Chapter 6
Fertilizer policy and future fertilizer needs

Since the green revolution in the early 1960s, mineral fertilizers have been officially recognized in Indonesia as essential inputs for the improvement of agriculture production. The first fertilizer plant came into production in 1963. This marked the beginning of the fertilizer industry in the country and other fertilizer plants were constructed subsequently. The Government of Indonesia used the fertilizer subsidy as an important instrument for managing fertilizer marketing and distribution, with a major focus on the increased production of rice, the staple food in Indonesia. Rice production more than doubled, from about 20 million tonnes in early 1970s to 51 million tonnes in 2002. This achievement was made possible by a remarkable increase in fertilizer use. During the last 30 years (1970-2000), annual fertilizer use has increased from 635 to 5 931 thousand tonnes (Figure 2), over half of which was used to increase rice production.

Because of the subsidy, the domestic prices of fertilizer were lower than the world prices of the corresponding products. However, the past policy of subsidizing domestic fertilizer prices had two undesirable outcomes. Firstly, the cost became a heavy budgetary burden and secondly it created inefficiency on fertilizer use at the farm level. A study in West Java reported that rice farmers were applying levels of fertilizers that were higher than the recommended rates, by 12 percent in the case of urea, 16 percent in the case of TSP and 50 percent in the case of KCl. Another study found that TSP and KCl were often still applied when soil tests showed that the soil reserves had built up to high levels. Relatively low domestic fertilizer prices also resulted in fertilizer smuggling (Hanson et al., 1994).

To reduce the budgetary burden and to improve the efficiency of fertilizer use, the government had to increase the retail price. The subsidy on potassium chloride was removed in October 1991, those on AS and TSP/SP-36 in October 1994 and the urea subsidy was removed in December 1998. To maintain a relatively constant fertilizer to paddy price ratio, the floor purchase price of paddy was also increased annually. The ratio fluctuated around 0.78 in 1970/71, 1.75 in 1985/86 and 1.14 in 1992/93.

The fertilizer policy had the most impact on the yields of rice. Between 1960 and 1975 the yield increased from 2.18 to 2.75 tonnes/ha or an average increase of 1.64 percent per year, while from 1975 to 1985 it increased from 2.75 to 4.00 tonnes/ha or an increase of 4.1 percent per year. During these two periods, total rice production increased from 14.3 million tonnes in 1960 to 23.4 million tonnes in 1975 and to 39.7 million tonnes in 1985. However, from 1985 onwards yields tended to stagnate, with an increase from 4 to 4.4 tonnes/ha or an average of 0.68 percent per year. During this latter period fertilizer use increased only slightly, from 4.4 to 5.5 million tonnes or a rate of increase of 1.7 percent per year.

The high increase of average rice yields in the 1975-1985 period was achieved by a special governmental intensification program which involved the dissemination of technology, the provision of capital and a guaranteed floor price for rice. The low increase of rice yields during the period between 1985 and 2000 was due to decreased government support, involving a reduction in advisory services, reduction in the subsidy on pesticides and fertilizers and uncertainty concerning the floor price of rice.

Aware of the negative impact of this development, since 1998 the government has taken some measures to reinstate certain subsidies. However, the re-implementation of subsidies has been inconsistent, largely due to the government's limited financial capacities. In April 1998 a subsidy for AS and SP-36 fertilizer for the agriculture sector was reinstated. This decision was soon followed by an announcement by the Ministry of Agriculture on 1 December 1998 that the government would no longer be involved in the marketing of fertilizers and that subsidies on fertilizers were to be terminated. However, in January 1999 the government regulated the supply and distribution of urea, TSP/SP-36, AS and KCl for farmers in remote areas that are difficult of access. In March 2001 the marketing of urea for the agricultural sector reverted to government control. In February 2003 the government applied regulations allocating the areas for the distribution of fertilizers to the different companies. The government has reinstated fertilizer subsidies for the years from 2003 until 2005 for urea, SP-36, AS and NPK fertilizers, but only for use on food crops and smallholder plantations.

These sometimes conflicting decisions were made in recognition of the importance of food security for stabilizing the country's economy, a country with a population of 215 million people and an economy heavily dependent on agriculture.

After two years experience, however, it is apparent that the dual pricing system leads to inefficiency and a distortion of marketing systems. Subsidized fertilizers are frequently not reaching the intended beneficiaries; they can easily be used for the unsubsidized non-food crop subsector and some subsidized fertilizers have been exported.

A serious problem is the frequent occurrence of non-availability or lack of appropriate types of fertilizer at the village level. Sometimes shortages occur when the fertilizers are needed for the basal fertilization of food crops during the planting season. Furthermore, despite the subsidy, farmers cannot afford to buy the full amounts they require due to their low purchasing power, this being a direct and indirect result of the economic crisis. However, these are not the only significant constraints. Other constraints include problems of low fertilizer quality, an inadequate choice of fertilizer types and inadequate access to credit, especially for smallholders. During the economic crisis, there was a deterioration also in other farming practices.

For efficient fertilization, the supply of fertilizers should be:

• Of the required type.
• In adequate amounts.
• Of guaranteed quality
• Available at the place required, village or farm level.
• Available at the time required, well before the peak planting season.
• At an affordable price.

Crop yields could be increased and food security thus improved by the application of improved fertilization technologies. Research has developed integrated plant nutrient management (IPNM) systems based on soil and plant analyses for both annual and perennial crops. Combining inorganic fertilizers with locally available soil amendments, such as farmyard manure and crop residues, can make inorganic fertilizer use more attractive economically.

TABLE 39
National fertilizer supply and demand

Source: IFPA, 2004.

The most important factor for increasing fertilizer demand is an improvement in the profitability of its use.

Based on data of fertilizer production and consumption in the period from 1998 to 2002, it is estimated that national fertilizer requirements until 2006, the end year of the assessment, can be supplied by the domestic fertilizer producers (Table 39).