the resulting price of fertilizer was less than N50<sup>21</sup> per kilogram of fertilizer or missing, the local government average (gotten from the data) was used and where that was not available, a state level average fertilizer price was used. To address persistently extreme values (beyond N1000/kg), fertilizer prices were winsorized at 95%. Extreme values after winsorizing (greater than N250/kg) were also replaced with the local government or state average.

We compare the profitability of plot level nitrogen application (determined by the MVCRs) to observed nitrogen application to see if observed use patterns are in line with that indicated from expected profitability. We consider how the profitability of nitrogen application varies when the acquisition cost is used to calculate expected profit versus the market price and when farmers are considered to be risk averse or risk neutral. We also consider how fertilizer profitability varies across different levels of fertilizer subsidy.

# **4.4 Fertilizer acquisition costs and the profitability of nitrogen application for maize production in Nigeria**

With few community level input suppliers and poor infrastructure in rural areas, market prices do not always adequately reflect the cost of acquiring fertilizer. Transactions cost more generally (and transport costs more particularly) have been shown to play a key role in farmers’ decisions to use modern inputs (Winter-Nelson and Temu, 2005; Morris et al., 2007; de Janvry et al., 1991; Key et al.,2000; Bellemare and Barrett, 2006). Thus we calculate the fertilizer acquisition cost to be the market price for nitrogen plus the cost of transportation from the market to the farm gate (Sheahan et al. 2013). Transportation costs to acquire fertilizer are very high in Nigeria (Table 5). The average price paid per kilogram of NPK fertilizer in 2010 was about N105. However, when we factor in the average transportation cost to acquire the fertilizer, the acquisition cost in 2010 was about N425<sup>22</sup> . This indicates that about 70% of the actual cost incurred by farmers using fertilizer is

> 21 According to the data from the Nigerian agricultural markets information system, the price for fertilizer in 2010 generally ranged between N4500 (for a 50kg bag) and N6000 which amounts to between N90/kg and N120. Our data exhibits wide variation thus extreme values were winsorized at 95% and then all fertilizer price values greater than N200 per kg were replaced with N200.

> 22 As the common mode of transporting fertilizer was motorcycle, closely followed by mini bus, transportation costs in this paper also replaces any transportation costs (after winsorizing) that exceed N700 with N700 to exclude the effect of transportation costs for cars and pickups. However anecdotal evidence from extension agents in rural Nigeria indicates that transportation cost even by motorcycle ranges between N200-N2,000 depending on many factors such as the region of the country, the season and  quality of the road.

> 22 We use both total winsorized (at 95%) transportation costs and winsorized transportation costs with a cap of N700. While the uncapped transportation costs  gives us much larger values (with transportation being up to 70% of total

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