The 2007/08 increase in world input and output prices put pressure on governments to intervene in markets using various policies including subsidies in an effort to raise agricultural production, incomes, and alleviate poverty and food insecurity. Countries like Russia and China implemented protectionist policies involving export restrictions on fertilizers and cereal outputs in a bid to encourage domestic production and safeguard against high food prices from speculation in futures markets. Such fears also influenced developing countries to subsidize inputs and implement social safety-net programs. Due to the increased interest in agricultural intensification, it is important for policy makers to be informed on the contribution of fertilizer to farm incomes in different agroecological zones so that interventions are tailored to local conditions. Essay 1 uses rigorous econometric methods on a rural household panel dataset to provide insights on the spatial heterogeneity of the effect of fertilizer on yields and household incomes and so the need for location-specific intervention. The results show that using a complementary set of improved technologies (fertilizer and hybrid seed) has significant yield effect. However, under moisture stress conditions, yields are negatively affected for hybrid compared to non-hybrid seed, indicating the importance of using improved technology that is appropriate to specific local conditions. The results show that it is not profitable to use fertilizers in some zones. There is spatial heterogeneity in Marginal Value-to-Cost Ratio (MVCR) and Average Value-to-Cost Ratio (AVCR) estimates. This has implications on government intervention through blanket non-targeted subsidies that do not take into account the local conditions and profitability of using fertilizers. This is an important contribution that can aid subsidy and other agricultural investment efforts in Kenya. For areas facing uncertain weather conditions, policies that aim to encourage fertilizer use have to tackle the production risks. Essay 2 explains results from Essay 1 that show differences in demand even within areas where fertilizer is potentially profitable to use. Essay 2 uses econometric approaches that mitigate bias from endogeneity to analyze factors that influence farmers' decision to use fertilizer. Distance to fertilizer seller is shorter, prices lower, and fertilizer use higher in areas with relatively more rainfall and less moisture stress. There is a complementarity between investments in access to information (extension), other infrastructure, and fertilizer adoption. Indicators of wealth like land size, value of agricultural assets, and using tractor or animal draught for land preparation have a positive and significant effect on the probability of purchasing fertilizer, while higher fertilizer prices have negative effect on use. Therefore, government policy that encourages private investments in the distribution of fertilizers coupled with training on the agronomic aspects and benefits of using fertilizers can be important in raising production. In cases where resources are constrained and fertilizer prices relatively high (as in remote dry areas in low potential regions), intervention in form of targeted subsidies may contribute to adoption of fertilizers.
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