# 3. Who Benefits from Fertilizer Subsidies in Indonesia?

The incidence of benefits from fertilizer subsidies is analyzed using two different rural household surveys by BPS: the Agriculture Census 2003 and the BPS Rice Household Survey 2008. The first survey comprises a random sample of 46,144 farmers for the rice subsector in 29 provinces. It was collected in 2004 and asked farmers about their usage of inputs in 2003. The latter survey entails data from a smaller sample of 11,297 rice farmers from 15 provinces regarding the harvest in 2007 (covering the 15 largest rice producers in Indonesia and collected in 2008).

## _Methodology_

The incidence analysis looks at two types of fertilizers, urea and SP36, and estimates the spending share captured by farmers according to their land size. The subsidy is defined as the difference between the market price for fertilizer and the actual prices paid by farmers as reported in these two BPS surveys. In addition, the GoI established a ceiling price for fertilizer (HET) that is below the market price and market prices are reported by the State Audit Agency (BPK), the ‘cost of goods sold’ or CoGS.<sup>2</sup> Thus, one can estimate if farmers received subsidy benefits by looking at their paying prices. Those farmers reporting paying at the HET captured fully subsidized fertilizer, while those farmers paying below the market and above the HET, received partial subsidy assistance. The analysis looks at the volume of fertilizer used and at what price and divides the farmers in 5 equal quintiles by the size of their total agricultural land (where quintile 1 groups the smaller-plot farmers and quintile 5 the largest).<sup>3</sup> By aggregating the amount of subsidy spending captured by each farmer in a quintile, one can see how much subsidy assistance benefited each group. (See Annex I for a more detailed discussion on the methodology.) Small farmers on average use more fertilizer per hectare. In 2007, the smaller rice producers used twice as much urea per hectare and harvested higher yields than farmers with the larger rice paddies (Table 3.1). This often leads to over-use of fertilizer (Figure 3.1). This may also reflect price distortions in input markets, which have led small farmers to substitute alternative inputs (other fertilizer, better seeds) for urea, as suggested by the increase in the demand for non-urea fertilizer following the removal of subsidies in 1999-2001. In contrast, larger farmers have greater access and better quality inputs, as well as better quality information and can, therefore, use an optimal mix of agriculture inputs.

> 2 The CoGS is taken as reported in the BPK reports, with the exception of the CoGS for urea in 2003 that is an estimate (see Annex I).   In 2003, the HET price for urea was Rp 1,150 per kg and the CoGS was Rp 1,489, while for 2007 the HET was Rp 1,200 per kg and the weighted average of the CoGS of four producers stood at  Rp 2,170.5.  Consequently, the HET price for SP-36 in 2003 was Rp 1,400 and the CoGS was Rp 1,629, while by 2007 the HET reached Rp 1,500 and the CoGS was Rp 2,395. 3 The land size variable includes total agriculture land  for  farmers that either, rented, owned, or sharecropped rice paddies. A different analysis, grouping farmers by the size of their gross revenues from rice (where quintile 1 holds the poorest individuals and quintile 5 the richest), corroborates the findings reported in this section. The results of this analysis are reported in Annex III.

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