Attention to organic fertilizer has been increasing but opinions are mixed as to its impacts. This paper explores the potential and limitations of the use of farmyard manure (FYM) for paddy and upland cereals under different soil conditions in Tamil Nadu, India, using farming households’ three-year rotating panel data from 1993 to 2003. Estimated yield functions reveal that a direct impact of FYM application exists only for upland cereals but not for paddy. Meanwhile, an indirect impact through an increase in the marginal product of chemical fertilizer is observed for both paddy and upland cereals, especially under low inherent soil fertility status. Reflecting the existence of the benefit of FYM application, our factor demand estimation shows that farmers react to FYM price change actively. This means that, through the transaction in the FYM market, the reduction in FYM price contributes to the productivity improvement of two kinds of poverty-prone areas: the upland cereal production area and the area of inherently poor soil conditions. However, our analyses on price transmission and determinants of FYM price reveal that although the reduction in FYM price is achieved by dairy sector development, due to high transportation costs and a non-tradable attribute of FYM, the reduction is spatially constrained within a village where dairy sector development has taken place. Hence, the impact of dairy sector development on productivity improvement is locally limited, which is a limitation of the FYM-based development strategy.


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