# 1. Introduction

Recently, Uganda has made impressive progress in terms of reducing poverty. The poverty headcount rate under the national poverty line declined from 31.1 in 2005/06 percent to 19.7 2012/13.<sup>2</sup> The majority of this poverty reduction can be attributed to the high growth in household agricultural income, at approximately 6 percent per year (World Bank, 2016). Key policies advanced by the government, mainly the stabilization of the conflict in the Northern region and infrastructure investments, contributed to agricultural income growth. There was also a component of good fortune: favorable rainfall and positive trends in commodity prices. However, only a small proportion of growth in household agricultural income can be explained by changes in the nature of production or an increase in the adoption of better technology in agricultural production (Barrett et al. 2017, World Bank 2016). Only around 40 percent of agricultural households _have ever_ used improved agricultural inputs and there has been little progress in adoption over the 2005/16 to 2012/13 period. The low use of improved inputs by farmers remains a constraint for agricultural productivity and, therefore, for sustained poverty reduction in Uganda.

The objective of this paper is twofold: to explore the financial returns of using agricultural inputs and to examine what factors are constraining input use among Ugandan households. First, the returns to two key inputs ‐inorganic fertilizer and hybrid seeds‐ are examined to determine whether the inputs that are available to farmers in Uganda are profitable. The analysis explicitly examines net returns, not just increases in gross income. It takes into account the volatility of crop prices (Hill and Mejia‐Mantilla 2017) and the problem farmers face in securing quality inputs (Bold et al. 2017). For the second objective, we test if some of the key constraints to input use identified in previous studies are present in the Ugandan context using a relatively long panel data set. This allows us to account for long‐run household trends, while estimating marginal impacts that reflect a decade of changes. For this part of the analysis, we study the use of pesticide in addition to that of inorganic fertilizer and improved seeds.

Our results suggest that increased input use has the potential to drive productivity growth and render positive financial returns among smallholder farmers, despite the substantial output price volatility that characterizes Uganda. Yields of the four main crops considered<sup>3</sup> —maize, beans, matooke and coffee‐‐ increase in response to the application of inorganic fertilizer (nitrogen), particularly beans and maize. The gain is high across the range of output prices experienced from the year 2000 onwards. The economic return to fertilizer is always positive (across the entire price range) for beans, maize and matooke and positive for the top 75 percent of prices for coffee. Median returns are 180 percent, 74 percent, 64 percent and 39 percent respectively. Commonly available improved seed varieties for maize and beans increase gains by 32 percent on average. However, the cost of using maize hybrid seeds often exceeds the extra revenue gained from using them, reducing its financial return.

In addition, we find that the low quality of inputs prevalent in agricultural input markets, lower the financial returns, often to less than zero, which likely discourages input adoption. Thirty percent of herbicide samples contain less than 75 percent of the active ingredient (Ashour et al. 2016); hybrid maize seeds are equivalent to a mix of 50 percent hybrid and 50 percent traditional; and the average nitrogen 2 Official poverty numbers estimated by the Uganda Bureau of Statistics (UBOS), using the Uganda National Household Survey (UNHS) 2005/06‐2012/13.

3 Under reasonable weather conditions, that is neither bad or particularly bad rainfall conditions.

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