concludes that American success in combining a great investment in increasing productivity with a spectacular decline in the proportion of labor force in agriculture depends "on a 25 8 He concludes curiously perverse reaction to adversity.“l that other countries might not be able to rely on such an insensitive instrument as the price system to achieve an acceptable combination of these resources. An important component of input markets in low income countries is the restraining influence of inade— quate supply of capital on agricultural development. Increases in supply of capital are, therefore, likely to enlarge the rural market for farm inputs and industrial goods. It can help augment farmers‘ credit reserves, accelerate the rate of capital formation in agriculture, effect a change in the structure of farm organization, raise farm income, increase labor returns in agriculture, and consequently enhance the contribution of agriculture to gross national product. Returns from a unit of capital invested in agriculture may be very low, if the farm in— vestors are already optimizing the use of old inputs. The rate of return to capital will be favorable, if a constant stream of low-priced and more productive new inputs con— tinues to improve farm investors' profit functions. Whether there will be capital flight from agricultural sector to the industrial sector or vice-versa, depends upon the relative shares of return in both sectors and the environ- ment of risk, uncertainty and price patterns for 18K. E. Boulding and P. Singh, “The Price Struc- ture in Economic Development," American Economic Review (September, 1957). 26 agricultural and industrial goods. It is quite possible that investment priorities may shift from one sector to the other from time to time involving the movement of capital back and forth between the agricultural and in- dustrial sectors. Schultz, however, argues convincingly that if the investments in agriculture change the form of capital used and are accompanied by massive investments in the human agent, the pay—off frequently might be 19 handsome. In the adoption of new inputs a variation in the mix of inputs used is constrained by the limitation of capital which tends to magnify the tendency for new inputs to be used inefficiently. On the aggregate level, imper- fections in the input markets and limitations in the availability of capital tend to produce structural dis- equilibrium in low-income countries. This has resulted in some undesirable consequences in the form of in- efficiency in resource use and untapped production poten- tial which has both its private and social costs. Since the production plans and decision-making processes of the farmer are dependent upon the environment for risk and uncertainty, the costs of borrowing credit and the rates of return available to it become important for the indi- vidual farmer. The high cost of credit tends to reduce 19Schultz, Transformation of Traditional Agri- culture, pp. 100-25. 27 the profitability of a new input and thus, inhibits the diffusion of new technology. On the other hand, external credit rationing exists through the terms and cost of borrowing money and the environment for farm investment. In a low-income agricultural based economy where the relative proportion of farm products to the gross national product tends to be high, the social returns are believed to be greater than private returns to a unit of capital invested in agriculture, it would therefore be desirable to provide credit at subsidized rates. The process through which an individual farmer will vary the use of a given input F, say fertilizer, with an extra limitation of credit can be illustrated by the following diagram: A Marginal A value product or cost of credit MVPF fi>F Units of Fertilizer Figure 2.1. Credit-Constrained Optima in the Use of Fertilizer. 28 The use of fertilizer by an individual farmer yields increments to returns as depicted by the height of marginal value product curve MVPF and is priced at the purely competitive level of Co' If we relax the con— straint of credit on the purchase of fertilizer, the-farm producer will maximize his returns above the cost of fertilizer, by equalizing the cost of a unit of fertilizer with the marginal value product at the fertilizer use level F3. At this level, the returns to the farm producer over and above the variable costs are represented by the area enclosed by COAG where the variable cost of fertilizer 3 revenues generated for fertilizer use to this level are to a use level of F is represented by OCOGF3 and the total depicted by OAGF3. It is assumed, however, that the supply of credit is perfectly elastic at a given rate of interest so that the supply curve of capital is identical with CoG' Under the assumption of external credit rationing, if we impose a restraint on the individual farmer that he has only a limited access to the purchase of fertilizer, because of the availability of a limited amount of credit. The effect will be to reduce the use of fertilizer from OF3 to OF2 and net earnings to the farmer to the amount represented by the area enclosed by COADE. The limited access to capital would tend to raise the supply cost of Capital, because of the existence of excess demand gener- ated by the triangle EDG which represents the farmer's 29 potentiality to increase his total returns by increasing the use of fertilizer. The cost of purchasing additional units of fertilizer to increase total net earnings rises because of the rising cost of capital that he faces. It is speculated that under the principle of "increasing risk,“ the effective cost of adding more and more units of capital increases, if the capital is borrowed. This is because of the fact that the rising proportion of borrowed capital to the amount of capital available to a farmer leads to a threat to his equity. In other words, the real cost of an unfavorable error in estimating the future ex- ceeds the gains in real terms from a favorable error. Thus, the value of credit can be estimated in terms of its protective or productive contribution to the producing system. The protection cost of credit is the cost fore- gone by making an alternative use of credit, instead of using it as a safeguard against contingencies. Whereas, the production cost of credit represents the returns that would be gained by making an alternative use of credit for investment. Thus, the rising marginal input cost curve COB slopes upward at rates that differ among inputs bought with borrowed funds and the rate of absorption of credit reserves. For those inputs which have a higher marginal value product and can absorb the farmer's credit reserves more rapidly, the marginal input expense curve Will be more steeply sloped than for those inputs which absorb credit reserves slowly. JIIIl--__L_, 30 In contrast to the product markets, which have a long history of evolution, the organization of factor markets for supplying the new technology-embodied inputs is relatively new and rudimentary in low-income countries. The existing market environment in and around agriculture neither encourages farmers to produce more, nor to market much of what they produce. The essential change in market— building is to increase the interaction of product and factor markets by enhancing the proportion of farm output flowing to urban consumers and expanding the market of off—farm produced inputs for farmers. Such supply and demand induced changes in the input market can lead to product mix changes and can trigger a self—reinforcing advance in the value of farm output. Since the introduction of a new factor of pro- duction into traditional market structures calls for reorganization and streamlining of market operation, a modern marketing system aiming at renovation of the exist— ing market structure would, therefore, require flexibility as an additional characteristic of the system in order to handle an ever-increasing volume of farm inputs and crop output. An identification of the economic interrelation- ships in terms of prices and physical flows of fertilizer, market risks, and uncertainties perceived by channel oper- ators would be necessary. Measures to improve the market Performance and reduction of risk and uncertainty may be undertaken through a "package“ of reforms which vary in ¥ 31 composition and intensity in accordance with the system and results desired by the society. Risk and uncertainty may arise in the marketing system due to prices, supplies of products, factors of production, and poor market coordination throughout the stages of market channel. While internal coordination may be managed through administrative action within the marketing firm, external coordination may be accomplished through the action of prices, markets, and other forces that govern relationships between firms. Internal coordi— nation may very well be achieved through vertical inte- gration of the various steps of production within the firm.20 Larson's thesis focuses considerable attention upon ways of improving the external coordination in the product and factor markets so as to reduce the overall level of risk and uncertainty. The fact that the existence of risk and uncertainty can lead to sub—optimal allocation of resources is attested to by D. Gale Johnson in the following statement, “in the short—run uncertainty results in less than the optimum combination of resources within the firm, while the long—run effect of uncertainty is the rationing of resources to less than optimum size of 20Donald Larson, “A Diagnosis of Product and Factor Market Coordination in the Bean Industry of North— east Brazil" (unpublished Ph.D. dissertation, Michigan State University, 1968). 32 firm."21 The risk reduction can, however, lead to an increase in the profit expectations of marketing firms so that new resources are attracted into the system thereby increasing its output and productivity. In the initial stages of input market development the administrative, organizational, and capital problems of production and distribution of new inputs may lead to an excess of demand over supply, thereby creating difficult educational problems of establishing priorities as to where the scarce inputs are to be directed. The stage of agricultural transformation of a country would deter- mine the extent to which new factors of production are to be capital intensive or labor intensive, and also the intensity and level of demand for these inputs. The rate of investment in agriculture would, however, depend on the relative discounted rate of return for farm and non—farm sectors. An agricultural development strategy that aims at generating an initial outflow of capital from agri- culture into input supplying industries and a subsequent inflow of capital to intensify the use of modern inputs as well as optimal utilization of investment opportunities at the farm level under given consumption and saving patterns would seem desirable. 21D. Gale Johnson, Forward Prices for Agriculture (Chicago: University of Chicago Press, 1947). 33 A necessary adjunct of the development of factor market institutions is the creation of adequate supportive infra-structure in order to generate a continuous stream of modern inputs which could be provided to the peasant farmer at the required time, place, and incentive price. Technical assistance is needed to generate information flows for the proper use of new inputs and a feedback system would be required to exact necessary improvements in the quality of technical inputs and to support "adaptive" research. An elaborate credit program may be built up to meet the loan requirements at a reasonable rate of interest and in a supervised form to make it more effective. Grad— ual commercialization of agriculture is likely to bring about more and more specialization in farm production and a rapid growth in demand for credit as well as other farm inputs. Existence of complementarities among the inputs and their varied characteristics are likely to lead to the emergence of specialized input supplying and distribution agencies. It may create the need for a specialized exten- sion organization in order to effectively diffuse the technical knowledge concerning the use of individual inputs. It will give the required dynamism to input supplying firms, give rise to the economies of scale, and simplify the process of tackling problems arising from the side effects of new technology. Technological back-stopping also grows in importance as the production 34 system becomes more technologically advanced. In this framework, the market would be required to function in the context of social efficiency so as to serve as a convenient means of making contributions to welfare while siphoning off large portions of the social product. A whole range of policy measures may be used so as to re- distribute the benefits of change and innovation among farm producers and urban consumers. The process of agricultural development, however, requires a simultaneous and coordinated expansion of in- vestments in production and marketing. Prices are the primary communication devices which can reflect most effectively the situation as it is and as it will be. The coordination of investment decisions depends im— portantly on the information about present plans and future conditions. Thus overall investment planning and administrative arrangements are necessary to supplement market prices as communication devices in coordinating production and marketing improvement programs. Three important economic relationships that are necessary for the acceleration of agricultural develop— ment are as follows: (1) developing a system of efficient prices, (2) rewarding economic opportunities for farmers, and (3) providing the sources of such opportunities. Whether a system of efficient price relationships is effective or not, depends to a large extent, upon how k 35 well the marketing system performs. The single best coordinator between product and factor markets is the price as an exchange opportunity that can be brought to bear upon the stimulation of output. Under perfect market conditions, the exchange opportunity would represent a single price; in an imperfect-market it will not describe a single, but a marginal exchange opportunity that is the rate at which small quantities of commodities can be exchanged.22 Price Policy Price policy is an important instrument that can help restructure the flow of resources from one commodity to another or to individually favored commodities through q uaranteed prices or through raising the average level of prices. This controlling device would not be successful, if physical production ratios work strongly to the dis- favor of the crop to be encouraged. In such cases, under- lying reasons for the structuring of free market prices and production patterns must be examined before any inter- vention to distort the existing price system can be made. Market determination of prices in less developed countries is beset with market restrictions, maximum or minimum prices, fixed grade price differentials, and inter- regional trading restrictions. The problem, therefore, 22Boulding and Singh, "The Price Structure in Economic Development." .__ .1. 36 is not that intervention distorts prices away from their equilibrium levels, but it is how to distort the price system at the least cost for the stimulation of production. The least cost alternative that tends to maximize our objective function would be a better solution. Changes in farm prices can be manipulated to facilitate the attainment of certain goals through the operation of one function, while operating against other simultaneously held goals. The three useful functions that farm prices can be expected to perform are delineated: 1. They can serve as allocator of resources and may signal to both producers and consumers concerning the conditions of farm production and consumption. 2. They can be used as an instrument to redistri- bute income. 3. They can influence the rate of capital formation. As an allocator of resources, the relative rise in farm prices can be interpreted to encourage increased investment in the farm sector that may operate through two influences. They may increase the gross returns to investment proportionate to the price increase, if almost all of the output from increased investment is marketed. The second influence of higher farm prices on investment in agriculture may operate through the income effect and iS in direct proportion to the latter. The income effect 37 tends to raise the saving coefficient and makes farmers a better credit risk. Change in farm prices does effect a transfer of income between the agricultural and non- agricultural sectors of the economy and redistributes income between high and low income persons. A rise in farm prices would tend to redistribute income away from low-income urban consumers towards high income farm pro- ducers. The extent to which urban consumers' relative real income will be affected by a given percentage rise in food prices would depend upon the proportion of their incomes spent on food. Thus, a low-income urban consumer with a relatively greater food budget is likely to be afflacted more by a given percentage rise in price. The usuall classification of a lower income and higher income farm producer can be based on the amount of marketable surplus. Thus, for a given change in farm prices, a lower income farm producer with a smaller level of marketable surplus will be proportionally less affected than the higher income cultivator with a higher level of marketable surplus. In isolation, the impact of price policy in en— hancing the level of aggregate farm output is more or less palliative, its effect being capitalized into higher land prices, except for when it is accompanied by techno- logical change in agriculture. As a matter of farm POlicy, the critical sequency of variables that can 38 1 effect a major shift in crop output, would be attained only through the introduction of a new technical input that can bring about a shift in crop production possi- bilities. While higher farm prices are likely to increase the value of marginal product of farm inputs and conse- quently increase the rate of capital formation in agri— culture. Conversely a low—price food policy is likely to reduce the cost of living of urban workers, encourage an outflow of capital from agriculture shift the level of saving in industrial sectors, and consequently, acceler— ate the rate of capital formation for industry. In general, it is assumed that the demand for agricultural commodities is inelastic and that the price flexibility coefficients are greater than one. Decreases in agricultural production will, therefore, be accompanied by more than proportional increase in prices and by in- creased farm incomes. This reflects the usual pattern of output response in high income agriculturally developed countries. On the other hand, in a low income country, two factors work to reverse this relationship between production and income. First, the price elasticity of demand is much less inelastic in low-income countries. Indeed, the price elasticity of demand for all food may not be much "less" than minus one and even for food grains alone, it may be as "high" as -0.5, and is, in any case, 1685 inelastic than in high income countries. Second, ¥ _ 3 9 I in low-income countries farmers who produce food crops, generally sell only a portion of what they produce and therefore, receive market price impact on only a portion of production. Suppose, on the average, farmers in a low-income country sell about 30 percent of what they produce. Given the magnitudes of price elasticity and the proportion of output marketed, real incomes of farmers would be directly related to production in sharp contrast to the inverse relationship in high income countries. It may be further assumed that marketable surplus directly varies with the changes in crop output. It can be con— cluded, therefore, when good weather brings increased production, real incomes of farmers rise and conversely, when weather is poor. Likewise, when technological change brings about increased production, incomes rise even without the effect of shifting demand schedules that accompany population growth and rising incomes. An increase in agricultural production is likely to increase national income affecting demand as well as savings and investment potentials. Price changes tend to redistribute additions to income between agricultural and non-agricultural sectors. The price elasticity of demand and marketing ratios in low-income countries are such that only a part of this increased income is distri- buted to the non—agricultural sector through price de- Clines and a part remains in the agricultural sector. In the long-run, however, as distinct from the short-run ¥ A 4O weather induced fluctuations, growth in population and urban derived incomes place a further upward pressure on agricultural prices favoring maintenance of an even higher proportion of the income from increased production in the agricultural sector. An estimation of the effects of changes in farm output on agricultural incomes would require a knowledge of the following variables: 1. The price flexibility coefficient. 2. The proportion of output marketed. 3. The change in the proportion of output marketed with respect to changes in pro— duction and consequent changes in prices. Statistical evidence, on the operation of factor markets and the effects of agricultural price policy is very limited. On the other hand, an exploration of these areas of research is necessary if the operation of input markets is to be understood and a precision in price policy with awareness of the consequences is to be achieved. CHAPTER III SUPPLY AND DEMAND FOR FERTILIZERS Introduction The problem of market development and distri— bution of fertilizers is essentially the problem of channelling the quantity of fertilizers available through the pipeline to meet the rising demand. Whether the existing system of marketing is adequate or inadequate and what new directions it should take, depends to a large extent upon the structure and behavior of the forces of supply and demand. The purpose of this chapter, there— fore, is to delineate various factors affecting the supply and demand conditions of fertilizers in West Pakistan. Agronomically, the demand tends to fluctuate with the sowing time of two major crop seasons of West Pakistan, i.e., Rabi (winter) and Kharif (summer). Whereas the supply is continuous as it passes through a variety of chemical processes and complex systems of production. The continuous flow is sustained through the year—round availability of raw materials from indigenous or external sources and an employable pool of labor. 41 42 Assuming a stable supply position of indigenously produced fertilizers, changes in the overall supply takes place because of variations in the quantity of imported ferti- lizers. Whether or not it will arrive in time depends upon the availability of such a scarce commodity as foreign exchange and the surplus capacity available from the exporting firms. The extent of spatial variation in supply depends upon the location, size, and number of supply points as well as the location of fertilizer demand points and the intensity of demand, and also the efficiency of intra— market movement of fertilizers. The demand for fertilizers in West Pakistan, as anywhere else, has the tendency to vary with the type of crop season, method of irrigation, level of farm income, liquidity position of the farmer, the pattern of economic incentives as well as the local availability of fertilizers to farmers. As a commodity of indirect consumption, the use of fertilizers requires technical knowledge and a time lag before desired crop output can be attained. Unlike fertilizer suppliers the demanders of fertilizer are essentially a multitude of decision makers in agriculture who are widely scattered geographically. They vary not Only in economic status and potential, but also exhibit a widely varying pattern of attitudes and motivations that are subject to a considerable variety of institutional ¥ 43 connections. Temporal changes in demand take place be- cause of the seasonal pattern of fertilizer consumption. Spatial demand for fertilizers is determined by the avail- ability of complementary inputs in different regions. A Brief Overview of the History of Fertilizer Use in West Pakistan The economic history of fertilizer diffusion in West Pakistan tends to substantiate the fact that ferti- lizer use was both a matter of expediency and necessity to the government. The post-independence period of 1947—51 witnessed a transition during which the Western Wing of Pakistan became food deficient from a food surplus region. It brought in its wake a continuously increasing dependence on food imports to meet the people's bare minimum calorie requirements as well as an increasing strain on the scarce foreign exchange resources of the country. The small foreign exchange resources of the country were placed under competing demands for financing the import of capi— tal goods to accelerate the place of industrialization as well as the cost of an increasing volume of food imports. Staple food, being the basic wage good, food shortages from time to time tended to escalate agricultural prices, thereby influencing the relative competitive position of Pakistan's agricultural exports in the world market. This brought about an early realization on the part of govern- ment concerning the use of modern inputs that could be 44 brought to bear upon the supply inelasticity of agricul— tural output, accelerate the food output, and reduce the foreign exchange cost of food imports. But it was not until 1952 that one thousand nutrient tons of nitrogenous fertilizers were distributed among the farmers by the Department of Agriculture in various regions of West Pakistan. An illustration of the fertilizer consumption history from 1952-53 to 1967—68 in terms of tons of ammonium sulphate is given in Figure 3.1. Experimental work conducted on fertilizer use indi- cated a general deficiency of nitrogen in the soils of West Pakistan and the recommendations that were made available to farmers were simply broad—based and related mostly to the application of nitrogen alone. It was pre- sumably thought that the soils of West Pakistan are ade— quately provided with phosphorous and potash nutrients so as to meet nutrient requirement of different crops and tkuat the application of a single nutrient could bring abCDut immediate returns to farmers' investment. The con- tinuous use and an unbalanced dose of nitrogenous ferti- liEZGBIS led to a steady removal of complementary soil nutllrients such as phosphates. It was by the year 1959-60 théit: one hundred thousand nutrient tons of phosphates were conS‘umed in West Pakistan. Persistent reliance still tends to CNDntinue on the existing potash resources in the soil .to SIlpport an increasing level of crop production and with ¥ 1000]— II 00" Tons of Ammonium Sulphate 45 l l l l l l l L l 1 l l l l r I I T I I I F T T I I I I 1963 1955 1957 1959 1961 19 5 1967 1954 1956 1953 1960 1962 1964 1966 1968 Years 953 S<>urce= Government of West Pakistan, Statistical Handbook of West Pakistan (Lahore: Bureau of Statistics, Planning an Development Department, 1967). The Pattern of Growth in Fertilizer Use in Figure 3.1. West Pakistan (1953-68). ¥ 46 still more expectations of even higher farm productivity. Since no specific survey has been conducted to determine the nutrient requirement of different soils, the optimum dose of fertilizer may differ from area to area. Until now, the use of fertilizer has continued on a blanket recommendation in terms of bags of fertilizers instead of nutrients regardless of the improvement in soil-water-crop management systems. Fertilizer consumption received an extra impetus during the second five year plan, partly because of the increased availability of chemical ferti— lizer and its complementary inputs to the farmers and partly because of a strong governmental drive to achieve food self sufficiency and in addition, due to the in- creased realization on the part of farmers about the bene- fits of this technology. Supply of Fertilizers The amount of fertilizer that will be available dufiring a particular year in West Pakistan depends upon the quéantity of fertilizer produced by indigenous plants and tIIEE magnitude of imported fertilizers. S:E = Df + If (L Sf = Total supply of fertilizers during a given year. Df = Quantity supplied of the indigenously pro- duced fertilizer. If = The amount of imported fertilizer during a given year. .-_. —‘_ 47 Since the supply of indigenously produced fertilizers tends to remain perfectly inelastic during a given production year, the equilibrium price (Pe) will be determined by the intersection of domestic supply curve SS with the demand for fertilizers DD at the point A. It may be assumed that the free market price of fertilizers is too high for the purchasing power of an average farmer and that it reduces farmers' profit expectations from the use of fertilizer. A subsidized price of fertilizers will, therefore, be necessary for market expansion and to improve farmers' expected rate return from their investments. Suppose that the government provides subsidy to effect a reduction in the equilibrium price of fertilizers to the extent of AC, the supply price of fertilizers will, there— fore, be Ps (see Figure 3.2). It may be further assumed tllat the government meets the deficiency in the overall S‘Ipply of fertilizers by imports so that the new market equilibrium gets established at B with equilibrium price being Ps' The subsidized price will induce increased feJZ‘tilizer consumption and effect a change in the quantity of. fertilizers purchased to the extent of CB which just e(31Lals the deficit in the domestic supply of fertilizers. If we relax the assumption of fixity in the d‘IHREStic supply of fertilizers and assume that the techno- 10Siically fixed supply of fertilizers can be changed over a‘ lmbng period of time through the erection of new plants 48 P l ' D S S Price Pe A C B PS D O 's 5 Quantity Adjustment of Fertilizer Supply Figure 3.2. and Demand at Subsidized Price. 01? through the expansion of production capacity of exist— iJIg plants, the fertilizer supply curve will be positively S lOping. Indigenous Fertilizer Production The decision whether to meet the domestic demand fCDI‘ fertilizer by indigenous production or through a con- tirTUal reliance on fertilizer imports will depend upon a nlmfifloer of factors. 1. A fundamental comparison which can be made is to establish whether the cost of freight and handling the imported fertilizer outweighs _._. —‘_._ . 49 the difference in operating costs between exporting countries and Pakistan. The effectiveness of investment in ferti— 2. lizer industry in saving or earning foreign exchange. 3. The availability of indigenous or imported cheaper raw materials for feeding a domestic fertilizer industry. One single factor that tends invariably to favor the indigenous production of fertilizers is foreign ex- change. As a scarce resource, foreign exchange is an asset to the development of Pakistan's economy, because of its multiple alternative uses and high shadow prices. It is needed for the import of capital goods, consumer dur- EflDles, spare parts, and industrial raw materials. Whether OI? not Pakistan can restructure its resources so as to oPtimally utilize them is constrained by the availability Of' foreign exchange. Pakistan's international trade sta— tiStics indicate that it has almost continuously faced an adVerse balance of trade with its attendant problems of deEMEndence on foreign aid and an over valued currency. Tl1e= production possibilities generated by existing resource endmeent have little chances of making any major increases 1r; ‘the foreign exchange earnings so as to meet the import reguirements of the country. ..-- 4‘ y 50 A continuous dependence on fertilizer imports would imply a recurring expenditure of high opportunity cost resources which will be subject to variations in keeping with the behavior of international fertilizer market and availability of such a volatile element as foreign aid. How far the investment in indigenous ferti- lizer production will effect a saving in the foreign ex- change earnings hinges on the availability of raw materials within the country, the amount of foreign exchange required to finance the capital costs of a fertilizer plant and the foreign exchange needed to finance the recurring costs. Since industrial countries are more frequently able to take advantage of the most recent technological changes, economies of size and scale, intensity of demand and size <>f the market, the capital costs of erecting a fertilizer E>lant will be higher by about 20 percent in a developing cOuntry than in a developed country. Available statistical e‘fidence indicates that the investment costs of erecting a ni'trogenous fertilizer plant in Pakistan are higher by abOut 30 percent as compared to developed countries and fC='1|:‘eign exchange component of the capital costs would eculstitute 60 percent.23 Given a lead time of three to five years in Eelftilizer plant construction, imports may be the only \ 23Emile C. Freeland and Clyde S. Adams, Fertilizer €§E§§5tistics and Recgpt Developments, U.S. AID, Karachi, 65, pp. 1—25. . 1.....— --§. _ 51 solution in the short run. An optimal rate of fertilizer importation in terms of the overall economy will depend on Pakistan's export capability, availability of foreign aid, and the net inflow of private investment. Inspite of the domestic production of fertilizers based on in— digenous reserves of natural gas, the fertilizer industry will require a high direct and indirect foreign exchange component. Soligo 22 a1. emphasize that “a fertilizer industry in Pakistan, currently based on natural gas still requires the importation of inputs equal to about 5 per- cent of the total value of output.“24 Though the results of soil tests throughout West Pakistan reveal a serious lack of nitrogen, phosphorous, and organic matter, of all the three plant nutrients more Ilitrogen is used than either phosphorous and potassium. Nj:trogen production also requires more investment than either of the others. About 98 percent of all nitrogenous fSirtilizers are made with ammonia which, in turn, are made fIKMn natural gas by a chemical combination of hydrogen and nitrogen through a process known as steam reforming. West Pakistan is endowed with relatively abundant reserves of rlailural gas estimated to be around 16,080 billion cft, W"heireas the domestic consumption of this gas was only \ . 24Soligo et al., "Economics of Ammonia Production 1‘1 Developing CouHErIES" (paper presented at the Inter- reSIional Conference on the Development of Petro-Chemical Industries in Developing Countries, Center of Industrial Ika‘felopment, New York, United Nations, 1964). 52 276 billion cft in 1964.25 The major single use of this gas has been made in power generation and as an industrial fuel. Very limited use of it has been made as a raw material for the industry except for the production of nitrogenous fertilizers at Multan. Since Pakistan has sufficient reserves of natural gas with almost no reserves of potash and phosphates, it will be advisable for Pakistan to rely on alternative sources of power and divert a greater percentage of natural gas for the production of nitrogenous fertilizers, apart from naphtha which can be obtained from local refineries. One of the objectives of the development of the fertilizer industry in a developing country like Pakistan is the transference of technical skills and provision of eunployment to the local labor. It has been estimated that tllree skilled and five unskilled persons are required for eéich thousand tons of nutrients that are produced and diAstributed per year. Inspite of the capital intensity of tfka fertilizer industry, an average fertilizer plant that DINDduces 1000 nutrient tons of fertilizer per day and operates for 300 working days in a year is estimated to prgy has been in the form of reduction in the capital and <3perating costs of nitrogenous fertilizers. In the Uniiled States, the capital cost of a basic ammonia plant \—_—— 26Development and Change in Traditional Agricul- gEEEii. Focus on South Asia, Asian Studies Center, An CaSional Paper, 1968. 54 with the production capacity of 350,000 tons of ammonia per‘ year has been reduced from $45 to $60 per ton in older plants and $20 to $30 per ton in plants making use of new technology . 2 7 A significant feature of the fertilizer industry is izhat it enjoys large economies of size and scale. A small-sized plant operating at full capacity may involve higgluer per unit cost of production than a large-sized plant operated at less than full capacity. On the other hand, the economies of scale obtained through the erection of a larger fertilizer plant could more than offset the diseconomies arising from low rate of capacity utilization. Since an industrial country has the most recent fertilizer teChnology, an accumulated reserve of technical know how, high intensity of fertilizer use, and compact marketing areéis, it finds itself in a considerable advantage in enjclying the economies of scale and size that are associ- atefii with the production of fertilizers and conversion plalnts. Due to the fact that the cost of production in the fertilizer industry is inversely correlated with the size 0f ilhe plant, economies of size that are available to S‘maller developing countries are, however, limited. The ratios of marketing and transportation costs in West \——____ in 27OECD, Sflply and Demand Prospects for Fertilizer ¢veloping Countries (Paris: OECD, 1968). 55 Pakistan are high because the marketing radius in which fertilizers are distributed tend to be extensive and the intensity of fertilizer use very low. Thus, the erection of a large fertilizer plant would mean that a larger marketing area must be served. It is quite possible that the savings arising from relatively lower investment costs in the erection of a larger plant may be offset by the transport cost disadvantage of smaller plants in closer Proximity to their markets. As a new large fertilizer Plant enjoys a high level of fixed costs, many of the apparent economies of size may disappear if these plants are not operated at near full capacity. So far as the capital costs of varying sizes of fertilizer plants are concerned, a 300 ton per day plant is estimated to cost $11.4 million with a production cost of $31.67 per ton; as compared to a 1000 ton plant costing $22. 7 million, and producing ammonia at $20.34 per ton. For 10 percent return on investment the 300 tons per day plant will have to sell fertilizer at $67.50 per ton as compared to $51.00 for a 1000 per ton per day plant.28 New technological advances that have made possible ecOnomies of size in the fertilizer industry can be well ass'essed from Table 3.2. \—_——__—_ 28Freeland and Adams, Fertilizer Statistics and \Re C3ent Developments . 56 Effect of Economies of Size on the Production TABLE 3.2. Cost of Urea. Relative Index Relative Index Plant Capacity Tons Urea Per Day Plant Cost Cost Per Ton 200 100 100 500 67 78 1000 45 61 FAO, 1966). Source: Fertilizer Annual Review (Rome: It has been estimated that with ammonia costing $42 per ton, urea will cost $441.39 for 1000 ton per day 29 Eilant, as against the prevailing cost of $878.36 per ton. In the production of nitrogenous fertilizers, the e<=<2>nomies of scale could be as much as $9.5 per ton for Europe, $7.7 for the United States, and $9 to $32 in case off India. The Indian case shows that the effect of eGonomies of size is much more important between 250 and 500 tons per day than between 500 and 1000 tons per day. ITIEB following table shows the rate of capacity utilization fc>1T the larger plant at which the savings in operating cc)Sits due to economies of size are likely to be compen- Sea~ted by low capacity utilization. This rate could be afs low as 56 percent in Europe for a 1000 ton per day Eu“I'lzlonia plant as compared with a 500 ton per day plant. JIt: could be 64 percent for a 500 ton per day plant in \ 291bid. ‘ 57 .Ammma .oumo "mflummv mmauucsoo ca 0Ho>oo Ca umuflafluuwm HOw muoo moum panama can a 5m .oumo "wUMSOm ucmHm mmw wee wmm mom :oflumN EsacoE IHHHu: >uflommmo mum 30H xn ooumm pcm IcomEoo mum camom Hagan Mo wwHEocouo moans uw>o um coflunuaaaus woe auwommmu wo ovum m.om me vs mm mm om.~m m.ov v.ev >.mm Amumaaoov mumoo mcflumummo .m m.om an we m.wm me No.o~ «.mm m.m~ w.m~ Amumaaocv mumoo poxam .v m.om em mm m.m~ on «.ma m.va m.HN «.mN AmumHHoov momumno wannaum> .m wma awe mma mma vma mm voa m.mm mHH Amcouo muflommmo ooaaoumCH uo weep \ucoeumw>:fl Hmuoe .N ooo.omm ooo.mwa oom.~m ooo.moa oom.~m ooo.omm ooo.moa ooo.omm ooo.mma mflcossm wo macs CH pom» pom >uflommmo .H Amnucmmzv Amzucmmzv Ammo Housumzv Amcuzmmzv nodumauomoa mflocH Hammum ammoo Mano cucudm . .coHuospoum mflcoes< :H onom Mo mwasocoom .m.m mqm¢8 58 Brazil as compared with a 250 ton per day plant. On the contrary, in the Indian case, the rate of capacity utili- zation could fall from 80 percent to 57 percent when doubling the capacity from 500 ton per day to 1000 ton per day. The rate of capacity utilization could be as low as 46 percent when this alternative is compared with a 250 ton per day plant before the economies of scale are (offset by the low rate of capacity utilization as illus— ‘trated in Table 3.3; some of the disadvantages that may arise from the erection of larger capacity fertilizer £>1ants are delineated below: 1. A larger amount of local currency or hard currency is required at the beginning to take care of larger investments, entailing payments of interests of non-utilized capacity. 2. By the time the economies of size are fully realized, plant life might be drawing to a close and technical advances in industry might even minimize such related economies of size. 3. The higher the discount rate, the stronger will be the case against the building of productive capacity in anticipation of demand. 59 A fertilizer plant may be operating below capacity because of inadequate demand, non-availability of raw materials, lack of spare parts, inefficiency of management, and technical difficulties. Whether it will be profitable to increase the size of market by exporting fertilizer or increasing the rate of capacity utilization by overcoming the technical inefficiencies depends on the alternative costs involved. The extent to which production costs of fertilizers will be raised due to the operation of ferti— lizer plant at less than full capacity is indicated in the following table. TTXBLE 3.4. Effect of Idle Capacity on the Production Cost of Urea. Relative Utilization or Relative Production Cost Rated Capacity Index of Urea 100 100 90 107 80 115 70 127 60 142 50 168 40 196 \ S<3I1rcez Food and Agriculture Organization, A Preliminary Report of the Survey of Fertilizer Economy of the Asian and Far East Region (Rome: Food and Agri— culture Organization, 1960). 60 Fertilizer production statistics30 indicate that fertilizer plants operate at 85 percent of the rated capacity in West Pakistan which means that on the basis of criterion developed by the FAO concerning direct cor— relation between idle capacity and cost of production, the cost of fertilizers will be raised by about 10 percent as compared to a fertilizer plant operated at full capacity. 0:1 the basis of a straight—forward commercial criteria, it MKDuld frequently be more economical to import the finished plroducts than to consider any form of local manufacture Mdiere the total market is limited, unless an increasing Inarket potential proves capable of supporting a viable fertilizer producing plant. In addition, indigenous manu- -facture of fertilizers may also be justified where the l-f5 nitrogenous fertilizers. A large pool of available SJSJLlled and unskilled labor can be trained to take over 1:1163 managerial and technical responsibilities. \ 30Freeland and Adams, Fertilizer Statistics and EEsaczent Developments. ‘ 61 The production of indigenous fertilizers in West Pakistan started with the establishment of a superphos- phate factory at Lyallpur with the annual rated capacity of 3600 nutrient tons. Nitrogenous fertilizers came on stream in 1958 with the erection of a fertilizer plant at Daudkhel for the production of ammonium sulphate with the annual rated capacity of 10,500 nutrient tons. In response 'to the rapidly rising demand for nitrogenous fertilizers, another urea and calcium ammonium nitrate producing plant vvas set up at Multan with an annual rated capacity of 56,833 nutrient tons. It was based on indigenous raw Inaterial supply of natural gas. Emphasis on the production (Df nitrogen and phosphates was laid, because almost all ag'ricultural regions of West Pakistan responded to varying d»Oses of nitrogen and phosphorous and in the areas where SOil erosion was active or which were under paddy would rEESpond to potassium as well. Phosphate deficiency does n<>t only exist in the alluvial soils of Indus Valley, but i55 also reflected in a pronounced shortage in the soils of Peashawar Valley. Generally the pattern of crop production, 'tlixoe of irrigation system, and nutrient requirement of the Sc>i.ls of given agricultural regions determine the level (>15 intensity and points of demand for various combinations C’IE given types of fertilizers. Whether fertilizer plants $31'1f 60 miles at Lyallpur to supplement an existing super- Efllosphate facility. It could also raise the future possi- bilities of producing mixed fertilizers. Similarly, two ‘UJTea plants are proposed to be set up at Daharki which CCNJld be easily substituted by a single urea plant in OI‘der to take advantage of the economies of size and SCIaJe and to reduce the per unit cost of production. Zklternatively, one of the urea plants could be shifted either to Hyderabad or Karachi, whereas Hyderabad division 1Defilng an area with a relatively high density of cultivated a‘czlfeage presents sufficient local fertilizer demand. \ 4%: 32Harza Engineering Company International: An fiT£21233aisal of Resources and Potential for Development, 963—75. ¥ 66 Change of location for the urea plant to Hyderabad will, therefore, reduce the marketing radius and costs of ferti- lizer shipment to the farm areas lying in this region. Similarly, the shifting of this urea plant to Karachi could increase the possibilities of having mixed ferti- lizers for the farmers at a relatively lower cost than the costs incurred by having nitrogen and phosphate pro- ducing plants at a considerable distance. In addition, the urea and triple superphosphate plants located at Karachi can service the coastal area and other accessible farm areas with mixed fertilizers at a much lower cost of local fertilizer delivery. Thus the choice of location site between Hyderabad and Karachi would depend upon Mfllichever is the best. From the structural point of View, the fertilizer iIldustry in West Pakistan is in the early stages of develop- nkent. The size of the indigenous fertilizer industry is, hOWever, limited due to the low level of farm income, non- a-Va.ilability of complementary inputs, and lack of credit availability. At present, there are only three plants Lufiéier the ownership of a semi-autonomous body, the West Ehaliistan Industrial Development Corporation. The plants EilTei operated on a commercial scale like a profit-motivated E>J?i:vate enterprise with management controlled by the cor- £><>ration. The organization of WPIDC was instituted by the SIag of calcium ammonium nitrate will be priced higher 12116in ammonium sulfate and a bag of urea will be priced e"en higher. The seller concentration ratio is expected to c3620line with the expansion of fertilizer market, rise in ¥ 68 farm income, greater fertilizer consciousness of the farmers, and as new firms come on the horizon and private enterprise is encouraged to invest. As the number of sellers increases competition is likely to become more intense, and prices are expected to be lower. Collusion is likely to become progressively more difficult and economies of size and scale would gain more importance. At present, barriers to entry for the private enterprise are high because the capital costs and its foreign ex- high. A limited fertilizer market change component are of high selling costs and riskiness offers the challenge of business for a new private entrant. The cooperation Of government and intensive efforts by the department of agricultural extension can do the initial spade work for tile sale of fertilizer by private firms and thereby reduce tlle per unit selling costs of fertilizers. Figure 3.4 iJ.lustrates the position of a new firm vis-a—vis an old Vertilizer firm. Since the fertilizer industry is subject to a ra-pid technological change, the new firm is likely to have ‘tIIEB benefit of new cost-reducing technology involving Sukbstantial economies of size and scale. It is quite EDCDSsible that the average unit costs of production for 121163 neW'private firms may be much lower than old estab— lished firms with obsolete technology. This is illus- trated in Figure 3.5. 69 New Private Firm Average 6.....- Selling lished Costs Per Firm Unit Sold Units Sold Figure 3.4. High Barriers to Entry for a New Private Entrant. AVerage A A . c c thlt Costs of Pro- duction Old Firm New Firm Output Figure 3.5. Economies of Size and Scale Effect for a New Private Firm. 70 Such a situation is likely to arise with the new fertilizer plants proposed to be set up during the next four or five years. Almost all of these plants are likely to have a larger capacity than the old plants which means a lower per unit cost of production but the huge selling effort required to dispose of fertilizers is likely to in- crease their variable costs. The proposal to expand the production capacity of existing plants is well taken. Transportation costs per unit of fertilizer sold are likely to increase, because a greater plant capacity can serve a larger marketing radius. The market structure of the fertilizer industry is likely to undergo consider— able change, in view of the rapid rise in the demand for fertilizer and growing interest of private enterprise in tile fertilizer industry. One of the new developments in tlle production structure of the fertilizer industry is the lC>cation of two almost identical fertilizer plants both at sheikhupura and Daharki under the ownership of different erltrepreneurs. It can lead to the possibility of tacit agreements, price collusion, joint profit maximization, (Dr‘ market sharing. Moreover, the other fertilizer plants WIlich are located at a considerable distance may not be 6113145 to competitively encroach upon the isolated and well EDJTCDtected markets of the two firms. Because the ratio of terétnsportation and distribution costs to the price of ifEEJTtilizer tends to be high, the geographical differential 71 may also be prohibitive for effective competition. Alter- native location of these plants could create the possi- bility of improving the performance of the fertilizer industry. Supply of Imported Fertilizers Fertilizer imports constitute an important com- ponent of the overall supply of fertilizers in West Pakistan. Variations in this component are likely to create fluctuations in the market supply of fertilizers. From the temporal point of View inaccurate timing of fertilizer imports is likely to affect the overall supply of fertilizers at a particular point of time in a given crop—year. The difficulties in channelling the flow of fertilizers to the farmers tend to create spatial vari- ations in the supply of fertilizers. Thus, in the case of free market operation, the prices of fertilizers are likely to vary at a particular time and place, unless apnpropriate measures are taken to stabilize them. A government decision to develop indigenous ferti- lizer production capacity does not imply that no fertilizer will be imported. Fertilizer may be imported because a 1nmited fertilizer market does not permit the development 0f iIldigenous fertilizer production or the per unit cost Of feeI‘tilizer produced domestically may be too high relatiVe to the price of imported fertilizers. In India, for eXample, the cost of producing fertilizers is 5 percent I‘lIIIIIl-___ ,2 I higher than in the United States.33 In addition, ferti- lizer may be imported initially in order to achieve market penetration and stimulation of demand. A case in point is the import of fertilizers in 1952-53 for demonstrating the benefits of fertilizer use to farmers. Ever since, fertilizer has been almost continuously imported in West Pakistan to supplement the indigenous supply of fertilizers so that favorable effects of fertilizer subsidy could be effectively communicated to farmers by keeping down the prices of fertilizer. Foreign exchange being a scarce commodity, it must be allocated among high priority alter- natives. If fertilizer imports are to reach the farmer in time, they must be planned about six months ahead of time so that required foreign exchange allocations could be sought and tenders given. The primary responsibility for fertilizer imports rests with the Agricultural Develop- Inent Corporation which arranges for the shipment of ferti- lizers from exporting countries, the major exporter being tflie United States. Annual fertilizer import requirements are based on the net difference between predicted demand and domestic fertilizer production forecast. Agricul- tural Development Corporation works in close cooperation With ‘the Planning Department which, in turn, consults the Minifirtry of Finance and Economic Affairs Division to \—___ 33Max F. Milliken and David Hapgood, No Easy garv‘ist: The Dilemma of Agriculture in Underdeveloped ~£§El§£ig§ IBoston: Little, Brown and Co., 1967). IIII--____ 73 obtain foreign exchange allocations and consults West Pakistan Industrial Development Corporation to determine the indigenous fertilizer availability. Whether or not fertilizer imports will arrive in time depends upon how early the orders were placed and how well the internal fertilizer distribution system can handle the large supply of fertilizers by channelling it into given outlets. In spite of a generally rising trend, the demand for ferti- lizers from year to year does not show a constant increase, but irregular fluctuations that may be due to a number of uncontrolled variables. Since production capacity of indigenous fertilizers during a particular crop—year is technologically limited, the irregular changes in the con- sumption of fertilizers will have to be offset by changing the fertilizer imports or evened out by a fertilizer stabilization stock to ensure a smooth flow of fertilizers to the farmer so as to prevent recurrence of blackmarket practices. The stock requirements are normally determined byr a stock turnover ratio of one-third. Much, however, depaends on the number of different types of fertilizers, quantities stored, and the number of distribution points. Since in West Pakistan the number of different kinds of fertilizers is limited, and the number of distribution poin1;s is large, a stock turnover ratio of 15-20 percent Seen“; advisable. In cases where aid has to be negotiated and 1lenders to be invited, fertilizer import requirements IIIIIIl--__ 74 must be determined much ahead of time. The work must be taken in hand in the month of January, if fertilizer is to be shipped from the port of departure in mid-April, unloaded at Karachi port in July, allowing a period of one to one-half month for the internal transport and distribution system to perform its functions so that fertilizer reaches the farmer in mid-August or September. In other words, arrangements for the import of fertilizers which are to be consumed by the farmer in the month of September, 1970 must have begun in December, 1969. Whether or not foreign exchange saving can be effected through a deliverate choice of exporting firm and mode of shipment depends on the type of fertilizers and whether fertilizers are imported in bulk or bagged form. It has been estimated that, at present, for United States AID financed fertilizers, a difference of about seven or eight dollars per ton exists in the c.i.f. cost of bulk versus bagged fertilizers. This difference may exchange cuzcasionally depending on shipping costs from plant to port.in the exporting country, its bagging costs, extend- ing charges, and ocean freight rates. The products that lend themselves to bulk shipping and handling are phos— PhatEB products, NPK compound fertilizer, calcium ammonium nitrérte, muriate of potash, and ammonium sulfate. With fertilizer imports amounting to 200,000 to 220,000 tons °f fertilizers in 1969 which could lend itself to bulk 75 I handling West Pakistan could effect a foreign exchange saving of $1 million to $1.5 million by buying bulk fertilizer.34 A comparison of the prices of bulk and bagged fertilizers could be made by Table 3.5. In order to avoid fertilizer losses arising from poor techniques of handling bulk fertilizer, leadage from fertilizer bags, and their non-standard weight as well as a high probability of fertilizer caking, the use of portable automatic bagging machines would be advisable. The cost of bagging equipment and its accessories with per month bagging capacity of 40,000 tons is estimated to be $225,000. At present West Pakistan meets 60 percent of its demand for fertilizer through imports, whereas 95 percent of the imported fertilizer will have to be shipped by railcars with an average turn—around period per car of twenty days. Fertilizer and foodgrains get first priority both on dock space and railroad cars. Yet the shortage of railroad cars makes it difficult to discharge nmare than 1500 tons of fertilizer per day. Whereas pro- jeacted fertilizer requirements for the year 1969-70 show that about 854 thousand product tons of fertilizer will have: to be imported. It implies that the handling capacity 0f already over—loaded Karachi port will have to be ex- panded. Assuming a work year of 350 days, an average load _____“_______________ 34John M. Hill, West Pakistan Fertilizer Handling 5351.D4arketing Survey (Pakistan: U.S. Agency for Inter- natiJDnal Development, 1968). ‘II-—___ .xHDQ sou mom ms.~em use common so» use os.mem ms neomsmx on smooo peso .m.o some moeoeoHemn .Hnomuwx ou unmoo ummm .m.D Eouw mucwfimflnmm oo.m me.mn me.ov oo.mm Omx unmoumm om cmmuom Mo oumwasm .m oo.m mm.moa me.oe om.mm oneIoa wumnm Imocm EstOEEoHQ .N oo.m mm me.mow me.oem oo.oem mo~m ucmoumm we wumcm Imocmuwmsw onHHB .H omnmo aommm> mmuozomfla anumumx xasm qu .m.o.m uosooum wo umoo woozm umou .w.H.o muouumru oooomm 6 season Hobos moss mo onoo mo 7 mnemEmacm ooooom oo.mm mm os.mo mm.om ms.mm ems osmosmo om smmuoo no onmwaom .m oo.mm mm mm.sos mm.om oo.mo oImeIoH mused Imoce ESHGOEEMHQ .N oo.mm mm mm.sww mm.omo oo.meo moNo ucouuom we ounce Imocmuomsm onHHB .H omnmo manommm Hommo> . acomumx xasm MOM one mom . . . . .m.o.m Rasm uosooum mono oma umoo w H o nouumco mo s .o umHHoo Hobos moan mo p O m3 m0 pmoo oomdm muemeosem xsom If .COB OHMumZ Mom mucofimflzm HoNHHHuHom nmmmmm mSme> Mada MO mumOU och .m.m mqm< B 77 of 2,440 tons of imported fertilizer will have to be shipped per day which is much more than the railway's handling capacity. In addition, two bagging machines will be required to handle the bulk of fertilizer for a full working year. Since the arrival of fertilizer loaded ships is not scheduled so as to keep the dock busy all year round, ships may arrive three at a time and none in a period of three months. Demand for limited dock space and dock workers for fertilizer unloading, bagging, and storage will be irregular. Even if the bids for ferti— lizer delivery are assumed to be given in time and arrival of ships well scheduled, fertilizer unloading, bagging, and storage work can remain at the most for eight months in a year. Any excess in the working period can be assumed to result in fertilizer losses through caking, spoilage, delayed delivery of fertilizer to farmers, and non-availability of limited dock space for alternative uses. In View of the limited railway capacity to channel the flow of fertilizer to various distribution centers, a large warehouse at Karachi to regulate the supply of fertilizers seems feasible. Its capacity can be deter- mineyj by the ratio of stock turnover to annual fertilizer impcxrt requirements. The rate of turnover at this ware- housGfi can be increased by increasing the railway's ferti- lizEEr handling capacity and raising the efficiency of ferdlilizer bagging on the dock by adding more units of ‘IIl--___ 78 automatic bagging machines. Since the demand for ferti— lizer by farmers tends to be seasonal, imported fertilizers can be used to even out the peak demand. It implies that the demand for railway handling capacity will be seasonal and may reach its peak during the period that just pre- cedes the peak of demand for fertilizer. Thus, it is possible that daily capacity of 1500 tons may not be used during certain periods but a capacity of 10,000 tons may be needed during other periods. Demand for Fertilizer The demand for fertilizer in West Pakistan is highly seasonal and tends to vary with the sowing times of two major crop seasons, i.e., Rabi and Kharif. An index of seasonal variation (see Figure 3.6) for ferti- lizer sales constructed by twelve-month moving average of monthwise sales data in West Pakistan, indicates that the demand for fertilizer is marked by peaks and troughs. Fertilizer demand reaches its peak in December, when the Inajor staple food crop of wheat is grown during the Rabi sezason. Fertilizer sales are second highest during the month of August when fertilizer is used for top-dressing canl crops like sugarcane, cotton, fruits, and vegetables. On tile other hand, it reaches its low during the months Of CN3tober and March which do not coincide with the time Of f6ertilizer application. Temporal variations in the denuind for fertilizer tend to interact with the spatial ‘IIl-___, Seasonal Index 160 + 140 120 100 JU 80 . 60 I 40 4 20 79 Fertilizer Sales 1965-69 I L l. I A I I I —+—-~—-+~— Aug. Sept. Oct. Nov. Dec. Jan.\4__.__ 1 Input Figure 3.9. A Case of Tenancy Under Which Both the Landlord and Tenant Share the Input Costs. optimum amount of input, to which they both agree is X1, the amount an owner—operator would use. While the tenant's profit is increased by cost—sharing, the landlord's profit may not be, particularly if he can convince the tenant to use more than the amount X2 as indicated in Figure 3.8. Thus, while cost sharing provides for the most efficient use of resources, it may not be the most profitable for one of the two parties. A classification of cultivated area by type of tenure shows that almost 51 percent of the cultivated area in West Pakistan is under the active operation tenants. Any program aiming at stepping up farm productivity cannot overlook the major portion of acreage operated by tenants. 101 The existing system of land tenure does not encourage the effective adoption of an innovation by farmers, because of uncertainty and variability in farmers' returns, the costs of which may be borne by the tenant only. Since the percentage share of the tenant and the procedure of dividing the harvested crop is not legalized, the tenant invariably gets a low return to this investment. In- security of tenure may reduce the incentive of tenants to make investments for the improvement of farms that might enhance the crop response from fertilizer and thus make its use more profitable. A graphical illustration of the percentage distri- bution of the cultivated acreage among tenants, tenant- cum owners, and peasant proprietors is provided in Figure 3.10. As for larger holdings one—third of the total culti- vated area is accounted for by farms of twenty-five acres or above. In order to attain rapid increases in fertilizer use and immediate gains in food output, it would be ad- visable to concentrate the extension effort on larger farmers, thereby reducing the administrative costs of distributing fertilizers to fewer farm operators. The credit requirements of larger farmers are likely to be less, because of their higher income and better liquidity position. Given an adequate motivation, the large farmers can effectively make use of the new inputs in a package l()2 .muscma Mo Ewumxm an wmmmuo< pmum>HuH50 mo coflusbfluumflo .oa.m wusmflh .Aucmfiuummwo acmEQOaw>mQ can mcficcmHm .moflumADMDm mo :mmusm "muonmqv cmumaxmm uwmz mo xoonccm: Hmoaumflumum .cmumflxmm ummz mo ucmEcum>oo "mousom wmmmuo< pmum>HuHDU w>onm can oma o.oma|o.om o.omuo.mm o.mm|m.ma m.ma|m.n m.n|o.m o.m|m.m m.muo filo i 4 (I + x l x I x \ \\ \ \\ \\ xx\ \ .\ \ |\x \ x\x xxx .x. ..m -.vIF\Ix-.\-.. . / \\\\\‘ Ia \ \ / \ x . x x 1 \ u. /; \x \ 1,0H /, . x x /x \ \ / \ . x \ \ x,mH \Vfl! I/ \ N \ / . \\\ /x // \ I.x\ // / N / // \ ~\ .. /.x\ \. ..o~ /. .. a \\ l/ \\ / / rfmm / .(\. muOumHudoum unammom IIIIIIII mumczo E50 mucmcme l.:|-:l:-|| mucmcme .I I om L-___ 3 abequaolad 103 form with lesser problems of resource proportionality. A sound credit position is likely to encourage them to make investments involving higher risks. The major problem remains with the smaller farmer who due to one reason or the other remains inaccessible to non—conventional inputs especially fertilizers, and does not share proportionally in the new gains in farm productivity in West Pakistan. A multitude of farmers owning 2.4 million farms below five acres account for 4 million acres of land in West Pakistan. An enormous extension effort would be required to make the new technology known and accessible to these farmers. Their weak risk-bearing position, limited financial re— sources, lack of managerial experience, and skill restrict him in the acquisition and effective use of new inputs. In addition to the rising factor prices there are some other forces that operate against the small farmer in the modern scientific-commercial setting which must be over- come if he is not to be squeezed and finally liquidated. Experience of Taiwan suggests that agricultural production increased by 85 percent between 1950 and 1965 on farms that averaged between 1.0 and 1.5 hectares through the joint efforts of government and farmers.37 Similar experiences can be repeated in West Pakistan through 37U.S. Department of Agriculture, Taiwan's Agri- cultural Development, Its Relevance for Developing Countries Today, Foreign Agricultural Economic Report No. 39 (Washington, D.C.: Government Printing Office, April, 1968). m 1.. 104 large-scale efforts of the government to enable the small farmer to survive the economic and technological forces operating against him. The theory of fixed cash needs relates that sub- sistence farmers in poor countries operate on backward- bending supply curve of labor. 'If we assume labor hours as the only variable input, they will be prepared to put in extra hours of labor in order to attain a fixed real income and to compensate for generally rising prices. If we allow all other farm inputs to vary, the level of inten- sity on the small farm will be greater than the larger farm which is not subject to as much financial squeeze. Poli- cies aiming at attaining a critical economic size of land— holdings by pooling together small holdings and eliminating inefficient farmers to capitalize on scarce managerial talent seem advisable. Development of Improved Crop Varieties The extent to which an average West Pakistani farmer will be motivated to purchase fertilizers depends upon his subjective projection function and his probability distribution for the expected permanent income stream arising from various doses of fertilizer. With a given price structure for farm inputs, an individual farmer is likely to substitute the use of fertilizers among various crops depending upon their relative benefit-cost ratios. 105 The factors that tend to be discounted in the decision— making process of a typical West Pakistani farmer may be the relatively small ratio of capital reserves, the oppor- tunity cost of investible funds, and the uncertainty re- lating to outcomes of fertilizer use in the more distant future. With the emergence of new high—yielding varieties of Mexi-Pak wheat, Irri rice, and J-l maize, the improved production possibilities have tended to shift the farmer's profit function thereby leaving a significant margin for the farmer's expectations about risk and uncertainty. A striking feature of Mexican dwarf wheat is the short and stiff straw and the capability of converting large amounts of plant nutrients into a heavy load of grain without lodging. The chances of fertilizer use have greatly improved because of a favorable crop-response of 15-30 pounds for one pound of nutrient under commercial conditions as compared to 8 pounds of increased grain for each pound of N and P (nutrient basis). Top experi- 205 mental yield of Irri rice in West Pakistan has been ob- tained at 164 bushels per acre as compared to 30 bushels for average commercial yield of local varieties. Simi- larly, introduction of J-l, synthetic maize on a limited commercial basis gave a yield of 60-100 bushels per acre in the summer of 1966.38 38Hanson, West Pakistan Agricultural Growth. 106 A comparison of the response of rice to nitrogen in India and the United States by Robert Herdt and J. W. Mellor shows the contrast in the profitability of ferti- lizer under conditions in which a high‘yielding variety of rice has been used and under conditions in which it has not. Figure 3.11 shows fertilizer response functions derived from data from a large number of experiment station trials of various levels of nitrogen application on rice in the states of Texas and Arkansas in the United States and the states of Prisna and West Bengal in India. The figure shows a positive response to further applications of nitrogen at a much higher level of nitrogen application and rice yields in the United States as com- pared to India. One single factor accounting for higher yields in the United States is the development of varieties which are high-yielding, adapted to climate, resistant to diseases of the area, and acceptable equally to both farmers and consumers. Assuming 16.7 cents per pound of nitrogen applied in the United States and 22.8 cents per pound in India, the optimal level of application of nitrogen in the United States was three and one-half times as great as in India. The net profit from appli— cation of nitrogen was ten times as high in the United States as in India and the rate of return on total cost was on the order of four times as great. The figure shows that with no applied nitrogen, yields in the United States Pounds of Rice Per Acre 4200' 3800_ 3400— 3000- 2600— 2200— 1800-//// O 1400 107 West Bengal O‘Orissa 50 do 60 do 1bo 150 140 180 1b0 Pounds of Nitrogen Applies Per Acre Source: Robert W. Herdt and John W. Mellor, l‘The Con— trasting Response of Rice to Nitrogen; India and the United States," Journal of Farm Eco- nomics, XLV (February, 1964), 150-60. Figure 3.11. Production Functions for Four States in India and the United States. are about 50 percent higher than in India, whereas at optimal levels of nitrogen application in each country, yields in the Even assuming countries the relationships half times as United States are twice as high as in India. the same price relationships, in the two differences in the physical input-output alone call for approximately two and one- much nitrogen per acre as in India. 108 TABLE 3.11. Quantity of Nitrogen Applied, Net Profit, and Rate of Return at Optimal Levels of Nitrogen Application Using Local Prices of All States. Most State Profitable Net Profit Rate of Return Level of Per Acre on Total Cost Nitrogen (pounds) (dollars) (percent) Arkansas 122 62.19 305 Texas 124 44.79 217 Orissa 33 6.48 86 West Bengal 35 4.28 53 Source: Robert W. Herdt and John W. Mellor, “The Con— trasting Response of Rice to Nitrogen; India and the United States," Journal of Farm Economics, XLV (February, 1964), 150-60. Conclusions An examination of the system of indigenous ferti— lizer production indicated that the size of existing fertilizer plants in West Pakistan is too small to permit the utilization of economies of size and scale. In view of the present and anticipated high rate of growth in fertilizer demand, it would be desirable to locate large- Capacity fertilizer plants with low per unit cost of pro- duction. Their capacity should be so designed that they Can be utilized to meet the minimum fertilizer require— ment to the extent that the rate of capacity utilization cancels out the economies of size and scale. Growth in 109 I the demand for fertilizer would, however, lead to in— ‘ creased capacity utilization and reduced per unit cost of production over time. In order to reduce the uncertainty and variability in the magnitude of fertilizer imports, they must be scheduled well ahead of time before the next crop sowing season sets in. An evaluation of the complementary factors in- fluencing the demand for fertilizer showed that a greater supply of irrigation water, increased availability of supervised loans for fertilizer use, and improved terms of lending would considerably increase the possibilities of attaining higher levels of fertilizer use for the farmers. In addition, development of high yielding, fertilizer-responsive crop varieties would lead to im- proved crop production possibilities and increased relative profitability from fertilizer use under a favorable price environment. A restructuring of the prevailing system of land tenure in West Pakistan is needed to ensure better returns to both the landlord and tenant as well as to promote the level of input use. CHAPTER IV CHANNEL ORGANIZATION AND MARKET STRUCTURE Introduction The preceding chapter provided an analysis of the various economic and non-economic variables that tend to affect the market forces of fertilizer supply and demand in West Pakistan. It provided an analytical view of the two market forces as to the manner in which they react or interact with the fertilizer distribution system. The objectives of this chapter are to examine the process of fertilizer market channel evolution and its organization and to develop a conceptual framework for the analysis of the behavior of the existing fertilizer market channel. It is supposed to trace out the history of fertilizer distribution in West Pakistan and to propose a new organizational setup as an alternative to the exist— ing system of fertilizer distribution in West Pakistan. From a theoretical point of view, the process of ferti- lizer distribution essentially involves the process of transfer of ownership and creation of time and place utilities through the physical flow of fertilizers from the industrial producer to the farm-consumer end of the 110 111 the channel. An analysis of the channel structure would, therefore, involve the character of the link between ferti- lizer production and consumption as well as tracing out the movement of ownership through the fertilizer channel. A channel of distribution would, thus, be considered to comprise of a set of institutions which perform all the activities utilized to move a product and its title from production to consumption. Thus, the complexity or simplicity of a fertilizer distribution channel in West Pakistan would be partially related to the stage of develop- ment of the fertilizer market and partially to the impact of new technical knowledge on market organization. Simi- larly, the length of delivery time required to transfer a unit of fertilizer from supply point to the demand point will depend upon the extent of dispersion and size of farm— consuming units as well as the centralization of the market, the mode of fertilizer shipment as well as the final form of serviceable fertilizer. A vital link in the analysis of channel structure is, however, a de— scription of the process of fertilizer market channel evolution and its organization. The Organization of Fertilizer Market Channel The ownership and control channel for fertilizers has been characterized by a great degree of instability since the inception of fertilizer use in West Pakistan. 112 I Through the process of trial and error, the government of West Pakistan has changed the ownership of agencies and inter-agency distributive shares. A gradual transfer of ownership has taken place from public agencies assuming monopolistic rights for fertilizer distribution to semi- public and private agencies. The organizational changes in the distribution channel have, primarily, taken place to meet the growing demand for fertilizer over a wider and wider geographical area with its attendant problems of storage and transportation. The fertilizer distri— bution system must, therefore, evolve gradually from organizational simplicity towards complexity, if better service to the farmers is to be provided and fertilizer use is to be further expanded. So to say, the addition of new product lines and increasing service to the farmers is likely to lead to organizational complexity which is the direct consequence of fertilizer market channel evolution. Under the currently operating centralized market- ing system, sellers' relation to the farmers is divergent because of the concentration of fertilizer supply at few production points and wide dispersion of low—income farmer-consumers whose level of per capita fertilizer use is very low, whereas the relationship of farmers to fertilizer suppliers is supposedly convergent. A sequence of fertilizer distribution patterns over the last decade and a half in West Pakistan indicates that the ownership 113 in the fertilizer distribution system has changed from absolute monopoly by the government to a mix of public and semi-public distribution agencies. The organizational structure of the existing system of fertilizer distri- bution is illustrated by Figure 4.1. It indicates that the two major sources of fertilizer supply in West Pakistan are the imported fertilizers and indigenous fertilizer production. Whereas indigenous fertilizer production is under the almost complete or partial control of West Pakistan Industrial Development Corporation—-a semi- autonomous body--the responsibility for fertilizer imports rests with the West Pakistan Agricultural DevelOpment Cor- poration. In contrast to the continuous and stable supply of domestic fertilizers, fertilizer imports are subject to a considerable level of volatility. An important auxiliary variable that influences the magnitude of fertilizer supplies in a particular year is the avail- ability of foreign aid and allocation of foreign exchange for fertilizer imports. The Economic Affairs Division of the Ministry of Finance in Central Government determines the amount of foreign exchange to be allocated in con- sultation with the Agricultural Development Corporation. But foreign exchange being the most scarce commodity in Pakistan is subject to variations which may lead to fluctuations in the level and quantity of imported ferti- lizers that would be available which, in turn, may 114 Economic Affairs Division Indigenous Fertilizer Importer Fertilizer Supply Agricultural Development Resources West Pakistan Industrial (2) Corporation Development Corporation Semi-Autonomous Body Semi-Autonomous Body Planning & Development Department Fertilizer RSCC Review Committee Pakistan National Oil ESSO Dawood. ' ' Corporation District . Committee Wholesaler Wholesaler —___ wholesaler Wholesaler Cooperative Service Retailer Society Retailer Retailer Retailer Farmers Figure 4.1. Fertilizer Distribution Channel for Ownership and Control in West Pakistan. 115 introduce shocks to the distribution system. On the other hand, the seasonal nature of the demand for fertilizer is likely to affect the behavior of market participants who may have to build up higher inventories to smooth out the temporal variations in the demand. It is likely to in— crease the credit requirements of distribution agencies for financing the expansion of storage capacity and meet- ing operational storage costs. The production plans of farmers are likely to be affected by the non-availability of fertilizers involving significant losses in the form of crop failure or retardation of crops. From the organizational point of view, fertilizer market channel is currently organized around five public and semi-public distribution agencies each maintaining its own chain of whole-time as well as part-time whole- salers and retailers whose loyalties tend to switch from time to time. The instability in retailing business arises partly from the satisfying rather than maximizing behavior of market participants and the shifting priorities of distributors with regard to fertilizer quota allocation in case only limited supplies of fertilizer are available. In spite of.the fact that fertilizer market channel is composed of various distribution agencies, it does not depict the behavior of an aggregate channel composed of a number of unit channels organized around vertically coordinated fertilizer distribution agencies. Since the 116 I government as the director of economic activity determines the volume of fertilizer that would flow through the market channel during a particular year, it allocates inter-agency fertilizer distributive shares and installs new institutions as well as dissolves old ones. Thus, the pattern of channel configuration is more or less determined by the government rather than by the market competition. Apart from being the allocator of resources, the government plays the role of a regulator of market behavior, limits the extent of market competition by en- forcing a flat pricing system and fixed marketing margins for fertilizer. The sources of fertilizer supply tend to create a greater relative uncertainty for those distri- bution agencies which depend upon fertilizer imports than those which rely on indigenous fertilizer. In addition, while there exists a vertical flow of fertilizers through the fertilizer market channel, the currently operating organizational structure of the market channel does not provide for the flow of fertilizers from one distribution agency to the other, in case excesses or deficits of fertilizer occur among the distributing agencies beyond the annually fixed quota of fertilizer. Analysis of the Fertilizer Market Channel The concept of marketing in its widest sense is any activity which actualizes the potential relationship through exchange between the makers and users of economic 117 goods and services. An input marketing channel consisting of a vertical sequence of trading concerns is traditionally assumed to bridge the gap between the producer and the farmer-consumer. Thus, the vertical segments involving exchange mechanisms at various levels of transaction from the producer to the retailer and farm-buyer may well be classified into three economic markets. 1. First, the exchange mechanism between the manufacturers as a seller and wholesaler as a buyer. 2. A second market is the exchange mechanism between the wholesaler as a seller and retailer as a buyer. 3. Third, the exchange mechanism between the retailer as a seller and the farmer as a buyer. Due to the imposition of a comprehensive control on fertilizer prices by the government through a system of allotment and fertilizer quota allocation, the ex- change activity that takes place among these economic markets operates within the defined limits of price con- trol. As a measure of fertilizer policy, the imported as well as indigenously produced fertilizers are considered the property of provincial government and titles to ownership are transferred to the various semi-public and private distributing agencies at f.o.b. ex-factory prices for indigenous and c.i.f. Karachi for imported fertilizers. 118 Government finances the cost of fertilizer movement from the supply point to the places of delivery to the farmers, thereby maintaining fixed marketing margins for the distri- bution agencies, wholesalers, and retailers as well as fixed resale prices throughout West Pakistan. The broad policies of the distribution agencies are subject to stipulations from the government such as: l. Fertilizers are to be distributed to the growers of crops in keeping with the allocations made for each individual distributing agency. 2. Black marketing of fertilizer above the officially fixed resale price and over- charging of marketing margins by the market functionaries is legally not allowed. 3. Deliberate withholding or adulteration of fertilizer stocks is prohibited. Insofar as the operation of economic markets at various levels of the fertilizer channel is concerned, at the wholesale level the exchange mechanism takes place between the fertilizer producers and the various fertilizer distributing agencies. Fertilizers are allo- cated to the private distributors on the basis of the broad policy of the government, the plan objectives, and past performance of the fertilizer distributing agencies. Since fertilizers are required to be distributed on fixed 119 terms of sale and pricing practices, the problems of bargaining arise only relative to the volume of fertilizer to be allocated to a particular agency. In general, the amount of fertilizer that a particular agency gets is based on its "capacity to distribute,ll irrespective of its relative market position and the ability to maximize its revenues. Because of the spatial dispersion in the location of fertilizer plants and large variance in the size of plants horizontal competition among fertilizer producers is almost nonexistent. In contrast to the retail price, the f.o.b. mill price of fertilizer is, therefore, dictated by the production and cost schedules of the firms, their market power, and government price regulations. On the side of wholesale fertilizer distri- buting agencies, horizontal competition tends to exist in the expansion of their geographical coverage and entry into each other's territorial market shares. The possi- bilities of vertical conflict under the existing system of fixation of profit margins of wholesalers and retailers in monetary terms are greater because of the squeezing marketing margins and declining capacity of wholesalers and retailers to sell fertilizer at the officially fixed retail price with a general rise in the price level. Under the current system of distribution WPADC allows for four months free credit to private distributors from the date fertilizer is delivered to them at the Karachi 120 port. The distributors, in turn, rely upon retail agents for their cash requirements while keeping a small amount of revolving fund. The existing tendency of wholesale distributors does not encourage them to make investments for the improvement of fertilizer distribution system due to the fact that limited marketing margins are only ade- quate enough to recover the distributor's costs and to maintain the existing facilities while yielding barely enough returns to remain in business at the current level. The operation of economic market at the second vertical segment of the fertilizer transactions is deter— mined by the exchange mechanism between wholesale distri- butors and retailers which operates on a tacit agreement based on terms of sale and fair business practices. Fertilizer stocks are directly shipped to whole—time as well as part-time dealers known as commission agents operating in various mandi towns all over West Pakistan. The local commodity markets are usually found at tehsil level and the commission agents who serve as brokers cum wholesalers for the sale of wheat, rice, cotton, and other agricultural raw materials also deal in fertilizers serv- ing the entire region that a mandi encompasses. The local commodity markets that serve as a focal point for the col- lection of farm commodities and distribution of fertilizers are connected with villages through a network of low— capacity muddy roads. The means of transport are very primitive and fertilizer must be carried on ox-cart, 121 animal backs, and also on human backs. This leads to a considerable market imperfection due to the bottlenecks in the movement of fertilizer from one mandi to the other. As a matter of distribution policy, fertilizer dealers are required to put up a cash deposit with the distributor in varying amounts depending on the wholesaler with whom they are dealing and to pay cash for railcars of fertilizer prior to their obtaining possession. This limits the quantity of material that an agent can stock at a time and also draws heavily upon the low capital position of retailers who must sell fertilizers for cash if he is to remain liquid. The exchange mechanism operates in a con- siderably imperfect environment. Lack of perfect knowl- edge, geographical dispersion of fertilizer retailers, and strict terms of sale between the wholesalers and retailers continue to make the market imperfect. The exchange mechanism between the retailers and farm-buyers is non-competitive insofar as the retail prices are publicly fixed. In some cases, retailers take ad- vantage of their position as a spatial monopolist and indulge in overcharging. The individual size of the retailer is small, because of the atomistic structure of the market at the farm level and low level of fertilizer use per acre. Due to the existence of non—competitive environment farm-buyers get less in terms of marketing services like soil testing facilities and mixed ferti- lizers required by soil type. There is usually a limited 122 product choice, with almost no product differentiation and grading of fertilizers. Since there exists no such marketing service as the home delivery of fertilizers, the farmer has to bear the high cost of local delivery in terms of time and money. Thus, in spite of a ferti- lizer subsidy, and fixed retail price, the real cost per bag of fertilizer to the farmer tends to remain high. Since a fundamental goal of the fertilizer distri- bution system is to attain efficiency, it may be defined as the maximization of output-input ratio. In other words, fertilizer marketing efficiency is the minimum ratio of prace spread between the ex—factory price of fertilizer and retail price at the farm level that can be attained; in addition to the extent of marketing ser- vices provided in terms of faster delivery, product choice, mixed fertilizers, and market to farm transportation facilities. An increase in marketing may, therefore, lead to lower per unit costs of input via market eXpansion of fertilizer through greater consumer convenience. Criteria for Channel Performance The concept of channel performance for the evalu- ation of fertilizer market channel under review, is essentially normative and is concerned with the overall output of utility from the system itself. Channel per- formance is a dynamic concept insofar as it permits the goals of the society to shift over time. Thus, in a 123 dynamic society involving changing values, a normative evaluation of the channel performance may be valid for only a particular period of time. In general, a set of criteria can be laid out for the desired directions in which fertilizer market channel evolution must take place, such as: (l) progressiveness, (2) channel efficiency, and (3) channel coordination. Progressiveness The system of fertilizer channel organization would be termed as progressive if it is flexible enough to adjust to changing market conditions. It must be able to absorb new technical knowledge and generate organizational and product innovations. In order to keep abreast with market expansion, farmers' needs and general social wel- fare, it must possess organizational flexibility and ade- quately trained management personnel to give direction to the fertilizer distribution policies and to maintain economic viability. The existing channel organization which consists of public and semi-public distribution agencies does not have the economic incentive, profit motivation, and resources to engage in technological innovation and marketing research. This may be due to the: l. Smaller size of distribution agencies and lack of availability of basic research 124 concerning the behavior of input markets in underdeveloped countries. 2. Lack of adequately trained personnel. 3. Lack of firms' adequate internal resources which may be invested for internal expansion of the firm. 4. Lack of public or private institutions to provide credit to the fertilizer distributing agencies for the pursuance of this research. It may, therefore, be recommended that the govern— ment should help promote the conduct of such research through close cooperation of universities, research insti- tutions, and fertilizer distributing agencies. The pro— gressiveness of market channel is closely related to the channel efficiency insofar as the new technical change aims at maximizing the output-input ratio. Channel Efficiengy How well the fertilizer distribution system of West Pakistan is organized depends to a large extent upon the operational efficiency of the fertilizer market channel. The specific performance goals concerning channel efficiency may thus be formulated around the following conditions. 1. Are production and channel costs being re— duced and if so how are the benefits distri- buted and used to further economic growth 125 objectives with, of course, the exception of short-run increases in costs in order to obtain long—run profits? 2. Does the existing system of channel organi- zation provide for dynamic interaction between fertilizer producers and farmers in order to create and fulfill demands for new and better fertilizer products? 3. Does the fertilizer market channel function so as to transmit effective farmer demand to fertilizer producers and facilitate production achievements? This criterion aims at the maximization of output- input ratio by providing maximum marketing services at the least cost and streamlining the process of fertilizer distribution by eliminating inefficiencies in pricing, volume handling, and management organization. Its main objective is to evaluate the extent of value added by the marketing process to the product handled through the fertilizer channel. Since the transfer of goods and ser— vices from fertilizer producers to farmers involves the process of creation of time and place utilities, the marketing Channel would be efficient if the product handled undergoes major transformations in terms of processing, packaging, grading, and standardization at the least possible cost. The existing system of channel organization may be considered to be the least productive 126 insofar as the stages of productive activity and product transformation are concerned. The fertilizer market is so small and the number of distributing agencies so large that none of them enjoys a larger market share in order to attain the required level of channel efficiency. In short, a reorganization of the fertilizer marketing channel involving vertically integrated and larger distribution firms would, however, lead to the internalization of external economies of various marketing processes like grading and bagging of bulk fertilizer, etc. Channel Coordination Channel coordination is the mechanism whereby fertilizer producers and farmers are supposed to interact to exchange relevant market information, to establish conditions of exchange, and to accomplish the physical transfer of fertilizer. The process of channel coordi- nation may, however, be accomplished through a system of flexible prices coordinating an immense number of inde- pendent actions by the freer adjustment of supply and demand. The extent to which channel coordination is effective in the attainment of indicated objectives may well be assessed from the costs of coordination and marketing progressiveness, product variety, and quality. Improvements in the channel performance may also be exacted through external channel coordination which will help reduce the overall level of channel risk and 127 uncertainty through improved storage and market infor- mation and price stabilization programs. Impact of Fertilizer Imports on the Distribution System The problem of making fertilizers available at the required time and place constitutes a major challenge to the fertiliZer distribution system of West Pakistan. Irregularity and uncertainty in the availability of im- ported fertilizer, the most volatile component of the aggregate fertilizer supply, can give shocks to the distribution system resulting in a great variability of prices, frustration of farmers' plans regarding culti— vation with a considerable impact on the level of farm income. It is, however, likely to give a new direction to the fertilizer market which may function spasmodically or exhibit such an unstable behavior as to be constantly on the verge of explosion and discontinuance. A stable behavior pattern of the fertilizer market could, however, be reflected only in regular and well-timed supply of fertilizers through a smoothly functioning distribution system. A proper timing of fertilizer imports would re- quire an advance assessment of the fertilizer needs during a particular year, the source of fertilizer im- ports and the required foreign exchange. Under the principle of postponement—speculation, it Will be 128 desirable to build up inventories at various levels of distribution system in order to effect a faster delivery and to overcome the delays arising from the inefficiency of the transportation system and paucity of access roads from railheads to villages. The capital as well as oper- ating costs of maintaining a desirable level of inventory to overcome temporal delay may be much less than the private and social costs arising from the non-availability of fertilizer. Since there exists a pseudo—complementarity be- tween temporal and spatial availability of fertilizer, the costs of late fertilizer delivery arising from an inefficient railway system are likely to more than offset the gains arising from greater availability of fertilizers. Under the existing system, longer delivery time is required for spatial distribution of fertilizer due to the fact that a limited railway handling capacity does not permit larger fertilizer shipments and the turn-around period per rail- car is supposed to be long because of the preference of passenger trains over goods trains. On the contrary, trucking costs show a progessive rise with the increase in ton-mileage and cannot effectively compete with the per unit handling costs of railway beyond fifty miles. Thus the current need is either to build up an adequate inventory system or to regulate the fluctuating supplies of imported fertilizers in order to channel the stock of 129 fertilizers available through a fixed railway handling capacity. Alternatively, worthwhile solutions will have to be found for the improvement of the efficiency of rail- way handling capacity which must be flexible enough for accommodating a variable volume of imported fertilizers. The problem of handling and affecting a timely delivery of imported fertilizers assumes further complications because of the high up—country costs of fertilizer shipment from the port of Karachi which tend to rise proportionately with the increase in distance. On the other hand, in- digenous fertilizer production points have both wide dispersion and locational advantage insofar as they enjoy lower per unit costs of fertilizer transportation to the points of consumption as compared to imported fertilizers. Since the port of Karachi remains completely isolated from the major fertilizer consuming regions of West Pakistan, the problems of channelling the flow of fertilizers to the remote regions of Peshawar division through an already overburdened system of transportation take on extra come plexity. The goods trains are subject to numerous stop- pages and unnecessary delays involving an average turn- around period of twenty days including losses in terms of pilferage, late delivery, and backhualing costs. The cost per ton—mile for the up—country movement of imported ferti- lizer from the port of Karachi tends to be high as come pared to the indigenous fertilizers due to the backhauling 130 costs that arise from a higher ratio of imported to exportable tonnage. On the contrary, an internal system of fertilizer distribution is likely to avoid the costs of backhauling insofar as the costs of inter- and intra- regional commodity movement cancel out. A theoretical illustration of the relationship between delivery time and average costs to the marketing system is presented in Figure 4.2. It is assumed, however, that slower delivery permits larger stocks at intermediate points, whereas fast delivery of direct shipments from fertilizer producers to farmers is likely to be very ex- pensive due to the fact that the amount of risk and channel costs for this mode of operation are very high. A D . Direct Average G C . OStS I Indirect \/ m \ H \ "5 x H H \ 8 4E I l | F I [F 0 B Delivery Time hours Figure 4.2. Direct and Indirect Methods of Fertilizer Delivery. 131 In Figure 4.2, the costs of fertilizer delivery include the transportation, storage, and handling costs which are represented in dollars on the vertical axis. The locus of costs incurred by the method of direct ferti- lizer shipment are represented by DCE which is negatively declining and shows decreasing costs for an increasing delivery time due to the fact that slower and less expen- sive means of transport could be substituted to move goods over a longer period of time. The curve GCI indicates an inverse relationship between the time of delivery and average costs to the marketing system for the indirect method of fertilizer delivery. The point of intersection C indicates that a fertilizer supplier would prefer the indirect mode of shipment at less per unit cost for a delivery time which is longer than OF. A speculative inventory can, however, be located at point C where the costs of keeping an inventory are far less than the net savings that may accrue to both the buyer and seller from postponements. Thus an optimum mode of shipment would be that which aims at minimizing the average costs to the marketing system keeping in view a fixed delivery time. Fertilizer Distribution System of West Pakistan in Retrospect An examination of the history of fertilizer distribution in West Pakistan indicates that fertilizer distribution channel has undergone drastic transformation 132 since the inception of fertilizer use. Whereas the sources of fertilizer supply have shifted from entire dependence on imports in 1952-53 to a position of partial reliance on indigenous production, the fertilizer distri- bution structure has experienced the dissolution of old inadequate unit market channel to be replaced by a new multi—unit fertilizer market channel. The process of this transformation in the fertilizer channel configur- ation will be outlined later. The major reasons for this change seem to be the rapid rate of growth in the demand for fertilizer and the instituting of specialized in place of non-specialized distributing agencies in order to cope with the growing marketing radius of fertilizers and its attendant problems of warehousing and transpor- tation. These transformations may also be attributed to the steady rise of per acre fertilizer application rates and the higher annual rate of turn-over of fertilizer. Initially, fertilizer distribution was the sole responsibility of the Department of Agriculture which used an hierarchy of extension officers as a sales force and. an innovation diffusion team. The Agricultural Depart- ment showed significant progress in demonstrating the use of fertilizer to farmers and in developing "conscious" and an "unsatisfied sub-conscious“ demand for fertilizer. The rationale was that only the public sector supported by inadequate funds could bear the high costs of market 133 ‘ develOpment and sales promotion. The effectiveness of extension organization proved itself in laying out ferti- lizer demonstration plots for the farmers through readily available fertilizers. In spite of the high rate of anticipated profitability and a rapidly rising effective demand for fertilizers, there were cases of occasional emergence of black market prices and shortages in the spatial supply of fertilizers. The reasons that can be put forth are the lack of profit motivation for the extension organization and lack of incentives for the extension workers, the bureaucratic inefficiency and shortage of personnel in the already overburdened Depart- ment of Agriculture. The major bottleneck in the sales organization of the Department of Agriculture was the lack of progressiveness to keep up with the growing demand for fertilizer and expanding geographical coverage, resulting in a declining ratio of sales personnel to the quantity of fertilizers sold,in addition to,the already low ratio of one extension worker for 1500 farm families. In evaluation of the performance of the Depart- ment of Agriculture, Food, and Agriculture Commission noted, Department of Agriculture reflects the patchwork way in which all the handicaps of a minor pro- vincial service starved of funds and low in public esteem are represented. Its original purpose was that of a very attenuated advisory service con- fined mostly to demonstration to rural leaders and larger landowners, . . . with totally inadequate personnel in the front line, it has, nevertheless, 134 Ministry of Agriculture Director of Agriculture Lahore, Peshawar, Hyderabad 1 Deputy Director of Agriculture I Extra Assistant Director of Agriculture I Agricultural Assistant] I Field Assistant Total Number of Villages: 37,959 Total Number of Farms: 4,859,983 Total Number of Cultivators: 9,186,000 Figure 4.3. Organizational Chart of the Department of Agriculture. 135 been the natural first medium to furn for handling the increasingly complicated claims of development. It has been called upon to expand extension and demonstration services, to supply fertilizers, to open and manage new seed farms, and to develop the completely new subject of plant protection, while the achievement is notable, it has inevitably fallen short of the needs. Organizational inefficiencies emerged from the structure of the Department of Agriculture which was like an inverted cone, top-heavy with desk—bound administrators and supported on a small base of field workers having a fertilizer supply line combined into a loose organization which had neither the cohesion nor the desire to make the fertilizer distribution program effective. On the other hand, as various types of fertilizers began to be added to the product line, the number of distribution centers began to increase and indigenous production of fertilizers started supplementing the supply of fertilizers, the need for a new distribution agency with its own chain of whole- salers and retailers was felt. It was not until 1960 that the Food and Agriculture Commission recommended the formation of the Agricultural Development Corporation in West Pakistan with the sole responsibility of undertaking developmental activity in the new project areas being brought under cultivation and supplying farm inputs to farmers in the project and 9Government of Pakistan, Report of the Food and Agriculture Commission, Manager of Publications, 1960, pp. 153-54. 136 non-project areas. The corporation structure consists of supply and field wings such that the operational work of each wing is organized under a general manager. The general manager of the supply wing has under him five divisions, each being headed by a director and two sections for planning and administration each. The pro- curement division has the sole responsibility for the procurement of supplies other than seeds, including fertilizers, plant protection, materials and equipment, and agricultural implements, etc. This involves the making of arrangements for the local manufacture of equipment and the import of necessary raw materials. A major function which this division performs is the pro- curement of imported fertilizers and distributing them to farmers in designated areas through a sequence of wholesalers and retailers. The West Pakistan Agricultural Development Cor- poration (WPADC), a semi-autonomous body, emerged as a competent organization to handle the import of ferti- lizers. Among other things, its functions included the determination of fertilizer import requirements of West Pakistan to meet the in-country demands for ferti- lizer, to schedule tenders, and invite bids in accordance with the financial means available. After having made the awards for fertilizer shipment to the port of Karachi, WPADC was responsible for giving notices to the private II I: 137 ucwmd coda: uumum >u0mfl>uwmsm houfluuo Inca: uuwnoum ||||||lll||lllll W _ 1 :Oauowm Hc04m4>ao :Ome>flo m>wueuu 1 1 coauomm mcqccmae1 uumfloum Imacwfip< 1 10:4cwmufi uOuowuqn , noboouwor hauumuqo 1 Anna: ceauwuu 1coflmu>ue -maeeeu< 16:”: nauumc 1 noduwaam>u1 mo mmnm:0u:H1 V umvm:¢z 1 uouuwufio >hmuwnuwm 1 Hmuwcwu .wuonnq 1:0flma>ao roummmvm1 uOuUwuun :mvmflxmm 0mm: mo ounzu Hacowumecmouo .v.v unawah cowuumm 1 cofluomm m>numuu , mzwcaauh 1 comma>ao ocuHNOCAmcm1 Imacweu< 1 a mcaccmAm1 1 . end pooh way we unommm .:Mumaxnm mo ucoiduo>oo . muwc: :oAvmnumo I11 wwmum mecmxuoz, 1 mumum . thmA>uwuzm 1 mucuuouwo uo vMMOm can :mfiuaunu 1 _ . ”wUHSOm unmuczouu< 1 uomwn llllllllllllllJ wou>u< 1 uOmw>u0m=m _ Amoucnowa vcd . . m>quuuumdcch< manomEH _ umuflaauuwm 1 noufiwwo now _ >Hmdsm canamcoummm 1uufluumao cadmfl>qo uwumcmz_ Hotcammm . Shah _ Illlllll 1 1:04mu>ua , ucoE0>oz A:o«mfl>«o AGmeA>wQ 1 11:0«m«>wo 1 V0 90dwo1 acmEUusuoum1 mummy 1 1 mauum. uouuwuqa Heuowuqn nouumuw01 youuouun 1 I1II 1 1 _ 1mca: samunmc 1uwmmzd: Hmumcoo 138 fertilizer distributors with regard to the availability of fertilizers at the port. It was responsible for clear- ing the shipment, unloading it, and arranging for railroad cars on the basis of its own scale of priority. After the fertilizers were discharged from the vessel at Karachi and loaded into railcars the problem of in-country move- ment rested with the Rural Supply Credit Corporation (RSCC) which through its own chain of 2000 cooperative service societies as selling agents, distributed ferti- lizers at the farm level on credit basis. This arrange— ment between WPADC and RSCC was discontinued at the end of June, 1963, as the RSCC was unable to collect outstand— ing debts of the cooperative societies. For the next eighteen months to July, 1965, fertilizer distribution was divided among WPIDC, WPADC, and RSCC. The allocation to the West Pakistan Industrial Development Corporation (WPIDC) of the quantity of fertilizer to be distributed was to the extent of 50 percent of the indigenous ferti- lizers and 25 percent of the imported fertilizers for distribution through private stockists. WPADC was allo- cated 50 percent of the imported fertilizers and 25 percent of the locally produced fertilizers for distri- bution among the farmers. The remaining 25 percent of the local production and 25 percent of imports were to be distributed by RSCC to some 2000 cooperative service societies. The rationale underlying the allotment of 139 I percentage shares among the three agencies for fertilizer distribution among the three agencies so that fertilizers could be brought within the effective reach of the farmer. A greater proportion of indigenous fertilizers was alloted to WPIDC which was the only semi—autonomous body responsi- ble for the local production of fertilizers. Simiarly, WPADC received a greater share of imported fertilizers because of its major responsibility for handling the import of fertilizers. WPADC also came to establish a long chain of retail agents requiring a token cash deposit of $42. In July, 1965 the system of inter-agency allo- cation of distributive shares was again changed and 75 percent of the total supply was allotted to RSCC for distri— bution through the various cooperative societies and all sales by WPIDC and WPADC through private stocklists were terminated. WPADC was allotted 25 percent of the total for its use in project areas and for the promotion of im— proved seed cultivation throughout West Pakistan. A major change in the fertilizer distribution policy of WPADC was affected in August, 1967 to streamline the distribution system and to associate the private sector. Under the proposed fertilizer distribution policy, fertilizer was not to be distributed at the retail level by WPADC, but was to be sold on a wholesale basis to its commission agents who were to sell it in retail to the farming community. In contrast to the previous policy 140 under which only 25 percent of the imported fertilizers were to be sold by the RSCC, the WPADC came to have an exclusive right on the handling of imported fertilizers. The wholesale operation was started through 211 wholesale depots in Peshawar, Sargodha, Lahore, Multan, Sukkur, and Hyderabad regions which were to supply fertilizers to 2400 commission agents having dealing connections throughout West Pakistan. Whereas each commission agent was bound to lift at least 400 bags of fertilizer from wholesale depots and in order to enable the commission agents to cover the expenses to be incurred by them for transport- ing the supplies from the corporation depots to their own premises, a surcharge of 21 cents per bag of urea and triple superphosphate and 12 cents per bag of ammonium sulphate and nitrate was allowed for. The failure of the WPADC system of distribution through private stockists indicates that their principal weakness was their inability to provide fertilizers in the right place and at the required time. Private stock- ists were reluctant to carry significant quantities of fertilizer in advance of farmer demand, because of the deliberate practice of obtaining higher prices from farmers during periods of peak demand. Some of the loopholes of the system were lack of supply depots to backstop the private dealers, a limited number of commission agents who could not ensure the availability of fertilizers in 141 most of the mandi towns; and lack of efficient and enter— prising dealers with a sufficient financial resource base who could carry adequate inventories to permit cash and carry sales to farmers. A major factor operating as a disincentive to the private dealer is the low-profit margins or fixed incidentals determined by the government through a system of comprehensive control of fertilizer prices. At current prices the profit margins on the sale of urea amount to 9 percent in West Pakistan as against 11 percent in East Pakistan; and sometimes dealers have to bear godown rent and some other charges out of this profit margin. It would, however, be well—advised to increase the profit margin from 20 to 25 percent of all fertilizer sales. Its net effect would be to increase the rate of return to investment in retailing business and thus to attract more capital, talent, and better marketing service into it. Under the current system of fertilizer distri- bution involving the participation of private sector, WPADC is allowing private distributors four months free credit from the date that fertilizer is delivered to them at Karachi. Distributors, on the other hand, demand from agents, either a deposit prior to shipment and/or full payment prior to the cars being released to the agent at the up-country railroad heading. It has done an admirable job of building up a distribution system that has effectively moved the fertilizer products to the 142 farmer and has stimulated increased fertilizer consumption. The success of WPADC in increasing fertilizer consumption has made it possible to create an environment that now allows the private sector to enter fertilizer manufacturing, marketing, and distribution on a profitable basis. The cooperative organization constitutes a vital link in the system of fertilizer distribution in West Pakistan. Whereas its functions include the supply of fertilizer and other farm inputs to farmer—members, it generates free rider effect for the non—members, except for a few privileges which can be enjoyed by the coopera- tive members only. Since it procures fertilizer and other farm inputs at the officially prescribed price and supplies them to the farmers at the least possible cost, it repre- sents a symbol of backward integration in the hierarchical organization which has a built—in credit supply line to meet the cash requirements of farmers. On the other hand, as a non-profit organization it seems to lack the initi— ative and drive of a profit-motivated private enterprise and an efficient management that could handle the growing volume of fertilizers. Due to the high private costs and lower private returns that accrue from the fertilizer education of the illiterate farmers, it lacks a solid financial base to bear the costs of mounting an adequate propaganda effort and to provide auxiliary marketing services which are the sine qua non of an efficient marketing system. 143 It was with the transfer of fertilizer distri- bution functions from the Department of Agriculture to WPADC in 1960-61 that a major void in the distribution system of fertilizers was found. Whereas WPADC could adequately perform the functions of procurement, it lacked a Viable institutional framework to channel the flow of fertilizers to farmers. Since the Cooperative Department which had the sole responsibility of extending credit to the farmers through a chain of cooperative credit societies throughout West Pakistan, it came to assume an additional responsibility of supplying fertilizers and other farm inputs to farmers. Until mid—1963, the only agent for fertilizer distribution in West Pakistan was the Rural Supply Credit Corporation (RSCC) which utilized its nearly 2000 cooperative societies as selling agents on credit basis. This was discontinued at the end of June, 1963, one of the reasons being that RSCC was unable to collect outstanding debts of the cooperative service societies. Furthermore, the organizational structure of cooperatives in West Pakistan was primarily meant to meet the credit needs of farmers and an additional function of farm input supply complicated the managerial functions which re— sulted in the accumulation of fertilizer stocks at various levels of the distribution system and also hampered the smooth flow of sales revenues. In addition, RSCC did not have the flexibility adequate to handle a larger volume of fertilizers so as to meet the requirements of a rapid 144 I rate of fertilizer offtake at the farm level. The volume of fertilizers available for distribution was so divided among the three agencies (referred to above) that RSCC got a quota of 25 percent of local production and 25 percent of imports. The cause of this reorganization in the distribution system was the inability of supply to keep pace with demand and emergence of black market prices from time to time. In July, 1965, the system of fertilizer distri- bution was again reshuffled and RSCC was allotted 75 percent of the total available supply of fertilizers to be distributed through its cooperative service societies. This reallocation of fertilizers was brought about as a temporary arrangement to curtail some of the existing black market practices in fertilizer sales. Subsequent changes in fertilizer distribution brought about a change in the process of fertilizer allocation between WPADC and RSCC on a fifty-fifty basis. After 1967, the supply of fertilizer has been handed over partly to the private sector as given in Table 4.1. The structure of the Rural Supply Credit Corpor- ation is such that it links the District Committees through service societies to Union Councils which constitute the basic distributive unit for fertilizers. Fertilizers which are available for distribution constitute 50 percent of the indigenous production and pass through the ferti- lizer flow channel as illustrated in Figure 4.5. The 145 TABLE 4.1. Inter-Agency Allocation of Fertilizers. Fertilizer Distribution Rights Nature of with Various Agencies Fertilizer PNO* Esso* Jaffersons Dawood ADC (percentage) Imported Fertilizers Allocative Share 28 18 18 18 18 RSCC PNO Indigenous Fertilizers Allocative Shares 50 50 *PNO = Pakistan National Oil; Esso = American Oil Company. Source: Government of West Pakistan, Planning and Development Department, Lahore. Provincial Allocation Board distributes the available supplies among three regions of Lahore, Hyderabad, and Peshawar which again passes on to the District Committees constituted by deputy commissioners, assistant registrar of local cooperative societies, and representatives of the Department of Agriculture and basic democracies. The list of eligible cooperative service societies is usually prepared by the assistant registrar of cooperative societies. This places him in the position of deter— mining who receives fertilizer and cooperative service 146 Rural Supply Credit Corporation Provincial Allocation Board Regional Allocations District Committee Cooperative Service Society Member Non-Member Farmers Farmers Figure 4.5. Flow of Fertilizer Through the Distributive Outlets of Rural Supply Credit Corporation. .- - firm-7" 147 societies with outstanding debts are seldom declared eligible. At present, there are 3,218 union councils40 in West Pakistan within which 2,570 cooperative service societies have been formed with a total membership of 91,387. Some 1,200 societies of various types, i.e., service, credit, development, etc., are reported to have been active in handling fertilizer since July, 1965. The societies sell fertilizers to non-members as well as members, but the extent to which this is done has not been quantified. According to the Bureau of Statistics, 2,176 union councils in West Pakistan are located pre- dominantly in irrigated areas where the intensity of fertilizer demand is relatively high. Even under the general assumption that all of the 1,200 societies re- ferred to above are within the irrigated areas, this would be only one fertilizer outlet for two union councils. This is grossly inadequate when it is looked upon as the principal source of making fertilizer available to the farmers at their doorstep. One of the principal weak- nesses of this system is that union council being basi- cally an elected body involving a variety of social, economic, and political objectives, its selection as a 40Union councils are basically a political unit which also help perform such public-supported programs which are useful for the community. 148 basic distributive unit is based on administrative rather than functional considerations. The hierarchical struc- ture of cooperative distribution system places immense demands on the technical competence of managers of cooper- ative service societies and secretaries of union councils most of whom tend to be unqualified, half—educated white collar workers. The Rural Supply Credit Corporation requires no cash deposit from the cooperative service societies. They are, however, required to send cash payment with fertilizer orders and pay past debts which may or may not equal the amount of fertilizer sales. Since advance order placement limits the quantity of fertilizer to the number of assured buyers and with almost no revolving inventory of fertilizers at the basic distributive units, the magnitude of ferti- lizer sales is likely to remain below the desirable limit. Whereas the cooperative members have the benefit of ferti- lizer sales on credit, the non—members must pay cash for the amount of purchase or seek credit from non—cooperative sources. Bottlenecks in the system of fertilizer distri- bution through RSCC occur when farmers fail to follow prescribed procedures. If farmers form cooperative societies and deposit the required share capital in the cooperative banks then the banks will assume the responsi- bility of advancing fertilizer credit and the system of recovery of sales revenues would work smoothly. Thus, it 149 I Rural Supply Credit Corporation J Central Cooperative Bank \ 1 Resident Representative of WPIDC Local Cooperative Bank \ Liaison Officer RSCC at Factory Cooperative Service Society —< A o 1’. w '0 2} m Union Council a 0 5 a s Member Non-Member Farmers Farmers Figure 4.6. Flow of Sales Revenues and Advance Order Placement. 150 would require an active participation of the farming community in order to obtain the services of a strong cooperative distribution system. It may be asserted that the cooperative input supply system has proved to be a real asset to the farming community by bringing the modern farm inputs within the easy reach of participating members. In addition, it has a real social value in breaking the traditional inertia of farmers and provoking their interest in using new scientific knowledge for the improvement of their farming conditions. It would, therefore, be desirable that: l. The additional services offered by the cooperative societies with fertilizer sales to farmer-members must be increased and terms and conditions of entry for the non-members be made easier. 2. Instead of the practice of equitable distri— bution of dividend, it may be calculated annually in accordance with the society. 3. No initial share capital may be demanded from non-members except for a moderate membership fee. 4. Share capital may be accumulated gradually from the dividend due to each member. Dividend or part of it should only be 151 I actually paid to the member when a certain percentage of his share capital has been paid up. 5. The societies be entitled to pay quantity allowance on individual orders. It may, however, be pointed out that the procedure of allocation from top to down does not give adequate con— sideration to actual farmer's demand and their willingness to purchase. Rather, prior years crop acreage figures are used and multiplied by the number of bags per acre recom— mended for various crops. It will, therefore, be desirable that the procedure of demand assessment be revised and three-fourths of the allotments that are made to coopera- tives should be made on an annual basis and that the re- maining 25 percent should be used for seasonal adjustments. Also, the allotment should be designed for a continuous delivery throughout the year so that orders could be placed in advance of the planting season of each crop. The procedure for ordering fertilizers is unneces- sarily long, complicated, and time—consuming. The actual order passes through seven offices and this procedure requires at least two months for processing of orders and delivery of fertilizer. Since cash payment is required upon placement of the order, the farmer's cash is tied up for this period of time, unless of course, he is a member of a society with credit arrangement. The shortage of railroad cars is often cited as the cause for delay in 152 delivery. Orders for fertilizer are placed on a quarterly basis, but due to the delays arising from the procedure of order placement and inefficiency of transport, it is often two months after the beginning of the quarter before the first shipments begin to arrive. In the event that total quarterly allotments are not delivered, no carryover of the allotment to the next quarter is permitted. Because of the complicated process through which the sales revenues flow, part of the big dues get swallowed up by the inertia of the remittance system in the form of malpractice or mismanagement of accounts. It is claimed that cooperative banks delay the transfers to capitalize on their own transactions. The process of transmission of sales proceeds can, however, be improved by giving option to the fertilizer suppliers in each instance to have the sales proceeds transmitted either through the cooperative banks or through postal money order or have them trans— ferred through the private banks if the cooperative banks fail to remit promptly. The flow diagram indicates the process through which an order placed by the member and non-member farmers passes through the cooperative service societies to local cooperative bank, central cooperative bank, and RSCC to resident representatives of WPIDC and forwarded to liaison officer of RSCC at WPIDC fertilizer factory. 153 In order to ensure a proper handling of accounts, it would be desirable to replace the present system of accounting by a clear—cut double-entry accounting system and with a streamlined standard set of ledger accounts. Facilities for training the needed personnel can, however, be provided if the substitution of the new accounting system for the old single—entry system is worth the cost. Measures aiming at centralized bookkeeping may be advo- cated since: (1) it would lessen the demand for highly qualified local management, and (2) it would facilitate the compilation of data and turn them into a valuable instrument for planning. Available evidence indicates that the local c00perative service societies do not maintain a proper record of fertilizer sales, and rate of stocking and an accurate assessment of the demand for fertilizer would, therefore, be difficult. In addition, the primary evalu- ation of demand requires a certain managerial maturity; the local service societies will thus not be able to form a clear idea about the actual demand and its fluctuations. In this case it is assured that at the equilibrium level supply is equal to demand at the officially prescribed price which remains almost fixed during the whole year. Thus an indent system carried out by RSCC supervisors could not be expected to function very well, especially when the local people notice that their estimates are disregarded. To make the indent system function properly, 154 two elements are necessary: (1) thorough local knowledge of the market and its seasonal fluctuations, and (2) prompt and accurate communication. In general, the formation of cooperative service societies has just added to the responsibilities of the field staff of the cooperative department without any com- pensation in the form of specialized training, additional staff, and better transport facilities. In order to improve the information processes, opening up of inter- society flow of fertilizers and as a step towards hori- zontal integration, the flow of communications through various administrative bodies should be made not only vertically, but also horizontally. In addition, the cooperatives must be encouraged to streamline the system of fertilizer distribution with a view to: (I) maintain- ing low handling costs, (2) to permit timely delivery to farmers, and (3) to ensure adequate geographical distribution of sales outlets. It would, therefore, be desirable if a semi-annual evaluation of these factors were made as a criteria for determining adjustments in the allocation of total fertilizer supply to the c00per— ative system. Originally fertilizer was sold through the Agri- cultural Development Corporation which, in turn, appointed RSCC as its sole agent thus, in fact, providing the t cooperative sector with a monopoly on fertilizer. For a number of reasons, the system was abandoned in January, 155 1964 and the WPIDC started contemplating the appointment of their own agents in about four hundred towns and mandi towns. The imported fertilizer still remained with WPADC and RSCC and the structure of distribution was accordingly split into parallel lines, one of them being WPIDC in- volving the ownership rights of indigenous production and establishing a chain of wholesalers and retailers for fertilizer distribution. WPIDC demanded a cash security of Rs 5000 per retailer while distributing fertilizers through 500 private stockists in over two-thirds of the districts in West Pakistan. Further, improvements could be expected as additional competition was brought about by increasing the number of private stockists. The appoint- ment by WPIDC of private agents really was a reintro- duction of the system in force before the cooperatives entered the stage with the exception that at that time wholesale distribution and appointment of agents was the responsibility of the Agricultural Department. That the fertilizer distribution system did not prove a success under the erstwhile organizational struc- ture can be evaluated from the following statement: Fertilizer was often costly to the cultivator despite the subsidy, because the distribution system was in- efficient. Distribution was in the hands of govern- ment agencies, semi-autonomous corporation or cooper- atives. That these agencies were often inadequate in performing their task is obvious from letters in newspapers, sample surveys and field observations. Some distribution points were closed for days; ferti- lizer was often out of stock; there was red tape in 156 obtaining it; and stores were too far from many villates. The distribution system was simply inadequate.41 The active participation of private enterprise in fertilizer distribution was restricted because of the lack of basic infrastructural facilities and marketing services, and due to high probability for new capitalists to go for overhead investments involving a broader diffusion of returns. The instability in the fertilizer market brought about by abrupt changes in subsidy, adversely affected a private investor's expectations about his returns from the uncertain fertilizer market where the expressed conscious demand had not been established involving a high proba— bility of loss of money for the firm which is "breaking the ice,“ to lose money in early years of operation. On the other hand, a limited amount of gross mark-up42 on fertilizer sales amounting to 10 percent, offered little incentive for private enterprise to invest money in fertilizer distribution whereas he could obtain higher returns from alternative investment. After a long period of hesitance, the private sector due to uncertainty of returns in the fertilizer market, some of the private enterprises decided to enter 4J'Gustav F. Papnek, Pakistan's Development--Social Goals and Private Incentives (Cambridge: Harvard Uni— versity Press, 1967), pp. 168—72. 42Gross mark-up is the only available gross esti- mate of the rate of return from fertilizer. 157 into the distribution sector to capture the benefits yielded by a tremendous spadework that had been undertaken by the public agencies. Currently the prospects of ferti- lizer demand expansion are greater and the need for private investment capital to engage in import substitution are more apparent. How far the private enterprise is going to invest in basic infraastructural facilities, provide marketing services, stimulate the demand for fertilizers through farmer education, sales promotion, and marketing effort depends on the discounted rate of return to invest- ment and the extent to which it can internalize the exter- nal economies. It was not until the latter part of 1967 that private enterprise showed active interest in the pro- duction and distribution sectors of the fertilizer in- dustry. Pakistan National Oil was the first to enter into the distribution sector with its own private organi— zation in November, 1967. The strategy of government was to gradually replace the existing public and semi—public organizations with private enterprise with the exception of those areas where the retainment of public institutions was considered necessary. An interesting feature of PNO has been the spectacular growth in fertilizer sales within the shortest possible time since its inception to the extent that it claims a share of 50 percent of the in- digenous production and a greater share of the imported fertilizers than any other private agency. Within a period of three months until February, 1968, fertilizer 158 sales reached the level of 103,771 tons in terms of ammonium sulfate. Pakistan National Oil was followed by Esso and Dawood Corporation, each of which maintains its own chain of wholesalers and retailers with their market- ing areas sometimes overlapping and sometimes distinctly separate. The most significant addition to the chain of fertilizer distribution agencies has been the addition of fertilizer company which with its new technical knowl- edge and organizational structure plans to float a verti- cally integrated distribution system consisting of its own chain of wholesalers and retailers assisted by a team of agricultural experts to advise on the use of fertilizers. While the magnitude of private organization in the ferti- lizer distribution system is still embryonic, it may be said to be passing through the learning curve. The fact that the fertilizer distribution system of West Pakistan has not operated satisfactorily is rein- forced by the evidence that in half of the districts of West Pakistan, there was only one dealer for 10,000 or more farms and over 400,000 farms were located in districts 43 Apart from the lack of adequate with no dealer at all. fertilizer distribution facilities in the form of fewer distribution centers and warehouses with the attendant complications of insufficient transhipment facilities, the 43Papnek, Pakistan's Development-—Social Goals and Private Incentives, pp. 145-56. 159 major problem arises in the lack of coordination between private sales effort and public extension activities. The administrative separation exists between the hierarchical structure of agricultural extension department and ferti- lizer distribution agencies at both the wholesale and retail levels. There may be some logic behind the adminis- trative separation of specialized fertilizer extension personnel and fertilizer distribution, nevertheless, this organizational division represents to a considerable extent a “deskilling” of wholesalers and retailers whose functions are merely reduced to the transfer of fertilizer rather than passing on scientific information to the farmers. The wholesale dealer is largely a warehouseman or breaker of bulk while the retailer is a private commission agent who is a licensee of WPADC. He obtains fertilizers at a slight discount and his functions are mainly restricted to over—the—counter filling of farmers' orders. Since the primary efforts for the stimulation of demand for ferti- lizers have been largely taken out of the distributor's hands through the fixation of fertilizer resale prices, it becomes difficult for them to play an active role in the marketing process. Even though an increasing sales volume is likely to increase total returns depending upon the elasticity of demand, the returns to investment in sales promotion and extension activities are such that they tend to be broadly diffused. Besides, the guaran- teed margins provided by the government do not allow for 160 favorable returns for other than selling activity. The distributors tend to be active in the sense that specific decisions that could lead to the expansion of sales are largely delegated to others. Their role, thus, becomes primarily that of order-taker, rather than that of active stimulator of demand. In general, the environment at wholesale and retail levels is often not competitive and, in some cases, COOper- ative organizations have more or less monopoly franchises for distributing fertilizers in specific areas. The locational monopoly tends to be perpetuated, due to the limitation of farmers to only a single outlet, whereas the costs of reaching an outlet other than the nearest one tend to be prohibitive. In addition, the currently oper- ating system of fertilizer distribution is neither ade- quately decentralized nor does it provide for sufficient number of distribution centers so as to provide an efficient marketing service to widely dispersed farm—producing units. The Proposed System of Fertilizer Market Channel Organization A proposed system of channel organization would be competitive or non-competitive depending upon how the market is organized and behaves. Thus, a new system of channel organization must be discussed in the context of its market structure with a view to achieving three broad market performance goals. They are concerned with: (l) 161 l the improvement of resource allocation, (2) stimulation of technological progress, (3) market coordination, and (4) product suitability.44 Since the ultimate goal of the government of West Pakistan is to effect a complete transfer of fertilizer channel organization from the public and semi-public cor- porations to private distribution agencies, a proposed system of distribution thus, must present a Pareto-better solution. Theoretically, the performance of a distri— bution system is to a great extent dependent upon its structure. Alterations in the structural variables are, therefore, likely to affect the firm conduct and market performance. Under the existing system of distribution, there are only three private agencies which as a whole claim almost 50 percent of the market share. The activity of private enterprise being at a very small level provides a relatively small geographical coverage, marketing ser- vice, and consumer choice. With their meager financial resources they are not only uneconomical and inefficient, but also lack adequate resources to build up a viable distribution system, and a firm market strategy to expand their relative and absolute market shares. 7 The atomistic structure of farm producing units, small size of farms, and low level of rural per capita 44Product suitability refers to the improvement of fertilizer quality through grading, standardization, and an improved system of market information flows. 162 I income demand that the fertilizer marketing system be decentralized so as to increase the number of distri- bution centers. It must maintain a chain of warehouses and retail outlets at strategic points in the rural areas in order to reduce the distance between rural farms to markets and to speed up the delivery system. An expansion in the number, size, and scale of operation of current private unit channels must, therefore, take place if the productivity and efficiency of the existing unit channels is to be improved and is to be made compatible with com- petitive norms. From the knowledge of economic theory, it can be said that oligopoly is by far the most common and important type of market structure in the agricultural supply and marketing industries. Whereas firms as unit channels in oligopolistic markets often exemplify schizo- phrenic behavior, as individual firms they are motivated to take the competitive offensive and strengthen their market position at the expense of competitors with no appreciable increase in sales and a loss in net price competition. They may as a group agree in the maxi— mization of their joint profits which would be very much similar to the behavior of a single monopolist. Despite the fact that firms in an oligopoly are motivated to maximize their joint profits, often they are able to do so to a limited extent because of a combination of market restraints. Under such a market situation, the 163 fear of retaliation tends to limit open price competition among firms without involving any direct retaliation; the price cuts, however, tend to be secret and discriminatory with a large number of customers of competitors being often favored. Since the direct consequence of a monopolistic or oligopolistic market structure most often is the "imperfect competition prices," it may lead to price collusion, joint profit-maximization, and misallocation of resources. ' based on a large number of Whereas “competitive pricing,‘ sellers is likely to lead to lack of progressiveness, lack of improvement in marketing service, and sales promotion, a horizontal expansion in the number and size of marketing firms in the fertilizer industry must, therefore, take place towards an oligopolistic structure of the market. Vertical expansion is desirable for increasing the local availability of fertilizer at the farm level through a chain of wholesalers, retailers, and sub-agents. As already discussed, the existing system of administrative controls, allotments, quotas, and price controls does not allow for a freer adjustment of the market forces of supply and demand and leads to the elimination of some of the important points of price formation. Thus, the substi- tution of a fertilizer distribution system which is free from such controls would lead to price formation through exchange mechanisms operating at various levels of the 164 I distribution system resulting in horizontal and inter— type competition among the vertically integrated private distribution channels. The main objective is to combine various verti- cally integrated privately—owned distribution agenCies in the form of unit fertilizer channels into a single market channel which may involve the economies of size and scale and of merging the various stages of marketing and at the same time to incorporate the benefits of providing better consumer service, lower-cost, and timely delivery of fertilizers. Since the existing state of channel for— mation is very rudimentary and divided among too many distributors, it is neither economical to supply the needed marketing service at the current size of operation nor does the private distributor have adequate resources. From the economic point of view, the private distributor is not prepared to lock up his high opportunity cost re- sources in long-term investments involving short-term losses and long-term benefits. In addition, the long- term benefits are neither large enough nor so visible as to attract the needed investments. The private distri- butor does not have adequate technical know-how for im— proving the methods of handling, reducing the costs of keeping lower or higher than optimum levels of inventory, managerial efficiency, methods of demand assessment, and measuring the marginal returns from an extra unit of service provided. 165 Thus, it is supposed to be a privately organized fertilizer channel structure where the government plays the role of a speculator through the maintenance of regu- lar speculative inventories at various strategic points in West Pakistan and thereby keeps the wholesale prices of fertilizer at remunerative and socially deSirable levels through the release of fertilizer stocks from time to time. On the supply side, the government must respond to private investor's perception of demand-induced investment opportunities for the production of indigenous fertilizers by timely and adequate allocation of foreign exchange. Fertilizer imports must be scheduled much ahead of time and their magnitude may be determined from the anticipated domestic demand for fertilizers and the need for keeping adequate inventories after deductions from the expected annual indigenous fertilizer production. Since there is an invariable tendency for indigenously produced ferti— lizers to lag behind the requirements with increments in fertilizer demand being met from an increased level of imports, it would be desirable that in order to save the high opportunity cost resource of foreign exchange no opportunity be spared to engage in import-substitution as soon as fertilizer imports reach the critical minimum size necessary for the initial operations of an economic-sized plant. At present, the existing level of fertilizer imports indicates that the decision to locate a medium- sized nitrogenous fertilizer plant could substitute for 166 a large volume of fertilizer imports and, therefore, a fixed amount of foreign exchange to finance the capital costs, could substitute for a recurring expenditure of foreign exchange. One of the flaws in the existing system of ferti- 1izer distribution is the lack of coordination between public-supported sales promotion through fertilizer demonstration plots and private sales effort. Thus, much of the activity of agricultural extension department loses its significance, because of the non—availability of fertilizers in a specific area and also because of the inability of extension workers to demonstrate the higher productivity of fertilizers due to lack of proper dosage, appropriate combination of plant nutrients, and lack of soil testing facilities. It will, therefore, be desirable that each individual distributing agency should maintain its own agronomic service unit as a part of the selling and servicing organization. Since there is a derived demand for soil testing facilities and other auxiliary services like advice on fertilizer application, selection 0f Seeds, and use of pesticides by the fertilizer buyers, a major expansion in the sales volume can be expected. It mllst maintain an organized and intensively trained team Of fEBrtilizer sales personnel who should be able to advise farmeirs as to how, when, and where to use the fertilizers. They Should be equipped with portable soil sampling kits 167 in order to collect soil samples wherever found necessary and which may be sent for analysis to a central soil test- ing laboratory and mailed back to farmers. It should, however, be conveniently located to the areas of primary consumption and maintained by an individual distributing agency. Since most of the fertilizers which are sold in the market at present are unstandardized and non—graded, a government regulated and standardized system of uniform grades of fertilizer must be introduced in order to ease the process of consumer selection and producer specifi- cation. The system of grading is frequently defined as: ". . . a process of segmenting a highly heterogenous supply of a commodity into smaller more homogenous group- ings which are more nearly substitutable for one another than with other units."45 The two economic effects that may accrue from such a system of grading are: (l) reductions in marketing costs and operational inefficiency, and (2) improvements in pricing accuracy. The beneficial effects from such operational efficiency will follow from: 45W. F. Williams and T. T. Stout, Economics of the Livestock-Meat Industry (New York: Macmillan Co., 1969), pp. 445—89. 168 1. Increasing the extent of buying and selling by description. 2. Eliminating time and expense associated with arguments regarding quality. 3. Encouragement of specialization among suppliers by function, type of product handled, and type of outlet. 4. Reduction of pressure among suppliers for large expenditures on competitive brand advertising. 5. Increasing the emphasis on technological innovations, improving marketing practices, and other means of reducing costs through intensifying competition on price basis. The improvements in pricing accuracy may, however, be attained through: 1. The provision of a universal and generally accepted language by which differences in attributes of quality and level of nutrients can be interpreted by consumers and trade alike. 2. Increase of accuracy in the process of price formation through improved knowledge and increase in intensity of competition on price basis. 169 3. An increase or improvement in the efficiency with which desires and preferences of con- sumers are transmitted through the marketing system. A system of market information dissemination would be necessary to improve the process of decision-making of the farm-buyer concerning the quantity. Adequate, accurate, and timely information can lead to effective production and marketing decisions and competitive price determination. Even though the overhead costs of providing such services may be higher in the short run, in the long run the pay off from the expansion of sales volume may more than off- set the costs. At present, no such media for the constant flow of information to the farmers, and feedback to the producers, exists except for the prices which are also fixed. A system of market news dissemination making use of local newspapers, a farm journal, and radio broadcasts must be brought to bear upon the generation of information flows by the fertilizer distributing agencies. Infor- mation concerning detailed specification of fertilizer dosage per acre in various combinations of plant nutrients for various crops must be provided to the farmers to facilitate the process of consumer selection and rational choice. That irrational choice of fertilizer grades by farmers can give rise to social costs arising from less rather than more economical sources of plant nutrients is 170 indicated by the fact that in the United States such costs amounted to $61 million or 5-10 percent of the nation's 46 total fertilizer bill in 1949. Similar calculations made by Zvi Griliches put the “costs of imperfect knowl- edge" at $20 million in 1954 and $44.6 million in 1958.47 In other words, it must be clearly demonstrated to the farmers that two bags of fertilizer with 50 percent of nutrient content in each acre equal to one bag containing 100 percent nutrient content in the same combination. An additional development which must constitute a vital link in the system of fertilizer distribution is the provision of fertilizer mixing facilities. The need for fertilizer mixtures has assumed greater importance because of the greater realization by the farmers concern- ing the use of balanced doses of fertilizer. Consequently, the consumption ratio of nitrogenous to phosphatic ferti- lizers (NzPZOS) which was 1:6 in 1967-68 has decreased to 1:4 in 1969-70.48 Fertilizer mixtures also are likely to contain an improved ratio of potash besides nitrogen and phosphates, because of the potassium deficiency in some 46Jesse W. Markham, The Fertilizer Industryj-Study of the Imperfect Market (Nashville: Vanderbilt University Press, 1958). 47J. R. Moore and Richard G. Walsh, Market Struc- ture of Agricultural Industries (Iowa City: Iowa State University Press, 1966). 48An unpublished memo issued by the West Pakistan Agricultural Development Corporation, Lahore, 1969, pp. 4-10. 171 I areas of the country. Fertilizer mixing plants must be located near the areas of primary consumption so that the process of assortment of particular fertilizer nutrients in accordance with farmer needs can be facilitated. From the long-run point of view, it is desirable to lay empha- sis on the provision of centralized fertilizer mixing facilities with considerable emphasis on the economies of size. As a preventive measure against fertilizer adulteration, the government should legally prohibit malpractices of hoarding, dishonesty in dealings, and impurity of fertilizer mixtures. Although there are some institutional and non— institutional sources of agricultural credit in West Pakistan, the credit requirements of farmers are much higher than supply. There is an acute need for short- term supervised credit to finance the purchase of farm inputs. It is, therefore, recommended that each of the proposed fertilizer distribution agencies should maintain a vertically, integrated credit supply line with the objective of extending short—term fertilizer loans to farmers requiring a low level of security. The system of loan recoveries may be simplified by the acceptance of farm produce after the harvest and writing off the loans by their sale proceeds. With credit facilities available at each retail outlet, the system of super— vised credit would require a detailed account of loans 172 and recoveries for each farmer. Since the retailers, and sometimes wholesalers, lack adequate financial resources to finance the inventories required to meet emergency and peak season needs, a system of inventory financing must be part of the loan program for each fertilizer unit channel. Conclusions A critical evaluation of the history of fertilizer distribution on the basis of ownership and control indi- cated that the fertilizer market channel has been charac- terized by considerable organizational and market insta- bility. The operations of fertilizer market channel were analyzed on the basis of the following criteria: (1) operation of exchange mechanisms at various levels of the vertical segment of fertilizer channel, (2) progressive- ness, (3) channel efficiency, and (4) channel coordi- nation. It was found that the fertilizer market channel was not progressive enough to dynamically adjust to the rapidly expanding demand for fertilizer. Nor was it efficient enough to maximize the output-input ratio. The past experience has indicated that the substitution of private enterprise for public enterprise would be necessary in order to incorporate the elements of profit- motivation as well as to attain a distribution system 173 free from administrative controls. An alternative system of channel organization was proposed to fulfill the goals of technical advance, efficiency, and market coordination. Since the government cannot undertake all these reforms in a package form, in the interests of maximum effective- ness of public policy, it would be necessary to effect some major organizational changes and provide such market- ing services which are complementary. CHAPTER V PHYSICAL DISTRIBUTION SYSTEM ' Introduction The purpose of this chapter is to present a regional system of fertilizer distribution for West Pakis- tan in such a way that it outlines the actual movement of fertilizers. Its primary objective is to simplify a com— plex network of distribution outlets spread over the vast geographical expanse of West Pakistan by splotting up major fertilizer consuming areas into five distinct regions and thus to reduce the difficulties of fertilizer movement over longer distances through an already overburdened system of railroad transport. This system of regional distribution aims at reducing the marketing costs by in— ducing faster delivery and shorter fertilizer haulage as well as minimizing the costs arising from fertilizer caking and in-transit fertilizer losses. Since the major constraint in the physical movement of fertilizer is the available transportation capacity, the plan is to create a number of self—sufficient regions in order to reduce the costs of inter-regional and intermodal fertilizer shipment by organizing a chain of fertilizer producing factories to 174 175 meet the fertilizer needs of their respective regions. As a part of the demand for fertilizer is met by domestic pro- duction and the rest by fertilizer imports, a strategy has to be designed as to where the imported supplies can be directed at least cost with the long—run aim of import substitution. The research procedure is to make an assess— ment of the production potential of various fertilizer factories and projection of fertilizer requirements of various regions of West Pakistan up to l974v75 and to conduct an analysis of the attendant requirements of ware- housing and transportation. The physical distribution system is, as a matter of fact, supposed to constitute a vital link in the verti- cally integrated and workably competitive distribution system of the preceding chapter. It is an aggregation of the physical movement of fertilizer so as to trace out and facilitate the process of effective delivery and local availability to the farmers. Under this system, no indi— vidual fertilizer distribution agency is supposed to enjoy a monopoly franchise over any single marketing region, but the economic activities of each agency in various regions are overlapping. Regional Pattern of Fertilizer Consumption West Pakistan can be divided into twelve adminis— trative divisions for the sake of convenience involving a Varied range of soil types, topography, crop sequences, 176 and irrigation systems. They differ not only in their socio-economic and cultural characteristics, but also the level of farm income, pattern of farm practices, rate of input use, and level of farm productivity. The intensity and level of fertilizer use fluctuates within a wide range, from less than one pound per acre in Quetta and Kalat divisions to 78 pounds per acre in Multan division. Thus, the problem of bringing fertilizers within the effective reach of farmers varies from division to divi- sion depending upon their cultivated acreage, crops sown, level and intensity of fertilizer consumption. The twelve administrative divisions of West Pakistan have been classi- fied into five ecologically homogeneous regions. The various divisions which fall in the domain of a particular region are given below: Region 1: l. Peshawar division 2. D. I. Khan division 3. Rawalpindi division Region 2: l. Lahore division 2. Sargodha division Region 3: l. Multan division 2. Bahawalpur division 177 Region 4: l. Khairpur division 2. Hyderabad division 3. Karachi division Region 5: 1. Quetta division 2. Kalat division Since there exists a pseudo—complementarity be— tween a minimum level of water supply and fertilizer use in the climatically arid zone of West Pakistan, relatively greater fertilizer use would be expected in the regions where irrigation water supply tends to be greater. It is assumed, however, that there will be at least partial adoption of new crop varieties on major portions of irri- gated agricultural land with a declining use of traditional indigenous crop varieties. Fertilizer demand projections for each of these regions on the basis of an appropriate dose per acre were made up to 1974—75 as indicated in Table 5.1. A comparison of the regional increase in the consumption of fertilizer between 1969—70 and 1974—75 indicates that the rate of growth in fertilizer use in Region 1 is likely to be the highest. The major increase in the demand for fertilizer in West Pakistan as a whole is expected to arise from the adoption of new high-yielding and fertilizer responsive varieties of wheat, rice and COtton, and greater availability of complementary inputs Figure 5.1. 178 Various Fertilizer Regions of West Pakistan. .wuonmq .cmumflxmm ummz mo #QGEGHO>OU rucmfiuummmo pcwfimoH®>mQ paw mCHGCMHm one an ponmflansm mOHQMD HMOHumeMpm may Eoum Umcflmuno mMB memo "mousom 179 oe.hva owm.mH ooo.m omm.m omv.n ooo.m coflmwm mm.moa oom.mma ooo.HH omw.om oamrmma ooo.om coflmmm hm.an OHm1mNN ooo.ma oam.om ooo.oma ooo.oma coflmmm mm.oaa ooa.mmm ooo.NH omH.mw omm.aha oooroma coflmwm oo.mmaa oem.MNH ooo.ma onH.om ona.om ooo.oa seamwm umuflafluumm sumnz M m z mnmuz How mhlvhma onlmmma panama CH mcoHuownoum mnlenma ummomuom mcoflmmm mmmmuosH . . cofluQESmcoo mmmucwouom umuflafluumm mGOHuowfloum HmNHHHpHmm HmNHHfluHom .Amcou ucwflupscv swamflxmm puma 2H Hmmflafluuom How mCOHuuwfloum panama Hmcoflmmm w>aumummEoo .H.m momma 180 as well as improved economic and agricultural policies. An extremely disproportionate increase in the projected demand for fertilizer in Region 1 is due to the expec- tation of a significant increase in cropped acreage of wheat and sugarcane. Available statistics indicate that these two major crops accounted for more than 50 percent of fertilizer used for various crops by the farmers dur- ing the second five year plan. Greater use of fertilizer in Regions 2 and 3 is expected to arise from greater diversity and intensity of cropping as well as from a higher rate of vate tube well pensity of the fertilizer use farm.practices of the farmers adoption of new varieties, increased pri- development, and relatively higher pro- farmers to adopt innovations. In Region 4 is likely to increase progressively as new take root and “fertilizer consciousness" increases. Demand for fertilizer in Region 5 is lower because of the vast amount of barren sub- mountainous and desert land with an extremely low percent- age of cropped acreage. Scarcity of irrigation water and lack of modern farm practices do not permit fertilizer use beyond small doses. Thus the absolute as well as relative demand for fertilizer in this region is extremely small. 181 Strategy of Fertilizer Distribution The process of distribution essentially involves the transfer of fertilizer from given supply points to designated demand points at the least possible cost. Since the currently operating system of fertilizer distribution does not involve the delimitation of marketing radius to smaller distances confined within the already specified fertilizer regions, the marketing radius of any single fertilizer plant located at any strategic place becomes the entire breadth and length of West Pakistan. A major flaw of this system is the relatively high ratio of market- ing costs to the per unit production cost of fertilizer. In addition, a broader fertilizer coverage of the farming areas leads to lack of intensification of distribution activity in a particular agricultural area leading to an unsatisfied pent—up demand and sub-optimum use of ferti- lizers by the farmers. The new scheme of fertilizer distribution envis- ages the intensification of distribution activity at the micro level and the reduction of inter-regional shipment costs except, of course, in cases when the disequilibriums in the supply and demand for fertilizer lead to the development of surpluses or deficits in various types of plant nutrients in certain regions. Any strategy for fertilizer distribution in West Pakistan would have to be designed in accordance with the 182 . source of fertilizer supply. At present there exist two major sources of fertilizer supply: (1) imported ferti- lizers, and (2) indigenous production. Since imported fertilizers must be channelled through the single seaport located in the southwestern region of West Pakistan, priority in their distribution must be given to the regions which lie in the immediate nearness of the port. The economic justification of this policy is dictated by the fact that the lead time required to replenish the inventories and transportation costs of imported fertilizers progressively rise, as we move farther away to the northern part of West Pakistan. Possibilities of fertilizer losses and pilferage in the movement of fertilizers over longer distances especially to Region 1 are greater because of the numerous rail stoppages and preference of passenger trains over freight trains, as a matter of public policy. Long haulage of such a bulky and low-value commodity as fertilizer would not be feasi- ble, because of the low rate of expansion of railway handling capacity in response to the growing volume of internal and external trade in general, and an exceedingly low ratio of railway handling capacity that is allocated for the transportation of fertilizers. The possibilities of increasing the freight handling capacity of the railway through a multiple train system are ruled out because of the existence of a single railway track which connects Peshawar to Karachi. Alternatively, the pattern of railway 183 and truck rate structure indicates that the latter can be used only for short hauls. The costs of transporting fertilizers to the farthest areas of Peshawar division tend to be greater because of the likelihood of disecono- mies arising from backhauling costs. Thus the primary objective of the official policy of fertilizer import“ substitution must be to give priority in the location of fertilizer plants in those areas where the rate of growth and volume of consumption is relatively higher. Under this scheme of fertilizer distribution it is assumed, however, that the constraint of limited transportation capacity can be considerably relaxed through the shipment of ferti- lizer raw materials to designated grouping points where the plants are located, instead of channelling the imported fertilizers through a complex network of arterial routes. The data in Table 5.1 indicates that the rate of increase in the demand for fertilizer in Regions 1, 2, and 3 shows that preference for the development of fertilizer pro- duction capacity should be given to these regions. An assessment of the indigenous fertilizer production poten- tial by the year 1974-75 and areas of deficits and sur— pluses can be made from Table 5.2. The supply and demand prospects for fertilizer during the year 1974-75 show that in spite of the exis- tence of indigenous fertilizer producing plants in Regions 2 and 3, there is likely to occur an overall 184 .muosmq .cmumflxmm ummz mo ucmEch>ow .bcmEpHmmmo usmfimon>mo mam mcflccmam mop Eoum omsflmpbo mumo mHmEHum mo mammo map so mome whoa chHumpsmEou "momsom 0mv.HHm 000.0m 0H0.ema 0mv.00a 000.00 000.0mv mamuoa eem.ma ooo.m 0am.m eme.e . . . . m coummm 00m.m0| 000.HH 0HH.NI 000.Hnl 000.mm 000.00H e scammm 0H0.HOH 000.NH 0H0.00 000.00 . . 000.H0 m scammm 0HH.nn 000.NH 0mH.N0 000.m 000.5 000.00H m scammm oem.mmH eoo.ma ekH.om oea.em . . . . H eoummm Mlmlz M m Z m Z mkueema as mumuuafluumm mucummm HammMWMOSm ocmEmo co ommmm mammsm msocmmflocH H B Hmuflaflpumm ca maHmMquocm mo cofluosoonm .Amsou ucmfluuscv mhnvnma GH Magnum ummflaflunmm mo cumpumm Hmcoflmmm .m.m mamma 185 shortage of nitrogenous and phosphate fertilizers in these regions, with the highest deficit being in Region 1, and the lowest in Region 5. The only region which has a sur- plus in the production of nitrogenous and phosphate ferti- lizers is Region 4. On the whole, there would be an over- all shortage of potash in almost all the regions by the year 1974-75. Since the cumulative amount of nitrogenous, phosphatic, and potash deficits is much greater, decisions must be made concerning the development of indigenous fertilizer production capacity and fertilizer imports. A larger regional imbalance implies a larger volume of inter- regional trade in fertilizers. The cornerstone of the new strategy of fertilizer distribution is the shift of reliance from the up-country movement of fertilizers from the remotely placed single major seaport of West Pakistan to the intensive development of inter- and intra-regional low capacity routes. In other words, a chain of fertilizer producing plants will have to be organized in keeping with the official policy of import substitution. Considering the annual average rate of foreign exchange costs of $88 million for the period 1970-1975, the cumulative costs would amount to $440 million. Taking into account the annual fertilizer consumption and an allowance for a minimum level of annual stock requirements, the fertilizer import needs of West Pakistan would amount to 479 thousand nutrient tons which would give an impressive leeway for 186 I the substitution of indigenous fertilizer production capacity for fertilizer imports. An increasing volume of fertilizer imports and the rising foreign exchange cost of imports in Table 5.3 indi- cates the possibilities of import substitution. In order to save high opportunity cost foreign exchange the poten- tial demand for fertilizer suggests that it would be de- sirable, if a fertilizer plant were located in Region 1 with the production capacity of 300 thousand tons of ammonium sulfate or 160,000 tons of urea, also two phos- phate plants with an annual rated capacity of 125 thousand tons for the production of triple superphosphate could be set up in Regions 2 and 3. The new mechanism of physical distribution involves the coordination of the movement of fertilizer and trans- portation at various focal points in the distribution structure. In response to the expanding demand for ferti— lizer at the farm level and rising rate of fertilizer use per acre, it is recommended that distribution centers be located at each district headquarters. The functions of these distribution centers would be the replenishment of supplies of distribution sub—centers located at tehsil level. Their functions would include the assessment of fertilizer demand by each type of nutrient at the district level, the availability of fertilizers at the required time and place, and to maintain a constant liaison with the sub-distributors. They must provide soil testing III! I.I .III I .wuocmq .cmpmflxmm umoz mo pcmficnm>ow .ucmfipummoa usmfimon>mD pom mcflccmam map Eouw omcflmpbo mpmo mo mflmmb wow so momfi meB mGOHumbsmEoo "moudom .mommc GOHpQESmsoo mop mo m\H comm ommmo mum mbcmEmHHdUmH xooum 187 Amv .cou Hod 0Hmm mo 0» owESmmm mum umuflafluumm mo mmoflum HmcoflpmcumucH AHV umpoz 000.0mm.00H 000.0nv 000.Hmv 0001000 mnlvnma 80.32% eem.omm oeo§mm 08.st 3:93 000.mmm.vm 00m.mve 000.00N 00N.man mnlmnma 000.000.00 000.nme 0004mma 000.000 NhIHhmH 000.0ha.0n 000.hhm 000.0mH 000.5mm Hmionma AmHmHHom AmQOp Anson Anson m3 “$355 6.23355 6.96335 Saddam mucmEmHHsvmm Hmmw mmcmooxm mpcwEouflsqom Houflafluumh MUOpm mum cmamuom uHOQEH . mdocmmflosH coflpmfismcoo HmNflaflpumm .muuomfiH HmNHHfluumm mo mpmoo mmcmcoxm :mHmHom .m.m mqmflfi 188 facilities to the farmers by receiving soil samples through their distribution sub-centers and mailing them directly to the farmers who, in turn, get the necessary interpre- tation of their mailed soil samples from their respective extension workers. A system of supervised credit for. farmers and inventory financing may be organized at the district level as a necessary adjunct of the distribution system. Since fertilizer distribution is closely enmeshed with the transportation system of the country, it would be necessary that workings of each distribution center be Coordinated with railway and other transport concerns at the district level. Lack of coordination between trans- portation and distribution can, however, result in unneces- sary delays in the shipment of fertilizers. Since the existing system of agricultural extension is inadequate, it would be desirable if the fertilizer sales personnel are stationed at the district level who work in close COOperation with the fertilizer distributors in order to spearhead the process of demand expansion. On the other hand, the functions of sub-distri- butors at tehsil level would be to channel the available fertilizer supplies to the retail outlets falling within the range of a particular sub—division. The major problem of distribution sub-centers would be to maintain a close WC’rking relationship with retailers who stand in need of fertilizer credit and transportation facilities. Their responsibility would include the provision of fertilizers ‘ 189 to retailers in appropriate mixtures, collection of soil samples, and assessment of the nature and seasonality of demand in their respective regions. They must take into account the level and intensity of fertilizer use, the types of crops sown, availability of complementary inputs, and pattern of farm practices. They must consider the problems that confront the farmers arising from fertilizer use. A major flaw of the existing rail and road trans- portation system is that it simply connects major towns with cities while leaving the rural areas where the actual consumption of fertilizers takes place, completely iso- lated from the mainstream of modern transportation. At Present, there exists no well organized trucking service at tehsil level which could be used for the short haulage Of fertilizers. Thus it would be necessary to coordinate the system of fertilizer distribution with transportation at both the wholesale and retail levels. From a theoretical point of view, the logic under— lying such a system of distribution center location is to Provide maximum consolidation economies by purchasing Supplies from distant procurement points and to effect the transfer of cost and service benefits to retail stores with a relatively shorter delivery. The contention of this theory is that a firm possessing differential ad- Var”Sage holds a temporal monopoly over a market segment. The normal reaction of other firms is to adjust their market offers to overcome this differential advantage by 190 sshifting to a new industry equilibrium. Within the frame— Vvork of competition for differential advantage, location estrategy gains eminence in the theory of the firm. To the <flegree that the firm achieves control over a geographical Inarket segment, its market position is entrenched by virtue (of a spatial monopoly. Apart from political and geographi- czal considerations, a spatial monopolist Viewing superior Jmocation as a temporary spatial advantage and utilizing 11inear market assumptions and price structure based on :E’-o.b. mill prices would select that location which mini- Ini.zes the freight cost and allows for profit maximization. TFllee solution of market center location for a spatial monopo— ]_i.st is where MM' represents a linear market, Ll represents 111163 location in the following diagram. A E I I' P1 I I I | IL M B | l D 'M A Diagram of the Optimum Location Figure 5.2. of the Spatial Monopolist. 191 In this figure P is the net mill price, and AB 1 and/or ED represents the delivered price level at which fertilizer is offered to consumers located at various points in the market. The line labeled II' represents farmers' price indifference. The underlying assumption is that farm—consumers would uniformly reject monopolists' product, if the total delivered price exceeds the level indicated by II'. At the level of II', the consumer is generally indifferent to the purchase of product since he can obtain a higher degree of satisfaction by utilizing his resources in alternative ways. Under conditions of imperfect competition the firms engaged in distributing fertilizers would, thus, try to obtain a partial control over the market by seeking the location that provides the highest total revenue at lowest possible cost which is assumed to occur at a uniform point in all directions resulting in a circular market area. It is, however, assumed that initially the spatial monopo— list would sell fertilizers in all directions to the point of farmers' indifference to fertilizer price with the pre- condition that market prices are freely determined. Due to low price elasticity of demand sales intensity is, however, assumed to be the highest in areas surrounding the monopo- lists' location and would tend to decrease in magnitude as fertilizer was sold in farther hinterlands. The following diagram presents the demand cone where L represents the 1 spatial monopolists' location, the circle represents the 192 / Figure 5.3. The Diagram of Spatial Monopoly. total market area and height of the cone represents the intensity of the farmer's demand for fertilizer. The cir- cumference of the fertilizer sales territory around the distribution sub-center, e.g., tehsil level is limited by fertilizer price and the farmers' indifference level for this farm input. The fertilizer market for a single spatial monopolist would, however, be limited by its price elasticity of demand. Thus from the entire fertilizer industry's point of view each firm engaged in distributing fertilizers would serve areas offering highest demand potential and all such firms would select least-cost locations from which profits could be maximized. The net result is a series of space islands between the market areas serviced by each of the spatial monopolists. Space 193 islands occur as pockets in which monopolists are unable to sell at acceptable profits which is illustrated in the following diagram. A B Figure 5.4. Space Islands Under Conditions of Spatial Monopoly. The area ABCD fls assumed to represent the market areas of individual monopolists whereas the rest of the areas constitute space islands where the spatial monopo- lists do not find it profitable to sell. In the long run, however, all such space island will be filled by small- scale firms operating from high cost location. In other words, it is assumed that in the short run, size of the market is limited which is expected to expand in the long run due to such factors as greater consciousness of farmers, increased availability of complementary inputs, and rise in farm income. Under the prevailing conditions in West Pakistan, the area ABCD is supposed to represent a specific fertilizer region as already classified which, in turn, may 194 be repeated in all of the five regions. It is assumed, , however, that circular market areas represent low—cost fertilizer distributors either because of the economies of size and scale or due to superior techniques of ferti— lizer distribution which may be better represented as spatial monopolists. The strategy of a spatial monopolist would be to extend his market coverage by locating distri- bution centers in the circular market areas, i.e., M1’ M2, etc., and attaining higher barriers to entry for less competitive distributors. Assuming that each of the spatial monopolists operating in the fertilizer market of West Pakistan is a vertically integrated distribution agency, he would initially sell fertilizers at f.o.b. mill prices over his entire market area by direct delivery. The spatial monopolist by reducing the transportation expense through the consolidation of fertilizer shipments to a distribution center can result in the movement of large quantities of fertilizer into market areas hereto- fore beyond his reach at a total price considerably below the farmers' price acceptance level. Fertilizers may be distributed f.o.b. distribution center in all directions to a point where total fertilizer price reaches the farmers' price indifference level resulting in a con- siderable expansion of markets. Under conditions of direct shipment, the monopolist is able to sell only as far into the market as point D in Figure 5.5. 195 LCL E B I 1' Wc / CL l / I P1 I I M I MI L D C Figure 5.5. Market Extension by the Use of a Distribution Center. Consolidation of shipments is the basic principle underlying the utilization of distribution centers to extend market areas. The case of the spatial monopolist that he can substantially reduce his transportation costs through consolidation of fertilizer shipment and that he can move large quantities of fertilizer into market areas heretofore beyond his reach at a total cost considerably below farmers' price acceptance level is illustrated only in one direction in the linear market. Since the ferti- lizer distributor by making direct shipments from P1 in less than carloads can only sell as far into the market as point D. At the line Ed, the total cost of fertilizer reaches farmers' price indifferenCe level. By placing a 196 distribution center at some point in the market beyond D, the distributor would be able to make consolidated ship- ments to the distribution center at a landed cost below the farmers' indifference price as indicated by the line P1CL. Shipments would then have to be returned toward the production point P and farther out into the market 1 area until total retail price of fertilizer once more becomes prohibitive to the consumer. The total market expansion achieved by utilizing a distribution center is, however, expressed in the linear diagram by the area DC. Transportation Needs Transportation constitutes a vital link in the physical movement of fertilizer from the points of pro- duction to the points of ultimate consumption. The extent to which rail and road fertilizer handling capacity must be expanded depends to a large extent on the magnitude of fertilizer deficit in various regions and fertilizer import needs of West Pakistan. Since the new scheme of fertilizer distribution indicates a shift of reliance from fertilizer imports to the domestic production of ferti- lizers, the development of a well-knit framework of high capacity rail and road routes that connect the collection distribution centers with the distribution sub—centers and low capacity routes that connect the distribution sub- centers with the villages would be necessary. An increase in inter-regional trade would require a well developed 197 high capacity rail system as a measure towards achieving greater market efficiency. The ratio in which a given budget should be spent for the development of rail and road transportation capacity would depend on the choice a shipper would make for a given structure of freight rates and the least cost combination of intermodal ship- ment that he would select for a specified quantity of fertilizers. Since railways tend to enjoy greater economies of scale than road transport, the former as a low priced mode of shipment gets preference over the latter for fertilizer haulage over longer distances. On the other hand, the capital costs of installing rail transportation systems are much higher than road construction. Thus the expansion of railway fertilizer handling capacity would be necessary where longer haulage is concerned, i.e., 100 miles and above whereas expansion in road transportation capacity must be undertaken over short hauls involving less than 100 miles. Table 5.4 presents the pattern of freight rates for various tonnages of fertilizer shipment. The comparative rate structure of fertilizer ship- ment by rail and road as given in Table 5.4 shows an apparent superiority of fertilizer transport by freight trains over road haulage. The high ratio of the cost of fertilizer shipment per ton-mile to the f.o.b. mill price per ton of fertilizer indicates the extent to which the benefits of lower fertilizer prices can be redistributed to farmers through reduced cost of transportation. .muocmq .cmbmflxmm Dmmz mo DcmEch>ow .DcmEDHmmmo DcmEmoaw>mo mum masccmam map 00 HHmo coapmuuommcmuu on» an mommmfl oEmE omomflaosmsd ad "mousom .Hm.w n momma moo ampcsom 00N.Nm n mpcsmzm mumm Boq+ mumm smflma 00H 0N0 mmn omva omva 00H 00.00 000 00.00H 000 00.0em 000a 00.0mm 000a 00.00v HnomHmMImHosmq 00.0HH 000 000 00NH 000a 00.00H 00.00 000 00.00H 000 00.000 ooea 00.000 ooea 00.m0m ombmumpmmlmuocmq Hsmmlmcoq 00.00 000 000 000 00v 00.00 m0.Hm 00m 00.00H 00m 00.00H 000 00.000 000 00.0mm Hmzmcmmmlmnocmq 8 0N.0m 00H 00H 00m 00m m 00.00 00.0N 00H 00.00 00H 00.0NH 00m 00.00H 00m 00.000 ambaszlmuonmq me 00a 00a 00m 000 00.00 0N.mm 00H 00.00 00H 00.0HH 0mm 00.00H omm 00.00H HochHmBmmlmHocmq me 00 00 00H 00H 00 00.0N 00H 00.00 00H 00.00 000 00.mNH 00m 00.00H Hm3flcmmlmuosmq Hsmmlesflpmz mn.mm 00 00 00a +00H me 00.0H 00H 00.00 00H 00.00 000 00.00H 4000 00.00H usdaamhqlmuoomq Hammluuozm Umom aflmm omom Hflmm wmom HHmm mmom Hflmm mmom HHmm coaumcflpmmo mpsdmz me mncsmz 00H mmcsmz omm mpcsmz 00¢ mpcsmz 000 \cflmfluo m.Amm tum mncdmfi GHV mmumm ubmflmum HmNflHHDHmm omom cam Hflmm mo muduosupm one .v.m mqmda 199 Greater efficiency and lower frieght rates in fertilizer handling may, however, be attained if the existing public I I I I i policy of giving preference to passenger trains over freight trains can be done away with. A reduction in the freight rates would, however, lead to increased use of fertilizer handling capacity which is limited because of the existence of a single spherical track that connects Karachi with the remote areas of Peshawar division. The limited freight handling capacity of the trains is subject to further competing demands from a multitude of trans- portable items ranging from livestock, farm products, minerals, semi—finished, and manufactured goods. The rail freight rates can be kept down only if the expansion in freight handling capacity takes place which would lead to an increase in total revenue because of the existence of inelastic demand for freight train services. The second area of concern is the scattering of focal points within each of the grids that serve as col- lection and distribution centers. It relates to the pat- tern of intra-regional fertilizer shipment that would be adopted in order to intensify the fertilizer distribution activity in rural areas. In other words, apart from expansion in fertilizer handling capacity at the macro- level, establishment of inter-connected low capacity routes at the micro level would be necessary. Since the various distribution centers and distribution sub—centers are sup- posedly located at the district and tehsil levels 200 respectively, they must be inter—connected through a well laid out railway track which is especially lacking in the remote areas of West Pakistan. A rescheduling of trains and an alteration in the system of priorities would have to be undertaken in order to ensure the arrival of freight trains on time. Fertilizer unloading facilities must be increased at each point of destination and regular truck- ing service must be floated between distribution sub- centers and the railway station which may be further used to make fertilizer delivery to retailers. A major flaw in the existing system of transpor- tation is the almost nonexistence of a thin grid of low capacity routes that could blanket and connect the rural areas of West Pakistan with mandi towns and cities. Ex- cept for a few village access roads that tend to pro- liferate in the important rural areas, the rest of rural West Pakistan remains almost completely detached from the major economic centers. That the efficiency of transpor- tation system is directly correlated with the availability of a certain minimum density of farm-to—market roads is verified by the comparative analysis of the number of miles of farm-to-market roads per square mile of cultivated land which in Britain, France, Japan, and the United States is calculated to be around four to one in contrast to a ratio of three to one in Taiwan and Denmark, three-fourths to one in Malaya, around one to one in the Philippines, and two- thirds to one mile of road to a square mile of cultivated 201 land in West Pakistan.49 The fact that rural road building can accelerate the rate of agricultural development and im— prove the efficiency of resource use by increased local availability of farm inputs is borne out by the experience of the Philippines where the construction of improved feeder roads connecting the farming communities to paved highways to which they had previously no road access led to a doubling of the sale of corn and tobacco with the time-lag of only a single year.50 The most common means of conveyance in rural West Pakistan is bullock carts which are frequently used for carrying fertilizers, seeds, seedlings, and other farm inputs to the fields and marketing of harvested crops back to the towns. It has been calculated that the average ton—mile costs of a bullock cart are as high as 20 to 40 cents while the service is no better than three miles per hour.51 It would, therefore, be more economical to substi- tute trucks for bullock carts and other beasts of burden which are not only expensive but also inefficient. Since most of the villages in West Pakistan remain isolated from 49President's Science Advisory Committee, The World Food Problem (Washington, D.C.: The White House, May, 1967). 50Arthur T. Mosher, Getting Agriculture Moving: Essentials for Developmgpt and Modernization (New York: Frederick A. Praeger, Publishers, 1965). slIbid. 202 a good all-weather road at an average distance of one to twenty miles, it is speculated that the construction of adequate motorable roads would be necessary in order to obtain the operating costs of a truck to one-tenth of a camel. In addition, an improvement in the fertilizer marketing system would require an increased ratio of farm-to-market roads per square mile of cultivated land. From a qualitative point of View, construction of good motorable intercity and farm-to—market roads can lead to faster delivery and lower operating and maintenance costs in truck haulage. A comparative study of the level of transportation efficiency that can be obtained in terms of time by truck on good versus bad roads is attested to by the fact that in Puerto Rico both small and big trucks traveled a round trip in about two and one-half hours on good roads as compared to three and one—half hours by small, five hours by medium, and six hours by big trucks and trailers on bad roads.52 A fine-mesh network of low capacity routes must be organized in order to streamline the process of fertilizer distribution in rural areas. Since the farming areas are crosscrossed by a multitude of canals and distributory outlets, a series of bridges and culverts would have to be constructed to facilitate the process of inter-area transhipment. Thus an efficient system of transportation 52Holton and Galbraith, Marketing Efficiency in Puerto Rico. 203 I constitutes a vital link in the fertilizer marketing system of West Pakistan where farms have been increasingly assumed to take the role of "assembly lines." Improved efficiency in the system of transportation will have two—pronged effect in terms of speedy movement of the increased marketable surplus and improved market prices as well as faster delivery and increased local availability of ferti- lizer at competitive rates at the farm level. On the contrary, a poor and expensive system of transportation leads to lower levels of fertilizer use in distant areas and would tend to limit fertilizer market expansion. It would lead to greater inter-market price spreads, increased market imperfection involving greater chances for inter- market price collusion among the traders provided we assume a free market price system. The existing system of rail and road transpor- tation, undoubtedly, remains a constraint on the physical distribution of fertilizer in West Pakistan. Since the government does not have adequate resources to implement a series of recommendations, as a short—run measure, the government may develop a list of priorities in order to improve the efficiency of transportation by greater capacity utilization and taking into hand that critical sequence in the system of fertilizer transportation which has the greatest effectiveness in the improvement of overall efficiency. In the long run, however, measures 204 can be taken to reduce the real cost of local fertilizer delivery through the proliferation of low capacity routes. Apart from increasing the level of efficiency in ferti- lizer transportation, a larger railroad system would generate broader benefits of handling a growing volume of import and export trade as well as inter- and intra- regional trade. It would lead to reduced social costs that tend to operate due to a constrained system of transportation and realization of private costs over the long run due to a large number of secondary benefits that it generates. Estimapion of Warehouse Requirements for Fertilizer in West Pakistan The extent to which warehousing capacity must be provided in various regions by the year 1974-75 will be determined by a number of factors relating to the pattern of fertilizer distribution, the nature and magnitude of regional demand for fertilizer, and the rate of stock turn over. A major consideration in the location of a ware- house would be the minimization of in-bound and out-bound shipment costs. The strategy of warehouse location must be based upon the design of distribution center location as already mentioned. Fertilizer storage facilities must, however, be provided at the Karachi seaport in order to generate a smooth up-country flow of fertilizer through a limited rail transport capacity and to handle the irregular arrival of shipments of imported fertilizers. 205 As a measure of broader fertilizer policy, buffer stocks must be maintained in the various regions in order to even out the seasonal peaks. Due to the fact that the structure of fertilizer demand is spatially dispersed, a chain of warehouses would have to be organized at various strategic places in all the regions. It will, however, be in the producers' own interest to maximize their revenues by locating a series of warehouses at their indigenous fertilizer producing plants to handle the continuously generated supply of fertilizers which tend to be widely different from the seasonal pattern of demand. As a neces- sary adjunct to the scheme of fertilizer distribution, ware- houses may be located at the district and tehsil levels where a certain minimum level of inventory could be main— tained to regulate the flow of fertilizers in keeping with the pattern of demand. The lowest but most important tier in the scheme of warehouse location is the organization of small and cheap warehouses at retail levels where the level of inventory during the particular harvesting period is not expected to exceed sixty tons of fertilizer. At this level, quick replenishment of inventory would be necessary in order to ensure prompt lift off by the farm buyers. On the other hand, in the remote farm areas of West Pakis- tan where the level and intensity of fertilizer use is very low and the absolute demand so meager that the con- struction of warehouses would be uneconomical, it would 206 be desirable that the marketing radius served by a single warehouse be expanded in such cases. An adequate system of transportation would be needed to ensure effective local fertilizer delivery. In some instances, private warehouses or open—space storages are also used where the available supply of fertilizers can be sold off during a short period of time. Assuming that warehousing capacity must be allowed for at least one—half of the total requirement in a region whereas the other half is assumed to be pur— chased as soon as it arrives, Table 5.5 shows that the extent to which warehousing capacity must be arranged for by the year 1974—75. The data in this table indicates that the need for warehousing capacity is directly correlated with the demand for fertilizer in a particular region. Thus in order to tie up the scheme of warehouse location with the strategy of fertilizer distribution, it would be necessary that the capacity of warehouses be allowed to vary in direct proportion to the magnitude of area served and its demand for fertilizer in the larger interests of efficient capacity utilization. Apparently larger capacity ware- houses can be located at the district and divisional levels whereas the smaller warehouses may be located at tehsil and mandi (local market) levels. Since the demand for fertilizer is seasonal, it would be more eco- nomical and convenient to design such warehouses that can be used to accommodate fertilizer, other agricultural _,_.__— -— .11. 207 .mHOQmA .cmumHMmm ummz mo DGmEGHm>Ow .ucmfiuummmm ucmfimoam>ma mam mcflccmam mnp mo 0mSmmH came omcmflaosmcs mop Scum nonfimubo mmB msoflumpsmeoo How mpmp one "mousom .cou Mom Doom mumswm w>Hw me How omofl>oum mpflommmo mcfimsosmHmB may A00 ammo» mom woman on on ooEdmmm we Hm>0IGHsu xooum mo mumH mob A00 aucmEmHHDme Hmuflafluumm Hmuop may 00 mamctoco Mom owofl>onm comb mm: muflommmo moamsonmumz “H0 “muoz 000.00 0H0.0H 000.00 000.0H 000.0H 0H0.0m scammm 00H.ea0 000.00H 000.000 000.00 000.0Hm 000.000 scammm eme.mem eme.~aa e0m.emu.a eeo.oe 000.00m 00m.ea0 eoummm 000.000.H 000.0Hm 000.HOH.H 000.00 00H.mMe 000.0H0 scammm o00.~am emm.~ea mmm.mmw oee.00 mem.00H ~00.H0m ecummm Amaou .Amcou Amcou Anson Amcou Doom mumsvm pompoumv Dosoonmv posooumv Dosooumv uosooumv :H mpomz HmNHHHDHmm m 0 mcoflmmm mcwmsoamumz memHoum Awnwlwv ammuom mumsmmosm cmmouuflz mo 0ueucmso .00ue0ma on 09 06008060 mesmsoemumz mo coeusnfluumfle mmflzucoH0mm .m.m mumee 208 inputs, and farm commodities in order to make a year- round use of warehousing capacity. Whereas it takes a time—lag to replenish the inventories at both wholesale and retail levels and a proportion of the overall ferti— lizer supply is met through imports, impact of seasonality of demand would tend to be greater at the retail level rather than at the district or provincial level. Thus the functions of warehouses can be assumed to be specialized at the provincial and district levels and diverse at the retail level where the warehousing capacity can be utilized during the crop seasons only and can be put to alternative uses during the rest of the season. On the other hand, buffer stocks can be maintained at the wholesale level in order to discount the uncertainty arising from fertilizer imports. The costs of supplying required warehousing capacity are gradually increasing because of the rising volume of fertilizers that must be stored in response to an ever—increasing fertilizer demand. An assessment of the magnitude of storage supply costs can be made from Table 5.6. As a measure of price policy, additional quantity of fertilizers will be stored so long as intra-seasonal price spread exceeds the long—run marginal cost of pro- viding storage which is an apparent justification for a return to free market pricing system from a publically 209 .umoo mafimsoanmB m>flnmo ou poms Hmcuusm mmB mabmu mDOH>mHm or“ ca mumo "muoz mmm.mmm eee.aee.HH e0e.mm m ecummm mmm.ome.m oee.mmm.eH ooe.eam e eoummm eme.eee.e eoe.mem.ma eme.mem m ecummm eom.emm.e eom.emm.am eem.mae.a m eoflmmm mme.eme.m eee.mm~.eu 000.0Hm H coummm AmHmHHOQ GHV Ammmmsm GHV Auwmm mumswm CH0 mcoammm Dmou mcflwsoamumz muflommmo mcfimsO£mHm3 _ .001000H 0b mommm mmsOQmHmz mcfimamm50 mo mumoo .0.0 mamme 210 controlled pricing system in order to encourage more efficient utilization of warehousing capacity. From a practical point of view, an orderly system of fertilizer transportation and physical distribution can prove un— successful without an efficient scheme of warehouse location. In addition, the public sector lacks ade— quate resources to finance such a large scheme of ware- housing. It would, therefore, be desirable that the participation of private fertilizer distributors be sought to ensure efficient capacity utilization with considerable policy direction from the government. Thus a system of warehouse financing at concessional rates must be organized to meet the loan requirements of the private sector. Conclusions The three aspects of physical distribution have been tied together in terms of: (l) institutional, (2) transportation, and (3) warehousing, because of the pseudo- complementarity that exists between them. Since the simul- taneous development of the three aspects of fertilizer distribution is necessary in order to attain a certain level of efficiency, a critical minimum effort in terms of adequate financial resource allocation must be under- taken to keep the new scheme of fertilizer distribution going. . 1.1.104-“ . CHAPTER VI THE PROCESSES OF FERTILIZER ALLOCATION Introduction The purpose of this chapter is to examine the role of the government in influencing the market behavior of fertilizer supply and demand and the economic activity of fertilizer distributors. It delineates the existing system of fertilizer allocation and its compatibility with the fertilizer operations of private enterprise. It stresses the need for a shift from a system of compre- hensive controls to reliance on free market operation. In contrast to free market operation where the price system guides and directs the allocation of goods and services into uses consumers value most, the exchange system typified by the conditions in West Pakistan is governed by administrative order and exchange rates that tend to be variable at the discretion of governmental authorities. In the western region of Pakistan, as in other underdeveloped countries, an important instrument of economic growth is the institution of conscious eco- nomic planning which represents an attempt to improve the allocation of the community's resources for given social 211 212 purposes. These social purposes must be related to the resources available and the need for their realization. The government as an agency of informed social purpose and as the main executive authority exercising its control on such scarce resources as foreign exchange greatly in- fluences the course of action for both public and private sectors. In addition, the government as a competing or complementing entrepeneur acts as the director of economic activity. Key decisions concerning production, consumption, distribution, investment, and almost all socio—economic relationships are made by the government through a hierarchy of civil servants. It enunciates the targets to be achieved in various sectors of the economy and directs resources towards the fulfillment of those goals. Thus economic decisions made by the government officials tend to a con- siderable extent replace the market determination of prices of some such scarce products as foodgrains, chemical fertilizers, and irrigation water, etc. In the distribution of chemical fertilizers in West Pakistan the major determinant of goods allocation is government. The fundamental factor differentiating allocation under such government planning from that occurring in a free market is the attempt under government control to consciously determine the apportionment of specified quantities of fertilizer to particular groups of consumers in designated areas of the province. This . .- ..- .1111?” 213 planned conscious determination of allocation embodies a sequence of related activities all of which are directly oriented to the purpose of achieving specific consumption goals derived from the five year plan to be implemented. Economic planning in relation to chemical fertilizer has been accomplished by such measures as allotment, choice of distributive outlets, setting of prices, and sales terms. Government action in fixing these marketing vari- ables inevitably results in removing considerable areas of decision—making from the hands of private enterpreneur. The government as an allocator of resources makes some crucial decisions and performs certain functions for the allocation of fertilizer to various distribution agencies. The Allocative Functions of the Government In the process of making fertilizer allotments, the provincial government makes vital decisions concerning fertilizer distribution through the Fertilizer Review Com- mittee consisting of high ranking officials of the pro- vincial government--Planning and Development Department, WPIDC, Cooperative Department, and representatives of other distribution agencies. Apart from developing con- sumption and distribution goals, the Fertilizer Review Committee is responsible for the determination of specific quotas and making of allotments to specified users. The decision-making body of the provincial government as referred to above, bases fertilizer requirements for the 214 next year on assessment of fertilizer consumption in the previous year and a desired rate of increase in con— sumption. The magnitude of fertilizer imports is, how- ever, determined on the basis of expected fertilizer supply position at the end of a current year, the antici- pated availability of indigenous fertilizers, and the projected level of fertilizer demand. The goals for fertilizer consumption are derived from the five year plan and the process of determining fertilizer targets is essentially based on the food and cash crop production and associated complementary inputs that would be required to achieve the targets. Thus fertilizer targets would be based on the total cropped acreage. Fertilizer dose per acre for various crops, farmers' level of income, and size of holdings and the cropping pattern and intensity of cropping. If the plan targeted fertilizers are much higher than the fertilizer distribution estimates determined through the system of indenting, the provincial government will either try to reduce fertilizer targets or revise the fertilizer distribution plans of various agencies up- ward. Fertilizer allotment is made by the decisions of the Fertilizer Review Committee which takes into account broad agricultural policy issues like the acreage to be brought under new varieties, their fertilizer response coefficients, availability of complementary inputs, the strategic areas of fertilizer distribution, availability of agricultural credit, and transportation facilities. 215 The provincial fertilizer targets are further sub-divided into divisional and district—wise quotas and fertilizer distribution agencies are alloted quotas in accordance with their capacity to distribute, the market share, and indents of the agency. In spite of the regional allo- cation of fertilizers to various distribution agencies, farmers are free to purchase fertilizers for cash from the dealer of any fertilizer distributing agency without any restriction in inter-district or inter—divisional movement. Since the geographical cost differential for the movement of fertilizers is much higher than the local prices, it tends to be inhibitive unless the stocks of fertilizers in a district are completely exhausted and some farmers can afford to use fertilizers at even higher prices. Through the process of fertilizer allotment, specific quantities of fertilizers are earmarked for the groups of farmers in designated areas. However, there is no system of making allotments or rationing of fertilizers to specific farmers. Any "bona—fide" farmer may come forward and purchase fertilizers from a government authorized or private dealer for cash at a fixed retail price unless fertilizers are deliberately withheld, hoarded, or black marketed by the private dealer against the sanctions of the government. A facilitating aspect of the allocation function is the choice and consequent authorization of distribution 216 I agencies to distribute fertilizers. There are two levels of choice: 1. The designation of specific fertilizer distribution agencies. 2. Their economic viability and ability to distribute fertilizers at the farm level. The choice of a fertilizer distribution agency whether public or private is a matter of expediency to the government officials. The basic orientation towards cooperatives has, however, in numerous cases resulted in some form of discrimination against private fertilizer distribution agencies. But as a matter of public policy, the preference is given to the private enterprise for the distribution of fertilizers in order to do away with the traditional bureaucratic inefficiency which is character- istic of public distributing agencies. While the govern- ment gives a broad direction to fertilizer policy, ferti- lizer distributing agencies have a freedom in the choice of private commission agents and retailers. The very act of choice of a specific distributing agency also shares with fertilizer distributors the main burdens of carrying on propaganda for the furtherment of fertilizer use among farmers providing sufficient distributive outlets and warehousing facilities and to some extent the adminis- tration of fertilizer credit to farmers--in short, doing the bulk of work necessary to expand an underdeveloped market. Since all these aspects of fertilizer distribution v1- ‘ v - - ‘ ..—_._._. -.—....... .W“ 217 present problems of considerable magnitude to the govern- ment officials, their views of allotment are, therefore, to a great extent conditioned by the nature of these problems and the progress that has been made by the fertilizer distributors in solving them. Faced by day- to-day problems of these sorts, the position of the fertilizer distribution agencies is often that of a reluctant buyer facing an aggressive seller. The subject matter of negotiations between the government officials and the fertilizer distributors would, therefore, not be price or sales terms, but the quantities of fertilizer in terms of distributive shares, the types of fertilizers available and demanded by the farmers, and the marketing margins plus haulage costs. The role of government is supposed to extend beyond the mere process of fertilizer allocation in order to supplement an inadequate marketing system which stems from a variety of factors including the low income of those constituting the largest potential market for fertilizers, inadequately developed physical resources, and a low level of development of marketing services. Since the farmers lack adequate resources for the expansion of fertilizer market, it devolves upon the marketing system, i.e., manufacturers and distributors of fertilizer to provide resources for the stimulation of such developments. Thus an assessment of the economic viability of a fertilizer .‘_~.——-- 1 4 ”1--...- .. . ~ .1], 1. 1.. _1__11 I _ ._ . 1.1 218 distributing agency would be necessary to qualify for floating an organizational structure with a minimum eco- nomic size unit for the distribution of fertilizers. It must have an adequate financial base to maintain a certain level of fertilizer inventory, marketing experience, and entrepreneurial talent in order to make its business a success. Thus a minimum level of financial security would pre-qualify a firm to launch its fertilizer dis— tribution program. An important aspect of the allocative function is the process of making requisitions of fertilizer by the distributors. The activity of making requisitions includes the process of passing on requisitions from retailers, wholesalers, and distributors to the officials of pro- vincial government. The requisitions are in line with allotments planned for the various political sub-divisions. Eventually the requisitions are passed on to the Ministry of Agriculture in the central government which, in turn, assesses the domestic fertilizer production capacity, arranges for foreign exchange allocation with the Ministry of Finance, and issues shipment instructions to domestic fertilizer factories as well as to port authorities. Since the WPIDC is responsible for the indigenous pro- duction of fertilizers, with the exception of a few pri- vate producers, and the WPADC arranges for the import of fertilizers, fertilizer distributors can obtain their supplies at f.o.b. mill prices from the aforesaid sources. ~ _mafi-t 1...? " '..' 219 Conflicts in the Process of Fertilizer Allocation The two major sources of conflict in the allocation of fertilizers are: l. Conflicts arising from the allocative function of government in relation to fertilizer distribution agencies. 2. Economic planning as a source of conflict. The basic conflict in the process of fertilizer allocation arises because of the existence of almost com- plete control of fertilizer at the higher stage of owner- ship of the channel and diverse types of distribution agencies at other levels of the marketing channel. The stronger bargaining power of government officials vis-a-vis the fertilizer distributors leads to the imposition of publicly conceived ivory tower ideas on the distributors whose work is concerned with what goes on in the field. Problems arise primarily in connection with the fertilizer distributing agencies whose requirements for fertilizer tend to vary with their performance, future plans, and the greater rate of growth in the demand for fertilizer. The planned fertilizer targets are based on the broader con- siderations of targeted crop production, anticipated fertilizer absorption capacity, and foreign exchange availability. An interesting fact is that the targets based on tentative absorption capacity tend to be much higher than the aggregate requirements of fertilizer 220 distributing agencies as well as their capacity to dispose of a given volume of fertilizers. Since the officials of the provincial government are extremely concerned about the attainment of fertilizer targets derived from the plan, their views of the size of allotment are most closely related to the implementation of official policy rather than to the problems of individual distribution agencies which they encounter in the actual sale of fertilizers. The conflicts, however, emerge when the government officials do not allow for adequate expansion of transport handling capacity while planning for a desired expansion in the fertilizer distribution. It would, however, be desirable if a coordinating mechanism is created between the trans- portation and distribution sectors by involving the officials from transportation department in Fertilizer Review Committee. Since the quota of fertilizers to be distributed by an individual distribution agency is alloted much ahead of time before the actual distributive activity takes place, there is a possibility of the emer- gence of intra—channel deficits and surpluses from the allocated quantity of fertilizers. Since the existing system of channel organization does not provide for the inter—firm flow of fertilizers, the allocation process may result in the inefficient use of fertilizers. In addition, the system of fertilizer allocation does not provide incentives for the incorporation of cost-increasing 221 technical changes, qualitative factors, and services, because of the fixed retail pricing system. Since 1955, the beginning of the first five year plan, economic planning in West Pakistan has considerably replaced the market determination of the sale of ferti- lizers and their prices. The program of allotments is to a considerable extent a substitute for the private enter- prise supply-demand—price method of determining how much of an item was distributed, where, and to whom. The pro- gram of fertilizer allotments has not only resulted in an abrogation of the immediate supply and demand consider- ations, especially as they are viewed by a private entre- preneur but also tends to force the consumption of ferti- lizers in the direction desired by government officials and planners. The government action in fixing these marketing variables inevitably results in removing con— siderable areas of decision—making from the hands of pri- vate entrepreneurs. In such a situation of planning, the entrepreneur is implicitly expected to “fit in" with decisions made at other levels. The process of "fitting in" involves the quantity of fertilizer, purchase price, and resale price that are set by others. The particular levels at which government fixes quantities and prices reflect some concept of social optimum which may well be valid for the nation as a whole, but might not be valid from the point of view of an individual entrepreneur. Since for an individual entrepreneur's acceptance of 222 government—fixed conditions is a precondition of his participation, he must decide for himself, if the income potentialities are sufficiently attractive. Thus, for those who are risk—takers the opportunity to expand in different directions may be limited. Economic planning results in substantial shifts in the marketing pattern with respect to the classes of buyers and the geographical areas served. The program of allotments tends to force "consumption“ in directions indicated by the social objectives of planners. Thus, a problem that could be solved through competitive buying in more purely private enterprise environments may be decided by administrative order with quite different end results. A conflict is, however, introduced by the public planning of market distribution primarily because it re- places private decision-making with administrative orders and control. In a private enterprise economy the entre- preneur has some power to manipulate certain marketing variables such as the products carried, the quantities stocked, the location of enterprise, and prices as well as sales terms. Whereas in an environment typified by administrative order the particular restrictions such as the inability to obtain allotments or to depart from a fixed price are likely to limit his ability to manipulate marketing variables and to respond to a market signal. The character of conflict between government and private 223 agencies is conditioned by the fact that government occupies a special place in the market, both as an entrepreneur and as government. The government's role as entrepreneur is not dissimilar to that of discriminating monopoly in a private enterprise economy. Given the government's special position as a participant and as a spokesman of public policy, conflicts cannot usually be resolved by direct market interplay. Instead they must be resolved largely through non-market negotiation. The Processes of Fertilizer Allotment Versus Private Producers Apart from the WPIDC there are also emerging pri- vate fertilizer producers on the economic horizon. For example, ESSO, which started its fertilizer distribution activities with pure dependence on fertilizer imports of WPADC, has begun its own fertilizer production in order to meet its fertilizer distribution requirements. Since it intends to have its own team of agricultural experts and a chain of wholesalers and retailers, the impact of new fertilizer distribution policy would be to eliminate a part of the activity of allotment and allocation of ferti- lizers from the hands of government. With the partici- pation of new private bodies in the fertilizer distri- bution system, the economic incentive to vertically inte- grate backward into production is likely to increase resulting in lesser and lesser fertilizer allotment 224 activity that passes through government officials. Its immediate consequence will be that government will be left with almost no account of the private entrepreneur's activity and, therefore, with considerably less control on fertilizer distribution policies. Unlike the govern- ment's allocative activities, nOne of the private activi- ties are likely to be directly-oriented towards putting specified quantities of a particular type of fertilizer in designated classes of farmers in given territories, nor would be the market planning of such measures as making of allotments to political sub-divisions. The market behavior of private enterprise is likely to be governed by "wait for orders as they come," and he would not be able to exert pressure on distributors which may be comparable to that exerted by the provincial government. The compatibility or incompatibility of private enterprise with public policy would depend largely upon: 1. The ability of private agencies to perform marketing functions in keeping with economic goals. 2. The extent to which government regulation and control impede or facilitate the private performance of marketing. Under the existing system of fertilizer distri— bution, the viability of a fertilizer distributing agency would depend to a large extent upon the latter's ability 225 to expand the market in desired social goals. To the extent private agencies cease to exercise entrepreneurial functions such as the assumption of risk and development of markets and simply become order-taking agencies, there 'seems to be little reason for their existence as separate institutions. The sole justification for the retention of a particular type of marketing agency is its ability to perform a function that other kinds of organizations cannot perform effectively. Conclusions An analysis of the existing processes of fertilizer allocation indicates that the lack of effectiveness of the fertilizer distribution system is primarily due to a number of exchange rules in the form of fertilizer allotment, quotas and fixed prices which are rather too restrictive to permit an organic growth of fertilizer industry. In addition, the emergence of new private fertilizer producers has led to the belief that the currently operating set of market exchange rules that influence the fertilizer distri- butive activity are inadequate to govern the operations of private enterprise. A relaxation of the government con- trols to give a greater leeway to the private entrepreneur would be necessary. CHAPTER VII TERMS OF SALE AND PRICING PRACTICES Iptroduction This chapter isolates that aspect of fertilizer distribution which relates to the system of fertilizer pricing. It examines the pros and cons of a shift from a system of comprehensive price control to a system of ferti- lizer pricing which is consistent with free market oper- ation. The price of fertilizer constitutes an important variable insofar as it influences the level and pattern of production and market resource allocation. Changes in fertilizer price can lead to shifts in the profitability of fertilizer and farmers' economic motivation towards the production of various crOps as well as input-output price ratio. Thus, an incentive towards increased or decreased use of fertilizers may either come from bring— ing about a shift in the physical productivity of ferti- lizer or from improved fertilizer crop price ratio. The shifts in the profitability of various crops are likely due to changes in price, if the ratio in which alter- native commodities can be produced with a given set of 226 227 resources at the farmer's disposal are very similar to the existing ratio of prices. Thus, small relative price changes under one set of physical production possibilities may induce a change in the profitability of some crops over others, whereas a large relative change in price under another set of physical production ratios with a given resource base may suggest a different combination of farm enterprises. The fact that fertilizer market in West Pakistan is still in the early stages of development, lack of technical knowledge, conservation, and price un- certainty combine to cause substantial under—utilization as judged by the exposte relationship of prices. The rational economic argument for subsidizing the price of fertilizer is that farmers in effect, tend to overdiscount the returns to fertilizer as compared to society due to a number of risks like yield risk, price risk, and weather risk. Subsidized price, therefore, provides a compen- sating discount that leads to a new, but higher level of optimal fertilizer use. Thus, in order to ensure low fertilizer prices to farmers, the government of West Pakistan provides for a relatively high fertilizer subsidy through a comprehensive set of controls by fixing the prices of fertilizer at f.o.b. mill wholesale and retail levels. 228 Vertical Price Structure The system of control on fertilizer prices through administrative order stems from the basic policy of ferti- lizer allotments, target setting, and economic planning. The broad purposes of this control are: l. Stimulation of demand for fertilizer by in- suring the lowest possible price to small farmers that would be consistent with a "no profit, no loss" marketing operation. 2. Facilitating a more even geographical pattern of consumption by maintaining nationally uni- form prices. 3. With these objectives in mind, the government of West Pakistan determines: a. The prices to be paid for fertilizer by the public and private distributive organ- izations to which it makes allotments. b. A maximum resale price for plantations and other big farmers who intend to pur- chase fertilizers directly from the government allotments. The power to set prices for all types of ferti- lizers, however, rests with the provincial government Which determines the retail prices for fertilizer on the basis of a broad criteria which include: 1. Average cost-price of fertilizer purchased from domestic and foreign sources. 229 2. Average charges for freight and handling from ports and factories to their desti- nations in West Pakistan. 3. Fixed average marketing margins for inter- mediaries. 4. Minus the percentage subsidy on fertilizer prices which government intends to advance during a particular year as a measure of broad agricultural policy. The procedure for determining the marketing margins is based on the calculation of average cost of physical distribution for both the imported and indigenous ferti— lizers including a provision for distributors' profit be— tween rail station and retail selling points. The cost is computed on the basis of: l. Cartage charges for an average distance of ten—fifteen miles. 2. Stevedoring, clearing, and forwarding charges for imported fertilizers as well as wharf rent and purchase and inspection costs. 3. Railway freight for inland and up—country transportation of indigenous and imported fertilizers. 4. Warehouse rent. 5. Wages, salaries, and administrative overhead. 230 6. Sales promotion costs of and provision for unforeseen losses. 7. Distributor's “commission“ or losses. In some cases, actual resale price is fixed at a level based on computations encompassing physical handling costs plus a "commission" for the distributor or dealer. While the marketing margin encompassed in the "commission" may vary with individual firms, it is often analogous to a gross margin between sale price and laid—in cost price, rather than being a payment for specific services rendered. Since the up-country costs for imported fertilizers are higher than those for the inter— and intra-regional move- ment of indigenous fertilizers, the gross markup on the product cost though low as a percentage of the total, is higher on imported than for domestically manufactured fertilizers as given in Table 7.1. Terms of Sale Since the WPADC is the only agency responsible for the import of fertilizers, its terms of sale to private distributors are four months free credit from the date that fertilizer is delivered to them at Karachi. Distri- butors, on the other hand, demand from retail agents either a cash deposit prior to shipment of the railroad cars and/or full payment prior to the cars being released to the agent at the up-country railroad heading. Similar arrangements exist for the sale of fertilizers produced 231 .muocmq .cmumflxmm Dmmz mo Dcmficum>ow .DcmEuummmo ucmEmon>mo mom chCGmam mop 0b mommmfl mOEoE pmnmflaosmco "mousom 00.00 00.00 . . . . cmmuomlouuflz 00.00 00.00 . . . . . . . . cmmuom .0 mNuwN mN.mN . . . . . . . . wfierQWOSnH EchoEEmflo «0.00 00.00 00.00 00.0H 0H.0 0H.0 mumcd Imosmummsm mHQHHB . . . . 00.0H . . 0H.0 0H.0 mumnmasm Edflcosem 00.00 00.00 0H.0H 00.0H 00.0 0H.0 mumnuflz wpmnmasm EdflcoEE¢ 00.00 00.00 Ha.m0 0H.0 0H.0 0H.0 mono mmuuomEH 00.00 00.00 00.00 mo.0 00.0 00.0 00600000000000 00.H0 00.H0 00.0H 00.0H 00.0 00.0 mono 0H.0H 00.0H 00.0H 00.0 00.0 00.0 mumuuflz esflcoaad 0H.0H 00.0H 00.0H 00.0 00.0 00.0 mumcmasm Esflcoaam msocmmflocH 000a 000a 000a 000a 000a 000a mmousom up I000H I000H I000H I000H I000H Iv00a mumwflaflpumm Mo mmmwa .AGOD Mom 00 mHmNflHHDHmm mo mmmha mDOflHm> so mHmquUHOGH .H.0 mqmfie 232 y WPIDC to private distributors. The existing system f fertilizer sales takes away a major part of the cash eserves of retail agents and reduces their liquidity osition for maintaining adequate inventories or making redit sales to farmers. It is, therefore, necessary hat a system of inventory financing or extension of redit facilities to retail agents be evolved. The possi- ility of conflict, however, arises when the extent of ncreased costs of storage and repayment is limited by ixed margins. Since the indigenous sources of fertilizer supply re controlled by the WPIDC, a semi—public body which is ubject to the rules and regulations of government, the roblem of making fertilizer directly available to the rivate distributors without the sanction of government oes not arise. As soon as the privately owned ESSO ertilizer plant and other similar plants came into pro- uction, the problem of imposing uniform price control and iving of fertilizer subsidy is likely to assume a new imension. ESSO intends to have a vertically integrated arketing system enabling the retail agents to sell ertilizers at lower prices than the officially fixed etail price. Similar changes may be noticed at f.o.b. 011 and wholesale levels. The structure of fertilizer ~roduction would take the pattern of an oligopolistic or bnopolistically competitive industry where new tools of Iconomic analysis can be applied. The fundamental factor 233 I Iiat can be put forth against the controlled pricing system s the maintenance of price control. It is almost practi- ally impossible to maintain an array of vertically fixed :rices throughout the year regardless of the temporal and eeographical variations that may automatically originate :rom the market forces of supply and demand for fertilizer 't a certain point in time. An Evaluation of the Current System of Fertilizer Pricing The existing system of vertical price relation— hips as determined through administrative decision-making .t the provincial level and in which an individual entre- Ireneur is required to "fit in“ allows the slightest Inargin" for him to actively pursue his profit maximizing Lctivities. The basic consideration in the fixation of Fertilizer prices is to pass on the full benefits of fertilizer subsidy to farmers while allowing the least >ossible margin of profit for the distribution sector. It provides a considerable disincentive to the fertilizer listributor to expand his distribution activity beyond the >oint where his marginal costs begin to exceed the hori— zontally fixed price. The rationale that each economic system has its own set of market rules within which an activity takes place, loses its ground when the market rules become too restrictive so as to permit profit maximization by the fertilizer distributor to take place at a much lower level than the profit level he would 234 tchieve under free market operation. The currently oper- lting system of price controls not only enjoins upon the [overnment to police a wide range Of fixed prices but also .5 costly in terms of economic inefficiency and adminis— :rative decision-making which uses up a considerable pro— >ortion Of the scarce administrative resource. While government officials reflect essentially a pragmatic con- :ern with the problems of carrying out distributive tasks lithin a specified operational margin the problem of fixed margins props up as an essential "dichotomy Of marketing" >etween planning and policy execution. The concept Of no >rofit, no loss" distributive Operation that seems to lurk Jehind the structure Of fertilizer prices is more apparent :han real. At least, it encompasses only the aggregate >f physical distribution costs from supply source to the final points of fertilizer distribution which are various railheads. The uniform pricing system of fertilizers all >ver West Pakistan reflects neither geographical price lifferentials nor market segmentation which may be based >n different classes Of buyers. The officially fixed f.o.b. mill prices allow for no price discount allowances, rebates, or cash discounts. Since the demand for ferti- Lizer is seasonal, the institution of “Off-season rebates“ luring the slack season would be necessary in order to naintain an even flow of fertilizers and to tide over the fluctuations in fertilizer production that tend to origi- late from demand. 235 I A Proposed Fertilizer Pricing Policy Since the officially prescribed fertilizer pricing system does not take into account the seasonal pattern of 1emand and such exogenous factors as.may cause unstable >ehavior of the market, it loses its significance to both :he distributor and the farmer. Such a pricing system may meerceptibly erode away the benefits Of fertilizer sub— sidy to the farmer with considerable gain to those who can inscrupulously accumulate profits. It would, therefore, be desirable to allow the free market determination of fertilizer prices. The rationale underlying the system 3f comprehensive price controls is that the fixed marketing nargins act as a safeguard against excessive profits by the narket intermediaries and ensure lower fertilizer prices to farmers as well as increase their marginal returns. Vhereas the public policy of policing the price system seems to be practically impossible, there exists no such narket mechanism that may ensure lower fertilizer prices and smaller price spread. Under a pricing system involv- ing freer adjustment Of the forces of fertilizer supply and demand, intra—channel competition tends to restrain excessive marketing margins and keeps fertilizer prices within competitive limits. The discussion as to what type of pricing policy to follow can only take place within the context of channel organization. In spite of the fact that the channel structure proposed in the previous chap- ter tends to promote a workably competitive environment 236 nd a favorable market conduct for fertilizer distributing irms, the market forces of fertilizer supply and demand re restrained by the public policy, the magnitude of ertilizer imports and the domestic fertilizer market. ince the primary Objective of a pricing policy is to aintain a remunerative price level for both the farmer .nd the distributor, it would be desirable that the govern- ent may maintain speculative inventories in various 'egions of West Pakistan. The retainment of government :Ontrol at various strategic points would be necessary so :hat freer Operation of the market forces of fertilizer :upply and demand may not adversely affect the terms of :rade between fertilizer and crop prices. It can serve to :upplement the inadequate market price signal as well as :O relieve the pent—up fertilizer demand by reinforcing fertilizer market supply through additional fertilizer .mports which must be obtained on foreign exchange. Since :he objective of maintaining a remunerative and stable Irice level is to guarantee a reasonable rate of return for the farmer and adequate profit margins for the private enterprise, it would, therefore, be recommended that :mphasis should not be laid on reducing the profit margins, but on the adoption of cost-reducing methods which may Ienerate greater economies of production and marketing. it is, however, a long run measure due to the fact that :he adoption Of new fertilizer technology and exploitation If the economies of size and scale requires a long period 237 If gestation. On the other hand, movements in the prices If fertilizer and commodities must be modified from time :0 time by the maintenance of speculative inventories, if I guaranteed and favorable rate of return to the farmer .s to be ensured. The speculative role can, however, be Lssigned to the private enterprise wherever found neces- :ary. An Analysis of the Fertilizer Black Market An undesirable phenomenon of the existing system 1f fertilizer pricing is the emergence of black market arices from time to time in various parts of West Pakistan. Dhe causes may vary from a general excess of demand over supply to spatial structure of the fertilizer market. fariations in both supply and demand for fertilizer may Lead to changes in prices beyond the publicly controlled Level. On the supply side, uncertainty and irregularity _n the volume and timing of fertilizer imports may lead :0 the left-ward shift of supply and cause a substantial :ise in fertilizer prices. Bottlenecks in the temporal and spatial movement of fertilizer supply and demand are Likely to create substantial variations in the price of fertilizer beyond the officially fixed price. Some of the :easons that can be adduced to the rise of black market >rices are the existence of the spatial monopoly of a particular retail agent or due to the imperfection of the fertilizer market arising from transportation inefficiency. 238 Under the existing more or less OligOpolistic structure of the fertilizer market, a private distributor aiming at profit maximization would sell that quantity of fertilizers where his marginal cost of marketing a unit Of fertilizer quals the Officially regulated price. Assuming that the regulated price at which a distributor can sell fertilizers is below the free market equilibrium price level and that the possibilities of the emergence Of a black market are greater because of the existence of a fringe of unsatis— fied demand at the officially fixed retail price OP. The process of emergence of the fertilizer black market is explained by the following diagram. x \ \ Q '00 Quantity of Fertilizer Figure 7.1. The Formation of Fertilizer Black Market. 239 In the above figure, a typical private fertilizer ributor is faced with the demand curve D and his ixual revenue curve MR where OP is the Officially Llated fertilizer retail price which is apparently WV the firm uncontrolled imperfectly competitive price 'Fhe private distributor would maximize his profits yelling OQ' units of fertilizer at OP' price which is we the competitive price level O"P. Since the private tributor is supposed to sell fertilizer only at the icially regulated price OP, he will dispose of only units Of fertilizer, thereby creating an unsatisfied .nge of demand AB. It would lead to the emergence of rtilizer black market which is assumed to be a certain >portion of the demand for fertilizer facing the indi- 1ual distributor. The demand curve DO facing the ferti- zer black market rises to the upward extension Of D, areas the corresponding marginal revenue curve MRO also es to the left of MR. The fertilizer distributor, erating on the principles of price discrimination would Januze his profits by equalizing his marginal cost with ranmrginal revenues MR0 and MR in both the black and Limanmrkets. Since the demand for fertilizer in the .adcnmrket is much more inelastic, he will be able to allfbrtilizer at OOP price which is greater than the thfially regulated price thereby making the controlled rimasystem ineffective. The aggregate fertilizer demand ndlmuginal revenue curves are, however, represented by 240 1d MRT' If we, however, assume an incremental premium Incertainty to the black market costs of private .lizer distributor, as is normally the case when price rcement is attempted, we ought to lower the black 2t demand curve DO. Similar analysis can be extended to other ferti- r distributors in the market which will exPlain the rior Of fertilizer distributing industry in relation Le fertilizer black market. It would indicate the fectiveness of an Officially fixed retail price, if : below the uncontrolled imperfectively competitive level. It is also one Of the causes of the in- :tiveness of the existing fertilizer pricing system :st Pakistan because a general belief of the govern- Officials is to ensure as low fertilizer prices to ?armer as possible in order to stimulate fertilizer .d and increase farm returns as well as to provide .he least possible profit margin for the fertilizer 'ibutor. Another argument may be the general excess mand over supply at the fixed retail price which is Iained through a costly program of fertilizer subsidy. as adequate foreign exchange is rarely allocated for mport of a required quantity Of fertilizers. Provision of Fertilizer Subsidy Sale of fertilizers to farmers at subsidized prices tool of market develOpment constitutes a cornerstone 241 est Pakistan's fertilizer policy. The rational HOHdJ: argument is to provide fertilizers to farmers L cflneaper price in order to improve the relative and -vifhial rate of return from the use of fertilizers. xe the farmers tend to overdiscount the returns from tilizer use as compared to society, the subsidized :me of fertilizers provides a compensating discount reby farmers can attain a new and higher level of imal fertilizer use. The primary Objective of ferti- er subsidy is to induce the low income farmer into .ng fertilizer for raising farm productivity. A serious Iblem confronting the low income farmer,however, is the :k and uncertainty which is incident to the requisite sh expenditure on fertilizers and the attendant ambi- Lence on the part of the farmers in the commitment of air limited cash resources. Thus a single major crop ilure arising from the ill-advised use of fertilizers likely to liquidate a low-income farmer and greatly duce his flexibility in attempting a similar experiment in meeting future emergencies. That fertilizer prices constitute an important uiable in the production plans of farmers can be ssessed from the comments Of the Food and Agriculture >mmission which after examining the question of ferti- Lzer subsidy stated that: 242 . . the rate of subsidy has been so variable from ear to year and changed at such a short notice that uch of the expected impact of subsidy was lost. . . . ertilizer use is still in its initial phase, and to nsure widespread distribution, it is desirable that ubsidy should continue and that the rate should re- ain unchanged over a number of years so that the armer may not be left in doubt as to the investment e has to make.53 result Of the recommendations Of the Food and Agri- re Commission, the government decided in 1961 to fix rices of fertilizer at about 50 percent of the cost 0 keep it constant throughout the plan period. A t consequence of fertilizer subsidy is to generate orable fertilizer—crop price ratio vis-a-vis other inputs, thereby creating output and substitution ts. The aggregate impact of the fertilizer subsidy rtilizer sales can be realized from the fact that the ase of the subsidy from 40 to 50 percent and its enance during the period 1959-61 resulted in more 100 percent increase in fertilizer use. That ferti- subsidy is not the only variable accounting for the sion in demand for fertilizer is verified by the nuously rising trend in fertilizer consumption te abrupt fluctuations in the level of fertilizer dy as illustrated in Figure 7.2. 53Government of Pakistan, Report of the Food and ulture Commission, Manager of Publications, Karachi, p. 157. 2413 Subsidy -II— ~1— L L 1 1 1 4 1 6 57 58 59 60 61 62 63 64 65 66 67 l 1 1 Y L l T W 5 S I 953 54 5 Iurce: Aziz Ahmad, Agriculture in Pakistan (Karachi: USAID, 1967). Figure 7.2. Fertilizer Subsidy and Consumption in West Pakistan. --~ --— Fertilizer Consumption IthSO “I 975 900 825 750 675 600 525 450 375 300 225 150 75 eqethns mnruommv go suoL (00) u: uoradmnsuog 1321113193 5”,”..- ‘n- .:-,—.-———— 244 ‘Whereas price reduction is generally an accepted rurte of sales promotion the extent to which the demand fertilizer will increase in reSponse to a given per- :age reduction in price at various levels of the demand we vwauld depend upon the price elasticity of fertilizer anni at that particular level. Whereas fertilizer sub- 5] tends to improve the relative profitability of ferti- eer and shifts the demand for fertilizer through output substitution effects, increased revenues from direct ce support may or may not be spent for increased farm restment or the purchase of fertilizer. On the contrary, equivalent budget allocation for direct price support 11d simply tend to raise the average cost of food and v materials for urban consumers. A major problem with e advancement of the fertilizer subsidy is, however, e rising volume of eXpenditure which is positively rrelated with the rate of rise in fertilizer sales as lustrated in Table 7.2. The single major Objective Of e fertilizer subsidy is fertilizer demand expansion by waning better returns to farmers which could also be :hieved by various means. The unilateral emphasis of 1bLu2policy on subsidized prices as the sole means of ttahfing the indicated objective leads to misallocation f'hnfllopportunity cost resources insofar as trade-off emmstm exist between the means. In order to maximize heefifiectiveness of a given budget allocation in achieving he desired Objective, government can diffuse the use Of 245 .Ouozmq .cmumflxmm #003 m0 Dcmficum >00 .DcmEuummoa usmEmOHm>mo pom mcflccmam won an UOSmmfl mOEmE pmcmfiaosmco "monsom 000.00 00 .¢.z 001000H 000.0H 00 0H0 001000H 00H.00 00 000 00:000H 000.00 00 000 001000H 000.0 00 000 00l000a 000.0 00 000 00:000H 000.H 00 00H 001000H .<.z 00 000 00IH00H .<.z 00 00H H01000H cOflHHeE m Ammamm mummmumme :00 chD =000= Hmm stuflocmmxm Hmuoe wwflmbsm mmmucmoumm mmamm Honefifluuom » .mmamm HmNHHHDHmm so hwflmbdm mo mumm .N.0 mqmow .DcmEDnmmmo ucmEmOHm>mo ocm mcflccmam mow 0b 005000 00505 Umnmeabsmss map so Ummmb mum mcoHDmusmfiou ”mousom .UE Hmm 00.00 0m mo 00 mmE500m 00 woenm 0000 mmmum>m c0 "muoz 0m.HH 00.00 00.0 00.00 00.0 00.0H 00.0 00.0H 00.0 00.0H anom 00.0 00.0H 00.0 00.00 00.0 00.MH 00.0 M0.0H 00.0 00.0H Huma 00.0 0m.HH 00.0 00.0 H0.0 no.0 H0.0 00.0 00.0 00.0 Huoa 00.0 00.0 00.0 0m.0 H0.m 00.0 00.0 00.0 00.0 00.0 Hum 00.0 00.0 00.0 00.0 00.0 00.0 00.0 H0.0 0H.0 00.0 Hum 0000mm 000m 248 .08 000 0.0a mm on 00 umfidmmm 00 moflum ummoz mmmum>m G4 "muoz 00.0 00.0H 00.0 00.0 00.0 00.0 00.0 0m.0 00.0 00.0 Huom 0H.0 00.0 00.0 H0.0 00.m 00.0 Hm.m 00.0 00.m 0m.0 Huma 00.0 00.0 00.0 00.0 00.0 00.0 00.0 00.0 0H.0 00.0 HHOH H0.0 00.0 00.0 00.m 00.H H0.m 00.H 00.m 00.H 0m.m H00 mm.H 00.0 0H.H 00.0 00.H 0H.0 0H.H 0m.0 0o.H 0H.0 Hum 000000 00003 .0000: .000 .00000 .000 .00000 .000 .00000 .000 .00000 .000 Oeumm mumnmmonmummsm mpmbmmonm mmH mpmeHZ oumsmasm umuflaflunmm OHQflHH luwmsm D ESHQOEEd ESHGOEE¢ 249 be real value Of farmers' investible funds as well as to unrate increased farm returns. The amount of increase Inmney returns to farm producers will, however, vary Lrectly with the extent to which fertilizer prices have zen subsidized and inversely with the general decrease in [rm product prices because of an increase in aggregate Irm output. The relative amounts of economic benefits .d costs of fertilizer subsidy are indicated in the llowing diagram: D S 'Sw DW Q 'Q Quantity of Fertilizer Figure 7.3. The Welfare Effects of Fertilizer Subsidy. 250 uatotal quantity Of fertilizers that will be sold at the isubsidized wholesale price Pw is indicated by OQ. At masubsidized wholesale price O"Pw the quantity of ferti- .zers that could be sold in commercial channels would be P which is determined by the intersection of wholesale mply curve S'w and the demand curve Dw at point P. The antity QQ', however, represents the increase in demand r fertilizer. The expansion in fertilizer demand aris- g from fertilizer subsidy by the quantity QQ' would re- ire an outlay Of public funds equal in amount to that dicated by the sum of areas B, C, D, and H. Whereas e total outlay Of public funds will be equivalent to the n Of areas A, B, C, D, E, and H. A similar decline in e retail price of fertilizers arising from the subsidized alesale price would generate a new point of intersection for the retail fertilizer supply curve 'Sr, and the nand curve Dr' The benefits of fertilizer subsidy tO :.farm.buyers of fertilizer are measured by the sum of :as F and G. The analysis of measuring the benefits to injbuyers based on the Marshallian method Of measuring .sumer surplus assumes constant marginal utility Of ey to the individual purchaser. The changes in the cue of fertilizer tend to influence the demand for izilizer through their effect on the real income of nvdouyers, with results similar to those indicated by onmr-consumption curves and by increasing the 251 mstitution of low—priced fertilizers for other farm in- ms with results similar to those indicated by the price msumption curve. In the short run, retention of the fertilizer bsidy may be justified on the grounds that social as 11 as private returns from a given subsidy program far tweigh the budget cost of financing it. In the long n, however, social returns begin to show a diminishing end for an increasing budget cost of fertilizer subsidy at would be required to finance a rising volume of rtilizer sales. As a measure of public policy, it would desirable that the rate of subsidy per unit of ferti- zer be reduced gradually to the extent that the marginal :ial cost is equalized with marginal social returns. Conclusions An examination of the existing system of compre- sive price controls indicates that a major reason for occasional emergence of black market prices is the ulated price and that a departure from it would be essary in order to ensure greater pricing and distri- ion efficiency as well as a freer adjustment of the peration upon product markets, the process of interaction >etween the two markets assumes increasing importance. the difficulty in regard to the effective operation of >roduct and factor markets prbmarily arises from a wide lisparity between rural and urban areas within the under- ieveloped countries. Industrial growth is inhibited by food shortages and high food prices while agricultural >roductivity lags because farmers perceive no stable and remunerative markets for their products. In short, the :ural-agricultural and urban industrial sectors are not effectively coordinated. The purpose of this thesis was to develop a rele— rant theoretical framework that explained the Operation Of farm input markets in the broader context of underdeveloped :Ountries. An attempt has been made to discuss the market- .ng system in its development perspective and to evaluate .he impact Of price policy on the Operation of farm input Iarkets as a guideline for public policy. The basic Ob- ective is to lay out an initial framework to eXplain the Iperation Of the fertilizer market in the context Of West akistan. Since fertilizer is an industrial input which tan be brought into commercial production through Obtain- ng technical and financial assistance from the developed rountries under the sponsorship Of public or private nterprise, the major problem Of West Pakistan is not .ow to produce it or consume it, but how to distribute .t in response to a rapidly expanding demand within the 254 zontext of an agriculturally less developed country. As fertilizer is supposed to constitute a vital link in the :hain of fertilizer supply and demand, the operation of each of the market forces was separately eXplained. On the supply side, the existing and proposed fertilizer production capacity was examined with a view :0 evaluating the impact of fertilizer supply on the Iistribution system. Since the supply of fertilizer tends :0 be continuous over time the effects Of the existence of economies of size and scale and idle capacity on the cost >f production were evaluated. It was proposed that a Iecular decline in the cost Of production Of fertilizer Ias necessary to ensure lower cost of crop production to :he farmers. On the demand side, complementary factors :hat tend to affect the demand for fertilizer were examined :0 analyze the extent Of stimulation and contribution of :ach factor towards demand expansion. Since the demand For fertilizer is seasonal, the causes underlying the .patial and temporal variation of fertilizer consumption 'ere examined. The aspect relating to fertilizer distribution has Ieen examined from the organizational point of view. The :riterion developed to analyze the fertilizer market :hannel indicated that the existing system of channel Irganization was inadequate and outdated. Thus, in order .0 make further suggestions for the improvement of 255 Fertilizer distribution system, the history of fertilizer Iistribution was examined from the point of view of ferti- ,izer Channel ownership and control. As an alternative to .he existing system of distribution, a privately organized 'ertically integrated system of fertilizer distribution 'as suggested. In order to avoid the problems arising 'rom the development of deficits and surpluses of ferti- ,izer, a system of channel coordination for the interfirm 'low Of fertilizer was proposed. Since the local delivery If fertilizer at the farm level and its spatial movement .re of urgent concent to the distribution system, a 'egional marketing system was proposed to streamline the rocess of physical distribution. For reasons Of con- enience, West Pakistan was divided into five major ferti- izer consuming regions in order to intensify fertilizer istribution activity at the farm level. The various ocal points in the system of regional marketing were upposed to be constituted by the location of distribution enters at the district, distribution sub-centers at ehsil, and fertilizer retail outlets at the farm level. chain of warehouses was proposed to assist the process f fertilizer movement over time and space through the eplenishment of fertilizer inventories at various levels f the distribution system. Since an articulate network f transportation constitutes a vital link in the system f fertilizer allotment and quotas and a controlled ertilizer pricing system that a freer adjustment of the 256 Iarket forces of supply and demand would be necessary to .mprove pricing as well as distribution efficiency. Conclusions and Implications of the Study The overall purpose of this study was to provide .nformation for the policy formulators in the government If West Pakistan that would assist them in making such Iolicy decisions as would lead to an improvement in the nerformance of fertilizer distribution system. Some of ,he policy measures that can be absed on the foregoing .nalysis are as follows: 1. The western region of Pakistan, like other .eveloping countries, is passing through a transitional tage and has a less developed farm input market as com- ared to product market which has evolved gradually over long period of time. Because of the low per capita ncome, low farm productivity and less developed urban nd farm sectors, there exists no such Rostovian National arket54 which may bring about coordination between factor nd product markets. Because of the inadequacy of tra- itional market structures to adjust to the demands of ew technical inputs, it is recommended that the public ector should complement the private sector through the rovision of such infra-structural facilities and technical 54W. W. Rostow, View From the Seventh Floor Jew York: Harper and Row, 1964). 257 ssistance to the marketing sector as may require larger nvestments and the social returns for which are supposedly igher than the private returns. 2. An evaluation of the performance of domestic ertilizer industry indicated that most Of the fertilizer lants were Operating much below the rated capacity. lmost all Of them were technologically obsolete and the ize of plants was small and the rate Of capacity utili— ation so low that the economies of size and scale could ardly be utilized. Some of the plants had higher rated roduction capacity than the anticipated fertilizer demand f the marketing radius they were supposed to serve. The ajor agricultural regions and fertilizer market centers f Peshawar, Lahore, and Rawalpindi divisions were found 0 be almost out Of the location polygon. It may, there- ore, be recommended that the government should ensure the vailability of Spare parts and determine f.o.b. mill rice of fertilizers with a due consideration towards the roduction and cost schedules of each firm in order to timulate greater capacity utilization Of the existing ertilizer plants. It must incorporate as recent ferti- izer technology as possible in the erection Of new ertilizer plants to minimize per unit cost Of production, 3 attain greater production efficiency, and in the eneral interests of the farming community. 258 I 3. An overall analysis of the market forces Of ’ertilizer supply and demand indicated that the most 'Olatile component in the aggregate supply was consti- uted by fertilizer imports and that variations in this omponent could lead to fluctuations in the level of ertilizer availability at the farm level as well as the rustration of production plans Of farmers. The social nd private costs of lower harvests can, however, be voided only through a well-timed scheduling of ferti- izer imports and adequate allocation Of foreign exchange. he procurement procedures for the import of fertilizers ust be initiated at least six months before the next crop ear sets in; and the arrival Of fertilizer shipments must e so regulated that an unnecessary accumulation of in- entories does not occur either at the Karachi seaport r at various railheads. 4. An examination Of the demand aspect for ertilizers indicated that the level and intensity Of ertilizer use tends to vary with the magnitude of the vailability of complementary inputs. A greater avail- bility of these inputs can, however, lead to a major xpansion in the demand for fertilizer. Assuming a given upply of fertilizer-responsive crop varieties, a rela- ively elastic supply of irrigation water would lead to considerable shift in the demand for fertilizer. hough the supply of these inputs in a "package form" 259 rould be desirable, the major emphasis must be laid on .tepping up the supply of irrigation water. 5. An evaluation Of the fertilizer market channel rrganization and its operation from the point of View of Iwnership and control showed that the transfer of distri- Iutive activity from public to private agencies must take Ilace, if a distribution system free from administrative rontrols is to be generated and the elements of profit- Iotivation and competitive strategy among them are to be ncorporated. A further analysis Of the market channel »n the basis of the effectiveness of the exchange mechanisms perating at various levels Of the channel indicated that t did not satisfy the norm of effective competition. The pplication performance criteria Of: (l) efficiency, (2) rogressiveness, and (3) coordination brought out the fact hat it did not satisfy the above norms. It was, there- ore, recommended that the government should try to ubstitute a privately organized and vertically inte- rated system of distribution which may more nearly pproximate the aforesaid norms. 6. A more vital link in the system of fertilizer istribution is, however, constituted by the effectiveness f local fertilizer delivery. In order to intensify the ertilizer distribution activity, West Pakistan was ivided into five major fertilizer consuming regions nd a stragegy of distribution was devised whereby a 260 hain of distribution centers and sub-centers at district nd tehsil levels, respectively, was to be organized. he installation of a chain of warehouses and coordi- ation as well as expansion of the rail and road ferti- izer transportation were considered to be a vital com- onent of the system. This scheme of distribution put ts major reliance upon import—substitution and develop- Ient Of regional fertilizer production capacity so as to ntensify the intra—regional distribution activity. Thus I government measure to improve the physical movement Of Fertilizer would be well advised, if it proceeds along :he indicated lines. 7. A major area Of concern to the system of fertilizer distribution is the government's allocative Ictivity itself and the determination of market exchange ‘ules which may be too restrictive so as to limit the Irofit-maximizing activity Of private distributing firms. The possibilities of vertical conflict were also discussed .n the previous chapters which may arise from the dichotomy vetween planning and policy execution. Thus, it can be :uggested that the government should shift the process of fertilizer procurement by distributing agencies to the Iperations of market mechanism. 8. The existing system Of comprehensive fertilizer >rice controls lacks incentive—orientation for the ferti— izer distributor and is impractical insofar as it is 261 ifficult to supervise. The price formations arising from he equilibrating adjustments Of fertilizer supply and emand tend to oscillate around the regulated price over pace and time. Since the fixed retail prices tend to uppress these forces, it leads to the emergence of ferti- izer black markets. It may, therefore, be suggested that he government should implement fertilizer pricing system -as discussed in Chapter VII—~which is free from adminis- rative controls. Due to the small size of fertilizer ndustry, the possibilities of a rise in fertilizer prices hich may reduce the relative profitability of fertilizer nd thus farmers' returns are greater. It can, therefore, e recommended that the government should maintain specu- ative inventories in order to maintain fertilizer prices ithin a desirable range in the larger interests of both he fertilizer producer and farmer. Evaluation of Hypotheses In relation to the bottlenecks in the system of ertilizer distribution and imperfection Of fertilizer erket in rural areas, the first hypothesis was stated 5 follows: ypothesis l Apart from favorable fertilizer response and conomic environment fertilizer use depends upon the hysical availability Of this farm input at the local evel. 262 I The available evidence indicates that in spite Of favorable economic environment maintained through ferti- Lizer subsidy which has been advanced by the government Ln varying percentages since the inception of fertilizer ase in West Pakistan, and a foodgrain price support policy IhiCh has remained in effect from time to time, fertilizer lse has been below the desirable levels. It may be added :hat the availability of fertilizer-responsive varieties las, though, considerably increased the potential ab- sorptive capacity of farmers, yet the actual level of fertilizer consumption has remained very low, because of Ionavailability of fertilizers at the farm level. Since :he methods of fertilizer demand assessment do not take .nto account the various economic as well as non-economic rariables that influence the demand for fertilizer at the farm level, most frequently the plan targeted supply Of Fertilizers lags behind demand. In addition, due to Iottlenecks in the system of fertilizer transportation Ind paucity of an arterial low-capacity route system and 'illage access roads, fertilizer hardly reaches the mandi ,evel where farmers purchase fertilizers. Since the com— Iercial farmers with a considerable marketable surplus Ire the only ones to have business contacts with a mandi .own, the fertilizer retail outlets located at the mandi .evel remain inaccessible to those subsistence and com- Iercial farmers who tend to rely for their purchases upon 263 itinerant market intermediary whose single function is at he purchases farm produce from the village and resells mandi towns. Thus, fertilizer is available only to a all number Of farmers at the publicly prescribed rate areas the rest of the farmers either simply do not get rtilizer or the real cost of its delivery to the farmers their doorstep tends to be so high that it virtually Odes away any returns accruing to them from fertilizer bsidy or the foodgrain price support system. Since the pply during a particular year has technological as well economic limitations, an excess of demand forces up 3 fertilizer price, thereby reversing the ratio Of vorable returns from the use Of a unit of fertilizer. JS, in order to make it physically available and to iuce its real cost to the farmer at the local level, perfections in the fertilizer market must be eliminated providing an enlarged system of fertilizer tranSpor- :ion. The transfer of a new function to the market :ermediaries operating at the farm level for the sale fertilizers would facilitate the process Of local :tribution. A streamlining Of the process of fertilizer :tribution would be necessary in order to ensure a 'orable economic environment for fertilizer use. 264 gypothesis 2 With respect to the variability of fertilizer upply and its impact on the fertilizer distribution system It was stated that: Uncertainty and the variabilityof fertilizer Imports account for major inefficiencies in the distri- Iution of fertilizer in West Pakistan. Considerable instability in the availability of .mported fertilizers leads to fluctuations in the overall supply. The variations in the supply of imported ferti- .izers may, however, arise from inadequate allocation of foreign exchange, delayed action by governmental depart- nents, and inaccurate timing of fertilizer imports. A >rief analysis in the foregoing chapters indicated that Ill-timed supply of imported fertilizers to meet seasonal iemand tends to create market surpluses and deficits re- sulting in considerable variations in the equilibrium fertilizer price which would set forth such positive and negative market forces as may tend to raise or oppress the officially fixed retail price. Thus temporal vari- ations in the supply of imported fertilizers give shocks to the internal distribution system and tend to create market inefficiencies in the movement of fertilizers. Late fertilizer deliveries tend to turn away some of the indifferent customers and generate losses in terms of fertilizer caking, storage costs until next season, 265 1d slower expansion of the fertilizer market in general. Jantitative variability in fertilizer imports may arise rom inaccurate assessment of demand in the domestic ertilizer market, inadequate allocation of foreign ex- 1ange, and some unpredictable events that may take place 1 the international fertilizer market. Since the internal Lstribution system depends for its success on in-time railability of fertilizers, speedier movement of imported ertilizers to the various distribution centers would tend > minimize losses resulting from a slowly contracting emand which may, in turn, arise from the non-availability fertilizers or higher free market prices. It would, Ierefore, be desirable that the fertilizer transportation 'stem be related to the distribution system in order to :duce the spatial variations in supply. Fertilizer im- Irts must be tailored to the internal demand with some ,lowance for safety stock to meet the unpredictable demand d must be well-scheduled so as to avoid exorbitant mands on the transportation and distribution system nerated by the ill-timed arrival of fertilizer imports. nce a remunerative fertilizer pricing system is closely ed up with various equilibrium levels resulting from the teraction of the market forces of fertilizer supply and mand, elements of risk and uncertainty must be elimi- ted in order to ensure timely availability of imports. e competitive strategy of private fertilizer distri- tors, however, receives a setback to the extent government 266 I ontrols the supply of imported fertilizers. Thus a udicious use of this monopoly power would be necessary 0 ensure a fair competition among rival distributors. ypothesis 3 In relation to the productivity of fertilizer in timulating greater crop production wherever fertilizer se is higher it was stated that: Diversity in the growth rates of various agri- gltural regions of West Pakistan may, in part, be ptributed to the level of fertilizer use per acre. An estimation of the growth rates of agricul- Jrally advanced districts of West Pakistan shows that the rowth rate in the districts of Lyallpur, Montgomery, and iltan is much higher than the rest. Disaggregation of :owth into acreage, yield, cropping pattern, and inter— :tion effects shows that increased yield accounted for 5 to 70 percent of the agricultural growth in these Lstricts. The data on the level of fertilizer use per :re indicates, however, that fertilizer use is much -gher in the aforesaid districts, because of the availa- .lity of complementary inputs like irrigation water, ztter seed, and due to the greater fertilizer con- :iousness of the farmers. The classification of various .stricts into three major groups indicated that the Iter-group variation of growth rates has an apparent >rrelation with the level of fertilizer use per acre. 267 I Thus, the hypothesis that the per acre fertilizer con- sumption does make a difference in the rate of agricul- tural growth is supported by the data in Table 8.1. _ ._ -....-0——.—r....-0-.-..—.._._ ___ 268 II- .0000 .00000000 00 0000000000Imouo 000 0000 .0000000000 000000000000 00 ucmEuHmmmo .musuHsOHnme osm 0000 Mo 00000C02 .cmumflxmm mo ucoEch>oo .000H .00004 .CHumHHDm manouumso =.cmumflxmm 0003 00 moflymfiumpm mocmEHOmumme .moeumflumum A00 mo smmusm .oumom ucmEQOHm>mQ osm mcflcsmam .smumflxmm 0003 00 0sm§cum>oo 0H1 "0000500 00.00 0.0 0.0 0.00 0.00 0.0 00000 00.00 0.0 0.0 0.00 0.00 0.0 0003000000 00.00 0.0 0.0 0.00 0.00 0.0 00000000000 00.0H 0.0 H.0 0.00 0.00 0.0 muonmq muommmm sumuumm 00000000 osm mmmmnom Op haflnmEHHm moo buzonw ”HHH 05000 00.00 0.0 0.0 0.00 .0.00 0.0 smuasz 00.mm 0.0 0.00 0.00 0.00 0.0 000000000: 00.00 0.0 0.00 0.00 0.0 0.0 00000000 mpommmm namew Op maeumEHHm one buzouw “HH msono 00.0 0.0 00000000 00.0 0.0 Hamacmflz 00.0 0.0- 00000000000 00.0 0.0 0000000300 00.0 0.HI muoxHMOm . 0.0 umu.sw 00 0 0.0- 000000 muofiuumflo msflumcmmum “H msouw 10000 0001 000 10>00 .00m snouumm uomwmm pommmm 00: 00mm 0000H000Q Hmueafluuom InmucH mcflmmouo paofiw ommmuod suaono .001000H .muoe Mom 005 Hmuflaflpumm mam ousuHSOHume 00 000mm 303000 00 coaumfinm> uofluumflolumch .H.0 mqmee LIST OF REFERENCES LI ST OF REFERENCES Abbot, J. 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APPENDICES com 0 O O I 00000 00000 om O O O I O O O I O O O O I O C gmmuom 000 00m 0mm . . . . . . . . . . . 00009 000 00 000 . . . . . . . . . . . 000000 .0 0m 00 mm mm . . . . . . . . 0000000m0> cam 000500 .0 0 m m 00 00 00.0 00.0 00.0 00.0 0000 000000000 00 000 so 00000000 .0 00 0 00 00 00 00.0 00.0 . . . . 000000000 .0 o o o o o o o o a o o mv-O u o a c xumHHMN/ Hmma on mm 0 0m 00 mm . . mm.m . . . . 0000 00 wom co >00000> a00000E¢ .0 00 0 mm . . . 00.0 00.0 . . . . 000000 .0 Wm 00 00 mm mm 00 No.0 00.0 . . 00.0 0000 mo woo co 0000 0000 .o 64 o N 0 00 om mm.o 00.0 . . 00.0 0000 00 wow so 000600m kHMCHUHO .n 00 00 mm mm 00 00.0 00.0 0000 00 wow co 000600m mumzo .0 mm mm mm mm.m om.m . . ow.m 000m .m 0m m0 mm «M 00 00.0 00.0 om.o om.0 0000 000000000 00 000 no 00002 .m 00 m m 0 00 00.0 0000 000000000 0:0:00500 mo m\m co >00000> 0500000600 .0 000 00 ~00 MNH 00 mm.0 0000 000000000 00 mmm co >00000> 0003o .0 000 00 com 00.00 00.00 00.0 00.00 00003 .0 00000 0 z 0 2 00000 0000000000: 000000000 0000000000 00000 00000 000 .0000 0>00o0m 00 00 00000000 :000.; 000000 0000 000000 00000000 0 0o 000E000300m 0004 00m 000a 0000 00000 0000000000 000o0 .00000000 0003 :0 0000000000 000 U00E0o 00000000 000 0000000000 00O000s0000--.0-< 00000 277 TABLE A-2. Nitrogen Fertilizer Consumption per Capita and per Acre in Selected Countries, 1961. Nitrogen Nitrogen Country Consumption Consumption per Capita Per Acre (in pounds) (in pounds) The Netherlands 43 193 United States 33 13 France 27 . 23 Taiwan 21 101 United Kingdom 19 56 Japan 18 111 Egypt 14 55 Philippines 2 3 India 1 1 Pakistan 2 2 Source: Food and Agriculture Organization, Production Yearbook (Rome: United Nations, 1961). ,‘{,):w-- ~ ‘f‘r‘- "0000