# 4. What Is the Impact of Urea Consumption on Rice Production?

This section estimates the impact of fertilizer subsidies on urea consumption and the impact of urea use on rice yields. A simple micro-model using data from the 2007 household survey explores two important questions: What is the effect of the fertilizer subsidy on urea consumption, and what impact does urea usage have on rice production? The model proposed allows for diminishing returns to the use of fertilizer (by including a quadratic term for urea used), implying that there is an optimal point for urea usage beyond which yields start to decline. The quantity of urea consumed depends on: the price of urea, the price of other fertilizers (which are proxied with the price of SP36), the price of rice, and the price of rice seeds. In turn, the impact of urea on rice yields is dependent on: the quantity of urea used, the consumption of other inputs (land, labor, irrigation), and controls for soil quality (a dummy variable for Java-Bali) and human capital (in this case, the years of education and the age of the head of the household). The model to be estimated is summarized below: _ln rice_yield =_  _+_  _1 ln urea_used +_  _2 ln urea_usedsq +_  _3 ln land_sizei +_  _4 ln labor_cost +_  _5 irrigation +_  _6educ +_  _7age +_  _8Java&Bali +_  _(1)_ where _urea_used_ is the fitted value of the regression: _(2) ln urea_used=_  _+_  _1 lnprice_urea +_  _2 ln price_SP +_  _3 ln price_seeds +_  _4 lnprice_rice +_  _5 ln land_sizei +_  _6 ln labor_cost +_  _7irrigation +_  _8educ +_  _9age +_  _10Java&Bali +_  And _urea_usedsq_ is the fitted value of the regression: _(3) ln urea_usedsq=_  _+_  _1 lnprice_urea +_  _2 ln price_SP +_  _3 ln price_seeds +_  _4 lnprice_rice +_  _5 ln land_sizei +_  _6 ln labor_cost +_  _7irrigation +_  _8educ +_  _9age +_  _10Java&Bali + z_ _Variable Definitions_<sup>_7_</sup> _:_ _rice_yield_ is the quantity of rice (kg/ha) _urea_used_ is the quantity of urea used (kg/ha) _urea_usedsq_ is the square term of _urea used land_size_ is the size of the cultivated rice field (ha) _labor_cost_ is the total cost of labor ($/ha)<sup>8</sup> _irrigation_ is a dummy variable (1 for irrigated land) _price_urea_ is the price of urea _price_SP_ is the price of SP36 fertilizer _price_seeds_ is the price of the most commonly used rice seeds -superior ($/kg) _price_rice_ is the dried grain price of rice at which the farmer sold the last harvest.<sup>9</sup> _educ_ is the years of education of the head of the household _age_ is the age of the household Java&Bali is a dummy variable (1 for provinces in Java and Bali) _e_ , v _, and z_ are error terms

> 7 A word of caution is necessary when interpreting the results. This model focuses on understanding the relationship between fertilizer use and rice yields. A model to better understand the factors determining rice production is a far more complex undertaking which requires additional information unavailable at this stage, such as the quality of rice seeds, irrigation and soil.

> 8 Labor costs: The number of workers multiplied by their reported salary.  For those non-wage workers, the average salary for men and women is assumed for the estimation. An alternate specification used labor inputs measured in man days per hectare and showed similar results.

> 9 The rice price influences the quantity of urea used by providing farmers with the means and incentives to buy fertilizer. Although the dried grain price at which farmer’s sell their output rice (the information provided in the survey) may differ from the price  farmers faced when buying  inputs (not provided by the survey),  both prices will be strongly correlated.  Therefore, this model uses this post-harvest  information from the survey  as a  proxy for  the rice  price.

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