Malawi - Smallholder Fertilizer Project

FlLE COPY Report No. 4309-MAI MALAWI SMALLHOLDER FERTILIZER PROJECT Appraisal Report April 7, 1983 Appraisal on behalf of the International Fund for Agricultural Development Eastern Africa Projects Department Southern Agriculture Division This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without authorization of both the International Fund for Agricultural Development (IFAD) and the World Bank.  Currency Equivalents Currency unit = Malawi kwacha (MK) SDR 1.00 = MK 0.8249 (from April 24, 1982) US$ 1.00 = MK 1.12 MK 1.00 = us$ 0.89 Weights and Measures 1 hectare = 2.47 acres 1 kilometer = 0.62 1 sq. kilometer = 0.39 sq. miles = 100 ha 1 kilogram = 2.2 pounds 1 metric ton = 1,000 kg = 2,204 pounds Abbreviations ADD - Agricultural Development Division ADMARC - Agricultural Development and Marketing Corporation ATC - Agricultural Trading Company CADO - Chief Agricultural Development Officer CARO - Chief Agricultural Research Officer DA - Development Area DAR - Department of Agricultural Research DSB - Department of Statutory Bodies EPA - Extension Planning Area FINCOM - Finance Corporation of Malawi GOM - Government of Malawi GRAMIL - Grain and Milling Company IDA - International Development Association IFAD - International Fund for Agricultural Development ISNAR - International Service for National Agricultural Research MOA - Ministry of Agriculture MOF - Ministry of Finance NRDP - National Rural Development Program NSCM - National Seed Company of Malawi RTC - Residential Training Center GOVERNMENT FISCAL YEAR April 1 to March 31  MALAWI FOR OFFICIAL USE ONLY SMALLHOLDER FERTILIZER PROJECT Table of Contents Page No. 1. BACKGROUND A. Introduction and Economic Setting ................ 1 B. The Agricultural Sector ...... .................... 2 C. Agricultural Services ...... ...................... 4 D. Agricultural Development Strategy . ............... 7 E. Constraints and Potential .................... .... 8 II. THE FERTILIZER SUB-SECTOR A. Introduction ..................................... 10 B. Crop Research and Fertilizer Responses ........... 10 C. Current Fertilizer Use ......... .................. 12 D. Forecast Future Fertilizer Demand ................ 13 E. Fertilizer Importation ...... ..................... 15 F. Fertilizer Transportation and Handling .......... . 16 G. Input Marketing and Distribution . ................ 18 H. Storage .......................................... 20 I. Fertilizer Blending ...... ........................ 21 J. Fertilizer Pricing ............................... 21 K. Summary of Needs for Fertilizer Project .......... 22 III. THE PROJECT A. Project Area .. ................................... 23 B. Objectives and Main Features ................... .. 23 C. Detailed Features ....... ......................... 24 D. Cost Estimates ........................... ...... . 28 E. Financing . ........................................ 31 IV. PROJECT IMPLEMENTATION A. Organization and Management ........... ........... 32 B. Implementation Schedule ...... .................... 33 C. Establishment and Management of the Fertilizer Fund ....... ......................... 33 D. Procurement .. .................................... 37 E. Disbursements .. .......... 38 F. Accounts and Audit ............................... 39 G. Monitoring Evaluation and Reporting .............. 40 This report is based on the findings of an appraisal mission comprising Messrs. A. Spurling, R. Nelson, A. Nyberg, S. Sengamalay, C. Warnaars and E. Vasur (IDA) and H. Shams (IFAD). The mission visited Malawi in September/ October 1982. This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without authorization of both the International Fund for Agricultural Development (IFAD) and the World Bank.  - ii - V. FINANCIAL ANALYSIS ..................................... 41 VI. ECONOMIC ANALYSIS A. Benefits ..43 B. Beneficiaries .................................... 43 C. Economic Justification . . 44 D. Risks. 45 E. Government Cash Flow ............................. 45 VII. ASSURANCES AND RECOMMENDATIONS ......................... 46 ANNEXES, TABLES, CHARTS, MAPS I. Supporting Charts and Tables Chart 1 - Ministry of Agriculture, Organization Chart 48 Chart 2 - Ministry of Finance .. 49 Chart 3 - Department of Statutory Bodies . .50 Chart 4 - ADMARC, Existing Organization Chart 51 Chart 5 - ADMARC, Proposed Organization Chart 52 Chart 6 - Project Implementation Schedule . .53 Chart 7 - Organization and Flow Chart. 54 Chart 8 - Fertilizer Procurement Sequence . .55 Chart 9 - Fertilizer Sales . .56 Chart 10 - Fertilizer Demand Forecast . ............... 57 Chart 11 - Fertilizer Response Curves ................ 58 Table T-1 - Key Indicators ............................ 59 Table T-2 - Schedule of Disbursements - IFAD Loan ..... 60 Table T-3 - Technical Assistance Schedule of Disbursements ........................... 61 Table T-4 - Schedule of Disbursements - IDA Credit .... 62 II. Cost Tables Table T-1 - Fertilizer Revolving Fund - Physical Movements ............................... 63 Table T-2 - Fertilizer Revolving Fund - Financial Movements ............................... 64 Table T-3 - Fertilizer Handling Costs (Beira) .... ..... 65 Table T-4 - Fertilizer Handling Costs (Durban) ........ 66 Table T-5 - Technical Assistance and Training .... ..... 67 III. Agriculture Table T-1 - Land Utilization, 1980/81 .... ............. 68 Table T-2 - Land Utilization Projections . ............. 69 Table T-3 - Fertilizer Imports by Distributor .... ..... 70 Table T-4 - Estimated Fertilizer Use by Crops .... ..... 71 Table T-5 - Actual and Projected Fertilizer Use ....... 72 Table T-6 - Maize Production Consumption .... .......... 73 Table T-7 - Hectare Budget Maize (BLADD/NADD/LWADD) ... 74 Table T-8 - Hectare Budget Maize (LADD) .... ........... 75 Table T-9 - Hectare Budget Tobacco (KADD/LADD) ........ 76  IV. ADMARC Chart C-1 - Distribution of Fertilizer Sales by Region 77 Table T-1 - ADMARC Crop Trading Results ............... 78 Table T-2 - ADMARC Balance Sheets ..................... 79 Table T-3 - ADMARC Cash Flow 1982/83 .................. 80 Table T-4 - Smallholder Fertilizer Prices .. ........... 81 V. Economic Analysis Table T-1 - Economic Farmgate Value Maize .... ......... 82 Table T-2 - Economic Farmgate Value NDDF Tobacco .... 83 Table T-3 - Economic Benefits from Crop Production .... 84 Table T-4 - Economic Cost of Fertilizer ............... 85 Table T-5 - Incremental Labor Cost .... ................ 86 VI. Terms of Reference (for Technical Assistance) .... ...... 87 Maps (IBRD) No. 16842 - Transportation Network .................... 88 No. 16843 - Regional Transport Facilities ............. 89 No. 16847 - Fertilizer Flows .................... 90 No. 16848 - Smallholder Fertilizer Distribution ....... 91 Selected Documents Available in the Project File 1. Hectare budgets for different crops. 2. ADMARC Transport costs, fertilizer sales pattern and storage facilities 3. Constraints of external transport and import routes. 4. Inception Report prepared by IFAD staff.   MALAWI SMALLHOLDER FERTILIZER PROJECT I. BACKGROUND A. Introduction and Economic Setting 1.01 Malawi is a land-locked country with a total area of 118,900 km2 of which 23,900 km2 is covered by Lake Malawi. The country is bordered on the north and north-east by Tanzania, to the east, south and southwest by Mozambique and to the west by Zambia. From Independence through 1978 the Malawi economy was robust. Growth in all sectors including agriculture exceeded the population growth rate and GDP grew at an average rate of 6 percent. Exports, primarily agricultural, expanded sufficiently to keep the current account (trade) deficit at a sustainable level, the budget deficit was kept under control and domestic prices experienced only modest inflation. Since 1978 GDP growth has virtually ceased and both the current account and budgetary deficits have grown to unsustainable levels. The economy remains heavily dependent on three agricultural commodity exports (tobacco, sugar and tea) and its landlocked status makes it vulnerable to external transport difficulties. The balance of payments problems have worsened due to: (a) a 40 percent decline in the terms of trade between 1977 and 1980 and (b) rapidly increasing outflows for non-factor services, primarily due to increased transport costs. Malawi's current account deficit increased from an annual average of 9 percent prior to 1978 to 24 percent in 1979 before falling to 12 percent in 1981, and foreign exchange reserves have declined from the equivalent of over five months of imports to less than two months between 1977 and 1981. Debt service in 1981 was the equivalent of 30 percent of exports. 1.02 The country's fiscal position has also deteriorated. Government deficits rarely exceeded 9 percent of GDP before 1978/79. However, subsequent deficits have averaged over 15 percent of GDP. Increased borrowing has accompanied the deficits and inflationary pressures have mounted. The Government is attempting to re-adjust its unbalanced trade and expenditure structure. Government expenditures are now concentrated on the productive sectors with limited investment in social infrastructure, the currency was devalued by 15 percent in April 1982 and the Paris Club agreed to a debt re-scheduling in September 1982. 1.03 Agriculture is the most important sector of the Malawi economy, engaging about 85 percent of the working population, accounting for 45 percent of wage employment, 40 percent of GDP and 89 percent of export earnings in 1981. Malawi's soils are relatively fertile and fairly reliable rainfall permits a variety of food and cash crops to be grown, but the population growth rate is high (2.9 percent) and population densities are already amongst the highest in Africa. In many areas, little uncultivated arable land remains available and the future welfare of the  - 2 - nation will increasingly have to depend upon the ability of the farming community to increase its productivity of both food and cash crops. For a number of crops this will be heavily dependent upon the availability and application of appropriate technical information combined with a reliable supply of agricultural inputs, of which fertilizer is the most important. 1.04 The Government's agricultural strategy has been to maintain self-sufficiency in food production, expand export crop production and improve rural incomes. Given the limitation on high quality land available for new cultivation and the need for quick returns on investments, the main emphasis of current agricultural policy is on a sustained rise in productivity. Increased food production over the last decade has been achieved from area expansion into both new land and land previously planted to export crops. The provision of effective technical support, timely access to agricultural inputs and appropriate crop prices for both food and export crops is essential if the Government strategy of increasing productivity is to get back on course. One of the major constraints now affecting development of the agricultural sector is the high cost and unreliability of the major import/export transport corridors through Mozambique, due to both operational and political problems. In addition to the outflow of agricultural exports, the timely flow of fertilizer to the farming community has been increasingly affected over the past three cropping seasons by transit difficulties. These problems have been compounded by institutional and financial weaknesses within the Agricultural Development and Marketing Corporation (ADMARC) and the Ministry of Agriculture (MOA). The Project appraised in this report would support the Government's efforts in addressing all these problems. 1.05 The proposed Project was submitted to the International Fund for Agricultural Development (IFAD) by the Malawi Government in July 1982 in the form of a written request for financial and technical assistance. Based on this request, IFAD prepared an inception report for GOM's consideration, proposing the removal of key constraints in the fertilizer sub-sector. The proposal, while including the urgently required financial assistance for fertilizer importation, entails the adoption of a set of policy and institutional reforms to help ensure a more regular and timely supply of fertilizer to the smallholder sub-sector. The Project was appraised on the basis of the invitation letter from Government together with an Inception Report prepared by IFAD staff. A World Bank mission, comprised of Messrs. Spurling, Nelson, Nyberg, Sengamalay, Vasur and Warnaars (IDA) and Shams (IFAD), appraised the Project in Malawi during September/October, 1982. Government subsequently invited IDA to assist in financing the Project. B. The Agricultural Sector 1.06 Malawi's agricultural production derives from two sub-sectors, smallholder agriculture and estate agriculture (which is principally under private management). In 1981 the smallholder sub-sector accounted for about 80 percent of all agricultural production, meeting the country's demand for food staples (maize, rice, beans, cassava, sweet potatoes, groundnuts, sorghum and millets), providing some export surplus (tobacco, groundnuts, tea, coffee and guar beans) and certain raw materials for domestic industry (cotton and fire-cured tobacco). However, the export  surplus from this sub-sector comprises only about 20 percent of all agricultural exports and it is the estate sub-sector which has functioned as the principal earner of foreign exchange with exports of tobacco, sugar, tea, tung oil, coffee and macadamia nuts. In 1981, tobacco provided the largest share of agricultural exports (48%), followed by sugar (26%), tea (12%) and groundnuts (4%). Maize has been imported and exported during years of deficit and surplus, but present policy is to aim for self-sufficiency backed up by strategic reserves. Agricultural production in 1982 was characterized by a very extensive shift, induced by prices fixed by Government, by the smallholder sub-sector from export crop production (particularly tobacco and groundnuts) to maize with resultant heavy purchases of surplus maize by ADMARC; by the considerable increases (also price-induced) in burley tobacco production; and by the very low world market prices for sugar. 1.07 The estate sub-sector is generally efficient and has averaged a growth rate of 10 percent in real terms since 1973. However, the sub-sector is heavily concentrated on only three commodities: tobacco, sugar and tea. Several factors will constrain future growth of these crops and thus the growth rate of the estate sector is unlikely to be maintained and may well decelerate unless greater diversification can be pursued. In this regard, the production of macadamia nuts, coffee, irrigated wheat and oilseeds offer considerable potential. In any event, Malawi will have to look, increasingly, to the smallholder sub-sector to broaden the export base still further while maintaining its traditional role of providing food and employment for a rapidly growing population. 1.08 Smallholder output is estimated to have been expanding at about 3 percent per annum in real terms (equal to the rate of population growth) in recent years. The average GDP (1982) from smallholder agriculture is estimated to be about MK 400 per farm family. Better performance by the smallholder sub-sector has been constrained by (a) poor incentives provided by low Government-controlled producer prices to smallholders; (b) the transfer of labor and cultivable land to the estate sub-sector; (c) limitation by Government regulation of smallholder participation in the production of high value agricultural export crops such as burley tobacco, tea and guar beans; and (d) over the last three crop seasons by an increasingly untimely and limited availability of fertilizers. 1.09 While not contributing to export earnings, the livestock industry contributes significantly to domestic protein requirements and offers con- siderable potential for future production increases. The cattle herd is estimated to be growing at 4.4 percent and grazing areas are being steadily reduced through the expansion of crop production. Cattle are typically raised by traditional methods and are often considered as a source of wealth rather than a farm enterprise. Overstocking is becoming appreciable in some areas and will probably worsen unless the current offtake of 10 percent can be improved. Malawi still imports much of its dairy products, although recent progress in local production has been impressive. There is considerable potential for increased cycling of animal manures for crop production. The technical assistance included under the proposed fertilizer Project would collaborate with Government research staff in planning suitable adaptive research programs on optimizing use of imported fertilizer and helping improve use of locally available organic fertilizer.  - 4 - C. Agricultural Services Agricultural Extension 1.10 Crop and animal health extension services are provided by Govern- ment to the smallholder sub-sector, though recent performance of the sub- sector tends to indicate that these services have provided only a marginal stimulus to agricultural development, in part due to lack of incentives to farmers. As a result, MOA has restructured its extension services into 180 Extension Planning Areas (EPAs) based on ecological principles and administrative boundaries. For the most part, extension staff now work with groups of farmers and a modified system of extension is being introduced. The field extension worker is supported by supervisory and specialist staff at the Agricultural Development Division (ADD) level. The extension service has been greatly expanded over the last few years and although still generally lacking in experience, they are well-motivated and disciplined and the effectiveness of the service should steadily increase with increased training, regular funding and with the improved methods. The Government does not provide extension services to the estate sub-sector, though tobacco and tea estates do receive advice from their respective research authorities. Farmer Training 1.11 Training facilities for farmers (both men and women) have been steadily expanded under the NRDP with several levels of courses available at farm institutes, residential training centers (RTC) and day centers. There are 3 farm institutes and 22 residential centers; day training centers are being steadily developed at EPA level. Only limited evidence exists on the impact training programs have on farm operation, production and productivity. Some RTC participants have adopted practices learned in courses, but much wider adoption will need to be pursued. This will require improved focussing of training programs combined with more effective field follow-up, two aspects which are to receive increased attention under the NRDP. Agricultural Research 1.12 Agricultural research is carried out by the Department of Agricultural Research (DAR) of MOA, the Faculty of Agriculture of the University of Malawi, the Tea Research Foundation, and the Tobacco Research Authority (paras. 2.04 through 2.09). The DAR is a comprehensive research department with national responsibilities covering all crops and livestock as well as seed multiplication, seed certification and phytosanitary services. The DAR has conducted some very relevant and effective research, although there has been a lack of translation of such research results into extension messages and the linkages between extension and research need strengthening. Recently, there has been too great an emphasis on basic research at the expense of applied problem-solving research. The organization and structure of DAR has recently been reviewed by the International Service for National Agricultural Research (ISNAR) and an internal MOA program of review is now underway with the overall objective of improving the effectiveness of agricultural research.  - 5- Agricultural Marketing and Input Supply 1.13 ADMARC is a statutory company established to purchase smallholder crops (food and non-food crops), to sell food crops and to sell and deliver crop production inputs (seeds, fertilizer, agricultural chemicals and farm implements). ADMARC operates a national network of marketing sheds and storage facilities for these purposes. ADMARC also sells overseas some of the export crops which it buys. In addition, ADMARC invests in agricultural and agro-industrial enterprises and pays/charges prices as agreed and authorized by the Price Commission of the Malawi Government. Until recently, the authorized prices permitted ADMARC to realize profits on a number of its crops (mainly non-food), but recently higher transport costs and improper crop handling combined with higher costs of borrowing for large investments have resulted in substantial losses (Annex 4, Table T-1). Nevertheless, it is one of the more effective crop marketing parastatals in Eastern Africa and with its new management and extensive market infrastructure reinforced by Government's recently announced action plan to strengthen the Corporation, it has the potential to provide excellent support to the smallholder sub-sector. 1.14 The growing role of fertilizer use in Malawi's smallholder development efforts are reviewed in Chapter II. ADMARC's central role in fertilizer procurement and distribution for the smallholder sector is outlined in paragraphs 2.27 - 2.29. The proposed Fertilizer Project would address the urgent need to infuse the incremental working capital and foreign exchange, to reinforce the increasingly complex management of procurement and distribution, and to help the government in its definition of policies and research needed to optimize smallholder fertilizer use in Malawi. 1.15 Fertilizers for the estate sub-sector are principally procured by Optichem, a locally incorporated company, and other agro-chemicals are marketed by various commercial firms. The National Seed Company of Malawi (NSCM) produces a wide range of agricultural seeds for both the smallholders and estates. The seed sold to smallholders is marketed largely through ADMARC. Estate produce is marketed almost entirely through the private sector. The Grain and Milling Company (GRAMIL) purchases most of the estate maize and tobacco is marketed through the tobacco auctions in Lilongwe and Limbe. Tea and coffee are exported through international trading companies and sugar is handled by the two producers, Sucoma and Dwangwa Sugar Corporation. Credit Services 1.16 No central agricultural credit institution exists in Malawi. Smallholders have access to seasonal and medium-term agricultural credit through MOA's rural development projects, which have their own credit funds and credit staff. Very small amounts of credit are also processed through the settlement schemes under MOA (comprising 100-200 farmers at most) and through the Loans Board under the Ministry of Trade and Industry. A high proportion of seasonal credit is for fertilizer. Credit volume through the ADDs and fertilizer sales through ADMARC have increased over the last five years as follows:  - 6 - Table 1 Current Prices Seasonal Credit as % of total Seasonal Credit I/ Fertilizer Sales fertilizer sales (MK million) (MK million) 1977/78 2.417 5.2 46% 1978/79 2.883 4.2 68% 1979/80 4.006 5.6 71% 1980/81 6.446 9.2 70% 1981/82 5.617 8.8 64% 1/ Covers all seasonal credit, not only fertilizer. 1.17 Projections in a National Credit Study carried out in 1982 suggest that credit demand will reach MK 12 million, in 1980/81 prices, by 1990/91. Trend projections would suggest a level somewhat higher at about 2MK 16 million. A mean of MK 14 million would imply an increase of nearly 10 percent per annum from the present level, which is similar to adoption rates and projected fertilizer supply increases at the end of the Project period. In 1980/81, about 26 percent of farmers in the major NRDP projects received seasonal credit and the present credit supply is estimated at about 60 percent of effective demand. New projects providing credit have recently started, and some reallocation of funds between projects is being considered. As the nominal price of fertilizer increases, however, credit demand will also increase. The MOA has implemented policy to permit the reallocation of reserve surpluses, where they exist. However, it is probable that additional farm credit resources will have to be made available. 1.18 Most seasonal credit to smallholders has been through self-accounting groups at 10 percent (annualized rates have been higher because farmers pay loans back after 7-9 months); seasonal credit is also available to non-self accounting groups at 15 percent. However, a recent credit policy revision has reduced the annual interest rate to 10 and 15 percent respectively, commencing with the 1983/84 crop year. Repayment rates have been high at approximately 98-99 percent. Repayment is made either at the time of commodity sales to ADMARC or is refunded by the secretary/treasurer of the self-accounting groups. In addition, the credit staff provide strict supervision; seasonal credit is given only to groups and no credit is given to a group where any member has defaulted. Medium-term credit is available at 10 percent per year, repayable over three to five years. Repayment is less satisfactory at 60-80 percent since there is no systematic method of debt collection as there is for seasonal credit. Annual inflation rates for the past four years have averaged about 11 percent and are projected to be about 12 percent for the near future.  ^- 7 - 1.19 The estate farming sector obtains credit, which is primarily seasonal financing, from the two commercial banks - National Bank and Commercial Bank. D. Agricultural Development Strategy 1.20 The Government is attempting to provide a growth climate for both smaliholder and estate production in order to support its overall strategy of maintenance of self-sufficiency in food staples with expansion of agri- cultural exports and improvement in rural incomes. In the past, improve- ment in smallholder productivity was attempted through restricted but relatively expensive and management-intensive integrated development projects based on four intensively settled and potentially highly productive areas; this was balanced with the gradual improvement of extension, land husbandry and farmer training throughout the rest of the customary farming areas augmented by small, low cost rural development projects and by special activities and programs (e.g., ox-training, dairy development, tea development). 1.21 In the mid-1970s, the NRDP was formulated to provide a more extensive level of services to the whole smallholder subsector within a twenty year period. Resources were to be concentrated on the more immediately productive aspects of agricultural investment and the NRDP was designed to increase smallholder productivity through the provision of agricultural inputs and farm services and to increase the efficiency and scope of extension, input supply, marketing and credit services. Emphasis is also placed on soil conservation, watershed management and on afforestation. Many donors, including IFAD and IDA are assisting the Malawi Government with the NRDP and by 1982 approximately 50 percent of the planned Rural Development Projects had received some investment in development activities. The NRDP was intensively reviewed by IDA and Government in 1981 and it was recommended that future investments in NRDP should focus on agricultural extension and research, credit for inputs, land husbandry, water supplies, animal husbandry, marketing facilities, farmer and staff training and evaluation. The Review also highlighted the need for intensification of effort into the development of acceptable subsistence crop technical packages which could be integrated into the improved overall farming system. The Review concluded that Malawi's performance on rural development projects had been quite satisfactory and a good framework existed in which integrated agricultural programs could be implemented. 1.22 The development of the livestock sub-sector has been pursued within the confines of the area rural development projects through both local aninal husbandry and disease control programs. The Government has nIow decided to consider the future development of this sub-sector in a national context and will shortly be carrying out a National Livestock Policy and Program study with the assistance of IDA. Future strategy for the industry will be based on its role within the whole agricultural sector including its inter-relationship with crop production. 1.23 The estate sub-sector has been left largely in the hands of the private sector with Government assistance limited to that of providing a favorable investment climate. Considerable transfers of customary land in  - 8 - areas suitable for the production of flue and burley tobacco have been made, taxes have been moderate and most importantly, a deliberate low-wage policy has contributed to the continuing competitiveness of Malawi's exports. However, most of the growth of the estate sub-sector has arisen from expansion into customary land rather than from productivity increases and in the last few years a number of problems have caused a slowing down in the growth rate of the sub-sector. E. Constraints and Potential 1.24 Agricultural development in Malawi is constrained by limited arable land, difficult and high cost transport through its import/export routes, increasing shortages of fuelwood and insufficient skilled manpower and management. On the other hand, a moderately fertile soil and a range of favorable ecological zones enable the successful cultivation of a wide range of food and cash crops. This potential is enhanced by a hard-working rural population and by the Government's emphasis on an agro-based development strategy. 1.25 Only 3.3 million ha of customary land is considered to be suitable for arable agriculture, of which some 2.9 million ha (88%) are estimated to be under cultivation at present. The present density of population is 189 persons per km2, one of the highest in Africa. At present population growth rates, Malawi's population is estimated to reach 9 million in the quinquennium 1995-2000 raising the density to 273 persons per km2. Over the past decade, increased food requirements for the expanding population have been largely met through expansion of the area under cultivation, involving cultivation of marginal areas and reduction of fallow periods with consequent deterioration in soil fertility and increasing erosion. The adoption of improved maize packages by smallholders has been impressive in the past few years and some farmers have achieved considerable yield increases. However, much technical information generated by research remains untapped, offering the potential for further increases in yields and diversity of cropping. The potential, therefore, exists for considerable increases in productivity, particularly as regards food production, with realization likely to be heavily dependent upon the delivery of appropriate technical advice, timely and adequate inputs and incentive producer prices. Some policies, which complement the NRDP development strategy, address food self-sufficiency and price rationalization of agricultural inputs and commodities (see paras. 2.35 - 2.37 and 3.12 - 3.15). 1.26 The operational unpredictability of the ports and railways of Mozambique due to problems of age, poor maintenance and poor management have been exacerbated in recent years by sabotage. The agriculture sector has been hurt through the disruption of both export marketing and importation of agricultural inputs, of which fertilizer is by far the most important. Adequate and timely flows of fertilizer will be critical to the achievement of the steady increases in productivity required; over the last three seasons, flows have been increasingly unsatisfactory due, in large part, to the external transport constraints. There is potential for development of alternative external routes and early action on this may be critical for agricultural growth.  - 9 - 1.27 Expansion of fire-cured and flue-cured tobacco is constrained by the shortage of fuelwood required in their production processes. Consumption of firewood by the tobacco industry accounts for 40 percent of Malawi's fuelwood consumption and much of it continues to be harvested from the dwindling areas of traditional forests. The potential for increased fuelwood production by estates is high and 25 percent savings in consumption can also be effected through installation of modified grates and chimneys. Afforestation in the customary land areas is being encouraged through the Government's Woodlot Project, assisted by IDA, (Credit 992-MAI) and adequate non-arable land does exist for establishment of woodlots; protection of such land by trees would have advantages for the long-term productivity of the arable lands. 1.28 The lack of skilled labor and experienced management does pose a constraint to the development of both the smallholder and estate subsectors. The acute shortage of trained and experienced manpower in both the public and the private sectors means that improvement will of necessity be a long-term process. External technical assistance will continue to have to be relied upon to fill key posts and to provide in-service training. 1.29 Notwithstanding the above, the overall prospects for a steady improvement in productivity from the smallholder sub-sector would appear to be high for the following reasons: (i) The NRDP (para. 1.21) is progressing and an improved infrastructure of extension services, farmer and staff training, input delivery and marketing services and credit services is becoming available to increasing numbers of smallholder farmers each year; (ii) The interest in adoption of improved maize packages by smallholders has been generally strong and high yields have been obtained where technical recommendations have been followed. They have also shown interest in the cultivation of export crops when price incentives existed; (iii) There is much technical information available from research for both food and cash crops which could be incorporated into better extension messages; and (iv) A sufficient and timely supply of quality seed of improved varieties of the major crops is available through the NSCM. 1.30 The steady realization of these positive elements into increased productivity is particularly constrained at present by problems of timely and adequate fertilizer delivery and by imbalances in producer pricing between cash and food crops. The removal of the former constraint will be the principal objective of this Project while the latter constraint will be addressed through continued dialogue with IFAD and the World Bank/IDA on pricing and on Structural Adjustment.  - 10 - II. THE FERTILIZER SUB-SECTOR A. Introduction 2.01 There are considerable variations in the estimations of cultivable land still uncultivated (due to differences in the stringency of definition of arable land); however, there is agreement that, under the present systems of smallholder management, a high proportion of the potential arable land in the customary sector is already in use. By contrast, recent surveys indicate that of the 470,000 ha under estates, only approximately 90,000 ha was cropped in 1981, a cropping intensity of only 20 percent (Annex 3, Table T-1). Smallholder yields fluctuate widely from year to year, mainly in response to rainfall and availability of inputs; on the basis of averages and given the reasonably favorable soil and climatic conditions in most of the country, yields remain well below their technical potentials as indicated by research. 2.02 A review of 188 national fertilizer trials with local maize over the past 18 crop seasons showed that 55-60 percent of the trials had produced yield responses in the range of 11-21 kilos of grain per kilo of nitrogen. A shorter run of data for the most favorable maize area of the Lilongwe Plain showed yield responses of 26-31 kilos grain/kg N for composite and hybrid varieties. The use of improved crop packages has been good, and if the increased extension capacity of the NRDP can be harnessed to improve husbandry practices and the ready availability of credit and improved seed can be complemented by increased availability of fertilizer, the output response should be significant. 2.03 Malawi procures all its fertilizer from abroad, most of which is imported through the Mozambique ports of Beira and Nacala. The delivery of fertilizer to the smallholder sub-sector over the past three seasons has been inadequate and untimely due to problems of finance, external transport, management and timing of the procurement procedures. Timely delivery to meet the forecasted increases in demand will depend on the re-establishment of an 18-month lead-time for procurement, itself dependent upon the improvement of the sequence of estimation and procurement procedures together with the establishment of adequate financial capacity. External transport constraints are likely to present an on-going problem and' the development of a domestic capacity for fertilizer blending and manufacture will have to be considered. B. Crop Research and Fertilizer Responses 2.04 Results of MOA fertilizer crop research programs have been documented since 1953. Research on tea is being carried out by the industry-supported Tea Research Foundation, tobacco research by MOA and more recently by the industry-supported Tobacco Research Authority, and research on sugarcane mainly depends on the extrapolation of South African results. A considerable amount of information on fertilizer responsesnot all of it analyzed, exists for many crops, over a number of seasons and  - 11 - for many different ecological areas. While both cotton and groundnuts have shown responses to applied fertilizer, these have not been economic and for the smallholder, economic responses have been limited to maize, tobacco and rice. For the estate sub-sector both tea and sugar are regularly fertilized in addition to tobacco and maize. 2.05 The majority of fertilizer trials have been conducted on maize, and have included local, composite and hybrid varieties in both on-station and farmers' field trials. Results indicate that the Lilongwe and Kasungu Plains in the Central Region and the South Rukuru valley and Chitipa plains in the Northern Region are the most productive areas. Marginal areas for maize are found along the Lakeshore, in the Lower Shire Valley and in Karonga where rainfall is erratic and the temperatures are high. The most widely used improved varieties include the dent hybrid MH12, which is the most productive variety, and two semi-flint composite varieties, UCA (high altitude areas) and CCA (low-altitude), which are more suitable for lower potential areas. 2.06 For all types of maize the greatest yield responses were obtained from applications of nitrogen, Responses to phosphorus were variable and were obtained only in the presence of high nitrogen applications (Annex 1, Chart C-11). Responses to sulphur have been mainly recorded on land new'ly opened to cultivation. Potassium has become deficient in areas that have been cropped to hybrid maize for more than two to three years. In the better areas hybrid maize yield responses to nitrogen levelled off at 168 kg N/ha producing up to 8,000 kg of grain per ha; composite maize yields levelled at 112 kg N/ha producing up to 5,000 kg/ha; while local maize varieties seldom gave significant yield responses to nitrogen in excess of 60 kg N/ha producing 3.500 kg grain per ha. Trials with different nitrogen sources have shown that both the sulphuric acid source (sulphate of ammonia, S.A.) and the nitric acid source (calcium ammonium nitrate, C.A.N.) produced considerably higher yields than urea, although the differences were not always significant. At present maize prices and 1983/84 fertilizer prices (still marginally subsidized), responses of at least 21 kilos of grain per kilo of nitrogen would be necessary to obtain a value to cost ratio of 2:1. Phosphate applications exceeding 20 kg P per ha (or about 50 kg P205 per ha) have rarely given an economic response. 2.07 Yield responses to fertilizers on research plots were always greater than on adjacent farmers' fields. Even without added fertilizer, yield differences of over 50 percent have been common. Some of the difference can be accounted for in the extrapolation of small plot yields to hectare yields, but much of the difference is due to the better standards of husbandry followed on the trials, thus demonstrating the need for improved seed and fertilizer use to be complemented by improved husbandry. It is also apparent from the data reviewed that different fertilizer recommendations must be developed for different maize growing areas. The two blanket recommendations now generally used for hybrid (102 kg N and 50 kg P205 per ha) and for composite (72 kg N and 40 kg P205 per ha) are an extremely inefficient use of a scarce and expensive resource.  - 12 - 2.08 Research on dark-fired tobacco has indicated that, under most conditions, applications up to 300 kg/ha CAN and 500 kg/ha single superphosphates gave significant yield responses. Potassium improved quality but not yield. Thus, MOA recommend base dressing applications of 200 kg/ha compound fertilizer (6:18:15) and a top-dressing of 200 kg/ha CAN. However, few smallholders follow these recommendations because of low, still controlled producer prices, and use cheaper 20:20:0 fertilizer with sulphate of ammonia. Thus no potassium is applied and leaf quality has declined. Flue-cured tobacco requires applications of 600 kg/ha of a compound fertilizer and 200 kg/ha of CAN, while an additional top-dressing of 200 kg/ha CAN is required for the higher yielding burley tobacco. Research on rice has been conducted with the variety Blue Bonnet under irrigation and with Faya under rain-fed conditions. Yield responses have mainly been related to nitrogen, using either sulphate of ammonia or urea. Responses to phosphorus or potassium have been limited. Nitrogen fertilizer trials with Faya have given inconsistent results but yields of up to 6,000 kg/ha have been obtained under good growing conditions. Farmers rarely apply more than 25 kg N/ha due to the uncertain yield response. Under irrigation, yield response of Blue Bonnet levelled off at applications of 90 kg N/ha producing up to 7,000 kg/ha. 2.09 The extensive fertilizer research results available for maize, tobacco and rice are not yet reflected in extension recommendations. Insufficient work has been carried out with low applications of nitrogen and detailed response curves have not been constructed. Additional research needs to be carried out with different nitroger sources with particular emphasis on urea and its time of application in order to further evaluate an apparent inferiority of urea as compared to CAN and sulphate of ammonia. Detailed work is also required on the acidifying effect of sulphate of ammonia on the soil and the effect of switching to CAN on the sulphur requirements of crops. C. Current Fertilizer Use 2.10 A precise definition of fertilizer use by the smallholder sub-sector is difficult since, particularly in recent years, an increasing quantity of subsidized fertilizer has been bought by the commercial sector from ADMARC markets. Estimates of this 'leakage' vary, but may be as much as 20 percent of the fertilizer ostensibly sold by ADMARC to smallholders. Over the past ten years (Annex 1, Clhart C-9), estate consumption has shown a steady annual growth averaging nearly 3 percent over the period. Smallholder consumption has been more erratic, being initially distorted in the 1974-1976 period by a fall in consumption caused by the abnormally high international prices for nitrogen. Since 1976 growth in consumption has been rapid, stimulated both by the increasing agricultural extension and credit programs under the NRDP and by the maintenance of a subsidized and steady fertilizer price. Most recently, consumption has been adversely affected by late deliveries in the 1980/81 crop season and by late and inadequate deliveries in 1981/82. Both estate and smallholder sub-sectors will be adversely affected in 1982/83 by a shortfall in supply due to an escalation of the problems on the import routes through Mozambique. Notwithstanding these problems, growth in fertilizer use by the smallholder sub-sector averaged nearly 10 percent per annum over the 1972-1982 decade. For 1982/83 the demand estimates were 86,400 mt for the smallholders and 44,300 mt for the estates.  - 13 - 2.11 Accurate information on smallholder hectarages for different crops is not available, but estimates indicate that approximately 20 percent of the cropped land now receives some fertilizer each year as compared to less than 10 percent in 1977/78. The potential for increased fertilizer consumption and productivity is considerable, particularly since the smallholder is generally aware of the benefits of fertilizer use, but not of optimum rates nor different types. Consequently, the smallholders use predominantly sulphate of ammonia and 20:20:0 while the estates use more balanced and compound fertilizers (Annex 3, Table T-3). 2.12 Estimates of the national fertilizer consumption in 1980/81 by crop, indicate that 34 percent is applied to tobacco and 46 percent to maize, most of which is used on smallholder maize with possibly 15 percent of local varieties receiving some fertilizer and approximately 85,000 ha of improved maize receiving about 300 kg/ha (Annex 3, Table T-4). Estate- grown tea uses about 10 percent of the national consumption and smallholder tea a further one percent, while sugarcane consumes 7,000 mt of fertilizer or about 7 percent. Rice is grown on an estimated 22,000 ha, but fertilizer consumption is less than one percent of the national total. The remaining one percent is used by minor crops and vegetable production. D. Forecast Future Fertilizer Demand 2.13 Future fertilizer demand for the estate sub-sector is relatively easy to calculate for the major crops now grown (Annex 1, Chart C-10). Accelerated diversification is unlikely to distort the small steady increases in fertilizer consumption expected over the next three or four years. Estimating future smallholder demand (Annex 3, Table T-5) is much more difficult, being dependent upon future price incentives, extension activities, adoption rates, credit availability, seed supply and fertilizer supply. Calculations are also made more uncertain by the lack of accurate hectarage data for maize, the major crop receiving fertilizer. Estimates for the short and medium-term (up to 1990) have been based on past consumption trends, while longer term estimates have been based on a composite of these trends with calculations on productivity increases required for self-sufficiency (Annex 1, Chart C-10). 2.14 The rapid expansion in the estate sub-sector in the 1970s is expected to be followed by consolidation due to a levelling-off in demand for tobacco, tea and sugar. Incremental fertilizer consumption is expected to fall to less than 2 percent per annum . Tobacco expansion is expected to be restricted to 2 percent per annum. Estate maize production and fertilizer demand is expected to expand at the rate of 3 percent per annum. The area planted to tea will not be expanded over the next five years, but continued replacement of old seedling tea by more heavily fertilized clonal tea is expected to lead to annual increases of consumption of fertilizer of 2 percent. Fertilizer requirements for sugarcane are not expected to increase over the next five years. 2.15 The pattern of fertilizer consumption in the smallholder sub-sector is not expected to change significantly over the short-term and maize is expected to continue to receive 75 percent of the fertilizer purchased by smallholders. The present adoption rates of improved husbandry practices are predicted to increase gradually as a result of the  - 14 - expanding NRDP, government policy changes and improvements in fertilizer supply that the proposed Project would effect (Annex 3, Table T-2). The number of farmers adopting the fertilizer package under the NRDP have been increasing at the rate of about 5 percent per annum. However, with the availability of reliable seed supplies, the increasing experience of NRDP staff and the benefits of the proposed Project, the adoption rate for improved maize packages is expected to gradually increase to 10 percent per annum over the next five years. Thereafter, the adoption rate could be expected to gradually fall away to 5 percent per annum as the lower potential areas are brought into the NRDP and as the more conservative farmers are reached. The removal of the subsidy on fertilizer over the next three years is expected to have little effect on adoption rates since the pricing methodologies now being followed will take input prices into account in the computation of crop prices and the cost benefit ratios are expected to remain similar to the present ones. International fertilizer prices are expected to increase, in current prices, by about 50 percent during the project period but it is conceptually possible that the landed price in Malawi could increase by a greater proportion due to alternative routing and increased transport cost. However, it is improbable that even a dramatic price increase would affect medium term demand as historically major price increases have resulted in only temporary usage declines. In 1975 the price paid by smallholders, for fertilizer was 250 percent of the 1974 price and while usage was substantially reduced in 1975, within two years it had gained its former level of use with only marginal increases in crop prices. A substantial increase in fertilizer prices would require review of optimum application rates, but appropriate application of the crop pricing methodology agreed under SAL should ensure continued fertilizer use. 2.16 Smallholder production of dark-fired tobacco is expected to increase as a result of the dialogue on crop pricing through both IDA's Structural Adjustment Lending Program and through the Fertilizer Project. Consequently, the hectarage planted to dark-fired tobacco and therefore fertilizer demand is expected to increase by 5 percent per annum over the next five years (Annex 3, Table T-2). Incremental fertilizer application to rice is expected to follow a similar pattern of 5 percent growth per annum due to a 2 percent per annum increase in the area cultivated combined with a steadily increasing intensity of management. Estimates of the use of fertilizer by crops are provided in Annex 3, Table T-5. Long-range fertilizer demand forecast 2.17 Forecasts indicate that maize production increases will just about keep pace with consumption demand up to 1990 (Annex 3, Table T-6). Present data on average yields and area cropped to maize indicate an average family annual consumption of about 900 kg maize grain per annum as compared to the 1,080 kg used in recent NRDP appraisals for projects in major maize production areas. The lower figure of 900 kg per family probably represents the national average since not all areas rely upon maize for basic subsistence. One method of calculating future fertilizer demand is to assume that self-sufficiency would be maintained without considerable extension of the present area cropped to maize. In that case average maize yields will have to be increased from the present 1,200 kg/ha to about 2,000 kg/ha by the year 2000. Assuming present response levels,  - 15 - this increase will require an incremental 32,000 mt of elemental (N) nitrogen in addition to the estimated 9,300 mt of nitrogen used by smallholders on maize in 1980/81. Thus, the overall smallholder consumption of nitrogen might be expected to rise to approximately 55,000 mt for all crops. However, using estimated adoption rates as an alternative method to predict fertilizer demand (Table 2) 34,500 mt of N for maize or 46,000 mt for the sub-sector as a whole would be required by the year 2000. The discrepancy in the total nitrogen consumption indicated by the two methods of estimation is not surprising as both are only indicative estimates. For the estate sub-sector, a continued trendline of 2 percent increment per annum would indicate a consumption level of 12,800 mt of N by the year 2000. Table 2 Malawi - Long Range Nitrogen Demand Forecast ('000 mt N)1/ 1980 1981 1982 1983 1984 1985 1990 1994 1999 1981 1982 1983 1984 1985 1986 1991 1995 2000 Smallholder nitrogen for maize 9.3 9.8 10.3 10.8 11.3 12.1 19.1 26.0 34.5 Smallholder total nitrogen 12.4 13.1 13.7 14.4 15.1 16.1 25.5 34.7 46.0 Estate sector at 2% p.a. increment 8.8 9.0 9.2 9.3 9,5 9.7 10.7 11.6 12.8 MALAWI Total N demand 21.2 22.1 22.9 23.7 24.6 25.8 36.2 46.3 58.8 1/ Based on the following adoption rates: 5% from 1980/81 through 1983/84; 7% from 1984/85 to 1985/86; 9% from 1985/86 to 1986/87; 10% from 1986/87 through 1989/90; 9% from 1989/90 through 1990/91; 8% from 1991/92 through 1992/93; 7% from 1993/94 through 1994/95; 6% from 1995/96 through 1996/97 and 5% from 1997/98 through 1998/99. E. Fertilizer Importation 2.18 Malawi has no fertilizer manufacturing capacity and thus has to import all the fertilizer it requires, A blending capacity does exist and some of the fertilizer mixtures required, especially those used in tobacco production, are blended by Optichem. Nitrogenous fertilizers thus constitute the bulk of the imports. Aggregate import tonnages by calendar year, for recent years, are shown in Table 3.  - 16 - Table 3 Fertilizer Imports (Thousand tons) Year 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 Imports 72.1 59.0 43.4 40.5 80.5 72.5 78.3 103.4 81.2 80.8 127.3 Source: National Statistical Office Fertilizer is normally only imported by ADMARC and by Optichem; however, other organizations have occasionally imported directly. Fertilizers are predominantly imported from West European sources (Federal Republic of Germany, Belgium, Netherlands, United Kingdom, Netherlands and France). Other, less frequently used sources are the Middle East (Turkey, Israel and Kuwait), East Asia (Japan, Korea and Taiwan), nearby African countries (Republic of South Africa and Zambia) plus occasional and small quantities from the United States. 2.19 The two major importers do not pool their requirements for collective tendering and procurement and due to the two distinctive types of importing agencies (Government parastatal and private commercial enterprise), collective purchasing might be difficult. In fact, under present practice, Optichem does tender for all or part of ADMARC's annual procurement although not often successfully. Most fertilizer imports have been commercial, although in recent years Malawi has received some concessional (grant and loan terms) fertilizer. These concessional imports formed a minor portion of total imports except for 1982/83 when they comprised about 20 percent of the planned imports. Concessional fertilizers have typically been on grant terms; the local funds, generated from domestic sales, are deposited in a counterpart fund and are used for activities mutually agreed upon between the two governments. F. Fertilizer Transport and Handling External Transport and Import Routes: Problems and Prospects 2.20 The Mozambican ports of Beira and Nacala (Map IBRD 16843) are the only ones directly linked to Malawi Railways. This situation has led to the position where virtually all of Malawi's overseas trade is routed through Beira and Nacala. This dependence is, however, reciprocal since 50 percent of the total traffic handled through Beira is in transit to or from Malawi. In Nacala the share is even higher at approximately 60 percent. Although road connections do exist between Malawi and Beira, their characteristics are such that their importance as export or import routes is almost negligible. There is no functioning road between Nacala and Malawi. 2.21 The conditions of the Beira and Nacala corridors have deteriorated continuously over the past few years. This applies both to the port and rail components with the situation much more severe for the railway lines than for the ports. During 1982 there was a dramatic worsening of the operations on the Beira line, due to two main reasons:  - 17 - (i) a long-term decline in performance due to lack of staff, spare parts and maintenance; and (ii) increasing insurgency activity in Mozambique, often directed at transport infrastructure, which, in turn, exacerbates the operational and other difficulties caused by (i) above. Although the Malawi Railways could certainly be improved, in the context of the whole transport chain to Beira and Nacala, the train operations within Malawi do not represent a problem and their improvement is not a critical issue in this context. 2.22 A contributing factor to the fertilizer import problems has been the bunching of fertilizer arrivals in Mozambique. During a 45-day period (August to mid-October, 1982) 58,000 tons arrived at Beira, overloading the handling and storage capacity of the port. A longer, phased delivery period could improve delivery, and thus staggered deliveries would be implemented within the procurement process under the Project. 2.23 In the short-term, any improvements in traffic levels are dependent on the development of the security situation. Whereas the Nacala line has not been affected directly by insurgency, the situation on the Beira line is a direct function of the level of attacks carried out by insurgent forces. A cessation of the insurgency would reduce the present high level of uncertainty, but the level which Malawi traffic could reach on a more permanent basis would still be uncertain in view of the precarious maintenance situation. 2.24 Even if the Mozambican routes do improve, it still seems to be a high risk arrangement for Malawi to rely on transit through one country for its normal overseas trade. For fertilizer imports for the 1982/83 planting season, Malawi has had to resort to very costly alternatives through South Africa. The only alternative routes that effectively do exist at present are by road to Lusaka and from there either continuing by road to South African ports, or north to Dar-es-Salaam or transferring to rail in Lusaka to the same destinations. The more direct southward connection which is the Malawi-Harare road is affected by the same security problems as the Beira railroad. It is presently not used. The transport costs for these alternatives are high. The estimated freight for containerized fertilizer by different routes to Blantyre/Lilongwe clearly demonstrates the additional costs of non-traditional routes (Table 4), which for fertilizer shipped via a blend of road and rail will effectively double the cost of the commodity to the farmer. With an average c.i.f. cost of fertilizer landed at Beira of MK 235 (1982/83 prices) per mt, the importance of the overland transport cost differences between the alternatives and the Mozambican routes is evident. Hence, there is an urgent need for Malawi to examine the potential for development of alternative, reliable import/export routes and to continuously assess the comparative costs and advantages of these alternatives.  - 18 - Table 4 Estimated freight costs for containerized fertilizer (MK/mt) From To Blantyre To Lilongwe Beira by rail 25 35 Nacala by rail 25 35 Durban by road 381 Durban by road and rail 1/ 113 139 Dar-es-Salaam via Lusaka by road _ 314 Dar-es-Salaam via Lusaka by road and rail - 135 Harare via Lusaka by road and rail 80 * Source: UNDP/UNCTAD Transit Transport Project for the Southern Africa Sub-Region, Malawi. 1/ via the presently closed road through Mozambique. Internal Transport and Distribution of Fertilizer 2.25 In comparison with the problems connected with external transport from Beira/Nacala to Malawi, transport and handling of fertilizer within Malawi is a comparatively smooth, though complex operation. Fertilizer arriving from Beira/Nacala is railed initially to Liwonde where ADMARC has extensive storage facilities. From Liwonde, the fertilizer is distributed by rail to six intermediary terminals on the Malawi Railways network, from where it is finally distributed by road to about 150 ADMARC selling points. Lake transport (operated by Malawi Railways) from Chipoka (Map IBRD 16842) is also used as part of the distribution chain to the Northern Region. Loading and offloading of rail wagons is done by ADMARC. Internal transport and handling in Malawi can be estimated to account for, on average, MK 42 per mt, which corresponds to about 15 percent of the cost of the fertilizer delivered to the farmer in 1982/83. 2.26 ADMARC uses hired trucks operated by private transport groups, composed principally of small businessmen, for transporting fertilizer to its selling points. Payment to transporters is based on official rates decided and gazetted by Government and applied to a schedule of distances between markets disaggregated into different types of road. Internal transport of fertilizer suffers from no major constraints, although there would appear to be considerable scope for increased efficiency of its management within ADMARC with concomitant savings and benefits to the private transport industry. G. Input Marketing and Distribution Smallholder sub-sector 2.27 ADMARC (para. 1.13) is a vertically integrated marketing distribution and sale of agricultural inputs (primarily fertilizer) to smallholder farmers. Further, ADMARC serves as distribution/marketing agent for the Government in the sale of concessionary or aid program  - 19 - fertilizers handled on a government-to-government basis. Distribution points are widely distributed around the country and there are 72 parent markets and 1,047 seasonal markets from which fertilizer is sold to farmers (Maps IBRD 16847 and 16848). 2.28 As fertilizer accounts for a major proportion of seasonal inputs, the timely procurement and distribution of fertilizer has been one of ADMARC's important functions. Throughout the last half of the decade of the 1970s, ADMA-RC's selling price for fertilizer was constant while the international price was increasing (Table 6). Thus, the fertilizer subsidy per ton and the fertilizer tonnage handled increased concurrently. These increasing subsidies were able to be absorbed by ADMARC because of reasonably high profitability from its crop trading operations. However, commencing in 1977/78 the crop trading accounts were severely weakened by adverse trends in crop marketing, resulting in ADMARC's inability to continue to bear the heavy fertilizer subsidies and to still remain commercially viable (see Annex 4, Table T-1). 2.29 In addition to the sharp decline in ADMARC's profitability since 1979, there has also been a severe erosion of its liquidity. The liquid reserves built up by ADMARC out of trading profits up to 1978 were invested outside the organization in unprofitable development projects, in unsecured loans and in commercial organizations which did not bring any reasonable return. Most of the long-term loans and investments of ADMARC (standing at a total of MK 65 million in June, 1982) have not produced any or acceptable annual dividends or interest. The short-term loans totalling MK 24 million shown on ADMARC's balance sheet do not bear any interest income and are mostly irrecoverable. ADMARC was used as conduit for on-lending to Press Holdings and their inability to repay the loans has left ADMARC with the debt servicing liability without an offsetting asset inflow. This problem is being addressed under SAL II. Furthermore, ADMARC has been charged with the responsibility of establishing and maintaining a national strategic grain reserve, Government has now been requested to share in this financial burden. Although the working capital position shown by ADMARC's balance sheets appears sound, its liquidity situation, particularly during the peak crop buying/inputs procurement season, has been extremely critical. Furthermore, due to the generally adverse financial position faced by the country's only two commercial banks, ADMARC's previously generous overdraft facilities have been drastically limited. Summarized balance sheets from 1977 to 1982 showing the financial status of ADMARC are contained in Annex 4, Table T-2, ADMARC's liquidity situation was so adverse that it could not meet its full commitment towards procuring smallholder fertilizer in 1981/82 which resulted in the Government of Malawi providing MK 6 million for this purpose to augment ADMARC's funds. ADMARC's cash flow projections for 1982/83 (Annex 4, Table T-3) reveal that it would be impossible for ADMARC to provide even the reduced share of MK 12.46 million for fertilizer procurement and distribution without external assistance or increased borrowings from commercial banks, which are, as noted above, not available. Estate Sub-Sector 2.30 Similar to the smallholder sector, there have been no prohibi- tions on the importation of fertilizer for the estate sub-sector. Optichem estimates the incremental growth in fertilizer requirements for the balance  - 20 - of the estate sub-sector (tea and tobacco) and lets tenders for these estimated requirements. Optichem, in which ADMARC has a 20 percent shareholding, has a limited distribution capacity and sells fertilizer directly to ghe sugar and tea estates and through Agricultural Trading Company (ATC) to other estates. Fertilizer must be collected from their depots in Blantyre or Lilongwe. Optichem imports elemental fertilizers and blends the mixtures required; approximately one-half of their sales (tonnage) are now of blended materials. Optichem provides the granular mixtures ADMARC requires for the smallholder tobacco producers (3,000 mt in 1980). In 1981/82 ADMARC and Optichem marketed about 60 percent and 40 percent respectively of the fertilizer sold in the country. However, this does not necessarily reflect the relative proportions of smallholder and estate fertilizer use as an unknown quantity of ADMARC fertilizer finds its way to the estate sub-sector. H. Storage 2.31 As fertilizer imports arrive over a period of several months, storage is required prior to distribution as smallholders typically purchase inputs near the onset of the crop season (Annex 4, Chart C-1). The storage capacity available to ADMARC is more than adequate to meet the annual fertilizer storage requirements during the Project period. This capacity is concentrated in the Southern and Central Regions - which conforms to the usage pattern. The Northern Region has limited total storage facilities, but it is reasonably well-distributed. ADMARC's main depot and primary market storage by region is as follows: Table 5 Region Main Depots Storage Southern Central Northern Total ('000) Main Depots Total ft3 5,787 6,433 290 12,510 Total mt 1/ 161 179 8 348 Fertilizer mt 40 61 2 103 Fertilizer w/rail access mt 32 42 - 74 Primary Markets Total ft3 1,068 3,270 536 4,874 Total mt 1/ 29 91 15 135 1/ Converted at 36 ft3 = 1 mt 2.32 In addition to the capacity of the main depots, the primary market facilities have 135,000 mt of total storage capacity. The capacity of primary market storage is also concentrated in the Southern and Central  - 21 - Regions. ADMARC also have over 1,000 seasonal markets. However, these are primarily for crop procurement rather than input distribution. Storage, in the aggregate, is not a constraint in the handling and use of fertilizer, although storage may be limiting in isolated instances. If fertilizer is programmed to arrive and be distributed over several months the existing facilities are adequate to handle the amount of fertilizer likely to be used for the remainder of the decade. I. Fertilizer Blending 2.33 Optichem has a blending plant with 40,000 mt annual capacity of which about 24,000 mt is currently utilized. In the interest of cost savings, high analysis materials should be imported and blended to the required local specifications. Assuming estate demand for blended fertilizers will increase by 10 percent over the project period, the unused capacity of the plant would still be 13,500 mt. If this unused capacity was used to blend nitro-phosphates (such as 20:20:0) from imported urea and diammonium phosphate and locally produced conditioners, 13,500 mt of blended fertilizer could be made from 9,500 mt of imported material - a 30 percent savings on external transport. 2.34 There is inadequate unutilized capacity to blend all the required fertilizers locally. With the escalation of external transport constraints and as transport costs increase, the economics of developing more blending capacity need to be evalaated. It may not be possible, in the short-term, to shift from direct farmer application of low analysis to high analysis nitrogenous fertilizers for agronomic and extension reasons. However, Malawi should immediately consider the importation of only high analysis fertilizers, which can then be blended with locally available inert materials to reduce them to the locally desired analysis. J. Fertilizer Pricing 2.35 Prior to the large petroleum price increase ADMARC fertilizer prices were near their economic costs. Very small losses (subsidies) were incurred prior to 1975/76 on farmers inputs which are primarily fertilizers. Since that time, with the exception of 1976/77 when a small profit was made, the total subsidy has not been less than K 2.0 million per annum (US$1.78 million) or equivalent to 20 to 25 percent of the full cost. 2.36 Prices charged by ADMARC have increased by several-fold since 1969/70 and at a rate considerably greater than the international prices, reflecting the high proportion of the landed-Malawi cost that comprises transportation costs. Smallholder fertilizer price increases have not been gradual (see Annex 4, Table T-4). During the 1980s price increases were accelerated in order to alleviate the high subsidies which had accrued, to cover the increased raw material and transport costs and also because of the devaluation of the Malawi Kwacha. 2.37 The prices charged to smallholders and estates, for ammonium sulphate and calcium ammonium nitrate and the equivalent world price for recent years (Northeast Europe) are shown in Table 6; also shown is the total ADMARC subsidy. The prices paid by estates (which include a small profit margin for Optichem) reflect values which are close to the economic price. In the most recent year, the prices charged to smallholders and  - 22 - estates have begun to converge. GOM has agreed to phase out fertilizer subsidies (para. 3.13) which have had the undesirable characteristics of not only having weakened ADMARC financially and its ability to provide crumcial smallholder fertilizer supply on an adequate and timely basis, but also having proved difficult to direct at the intended smallholder beneficiaries. As noted in paragraph 2.10, a sizable part of the subsidy has "leaked" to other farmers. Table 6 Ammonium Sulphate Calcium Ammonium Nitrate Total Fertilizer Year Smallholders Estates European* Smallholders Estates Subsidy Smallholder