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Storm in the Kenyan coffee Industry

By Dr. Caesar Mwangi

It seems there is never a dull moment for the Kenyan Coffee Industry. From coffee smuggling syndicates of the 1970’s fondly referred to as the coffee boom to the price boom of 2011 which led to record prices for farmers and an equal escalation of coffee theft in farms, in stores and in transit claiming fatalities from the ravenous coffee robbers. Coffee has in the past been referred to as black gold and it is touted to be one of the most traded commodities after oil. Is it thus not very strange that the Kenyan Coffee industry wades from one controversy to the next? After all it offers the allure of quick riches and the prestige of wealth that Kenyans have come to value as the end all that will make life worth living.

The Kenyan coffee industry has been plagued by various challenges and the most glaring outcome of these challenges is declining national production and related outcomes which include reduced earnings for farmers, reduction in rural livelihoods, increased poverty and at a national level reduced inflows of foreign exchange and rural employment. Production in 1988 was at a high of 130,000 tons and a mere ten years later this had declined to a mere 55,000 tons. Production in 2013 is pegged at approximately 40,000 tons. Of course the industry faces a myriad of factors beyond the farmers control especially in relation to fluctuating world prices, which move up and down with the regularity of a well-oiled yoyo. However, man made challenges seem to be at the center of most of its woes and these are occasioned by less than harmonious interactions and interests between key stakeholders including cooperative societies, the Coffee Board and Coffee Millers and Marketers who have led to controversies and even conflicts.

As if this was not enough, the industry has been further complicated by the promulgation of the new constitution and the devolved system of Governance. Agriculture is designated as devolved and hence comes under the ambit of County Governance. The logical approach for County Governments with coffee is to find ways of assisting their farmers and in the process result in the emergence of further controversy and conflict.

The latest controversy is an offshoot of our new devolved Governance structure. County Governments and specifically Governors’ from counties that grow coffee have laid claim to the coffee bushes within the counties. There has been a claim that existing multinational coffee millers in Kenya have been shortchanging the coffee farmers by operating in a cartel with the sole purpose of keeping coffee producer prices low for the benefit of the cartels and to the disadvantage of the poor farmers. They have suggested that as County Governors’, they owe their farmers a remedy and the only remedy they can prescribe is to lay claim to all the coffee produced in their counties and to market this coffee on behalf of their endangered coffee farmers.

I am not sure that this approach will necessarily benefit farmers but even if it is designed to benefit the farmers with higher coffee prices, it may not be legally possible given the current institutional arrangements in the coffee industry backed by existing laws. As of today Nyeri, Embu, Muranga, Meru and Kirinyaga Counties have all announced their intentions to set up coffee mills and cut out the market intermediaries (commercial millers and marketers) whom it is alleged are the cause of low earnings by farmers.

On one hand, the County Governments need to realize that the Kenya Coffee Industry operates on a liberalized framework. This means that farmers are at liberty to contract with any registered coffee miller and marketing agent in the country irrespective of the geographic location. It is thus not practical for County Governments to direct farmers to mill and market their coffee in county designated mills and marketing agents who are not even registered under existing laws. This is taking us back to the days before liberalization and it does not auger well for the need to base competition on efficiencies and best service offerings.

Secondly, the farmers have already signed milling and marketing contracts with existing mills and these are legal arrangements which need to be honored in a civilized business operating environment where millers have made huge investments in machinery and staff to be able to meet their contractual obligations to existing coffee farmers. By County Governments directing and at even forcefully insisting that all coffee should be milled in their counties, the coffee industry faces the real prospect of collapse if the current contracts are not honored and the expected income is not realized by investors in the industry.

Thirdly, the County Governments need to realize that the current volumes of coffee produced in the country are just too low compared to the existing milling capacity available. It is thus a waste of resources to commission additional milling capacity at extra cost when there is close to 80% idle capacity in the industry. Someone will have to bear this extra cost and it is likely to be the beleaguered farmer whose fortunes the county governments are trying to improve.

Fourthly, County Governments need to realize that coffee is a global commodity and hence coffee prices are not entirely within the control of Kenyan industry players. The cycles in the prices cannot be smoothened out by taking control of coffee based in the counties. This approach is akin to treating a cancer patient with flu medication. The treatment will not work and the patient will certainly ‘die’.

My take is….if we would really like to assist Kenyan coffee farmers, the various players especially including County Governments should come together and have sober discussions to understand the problem and come up with well informed recommendations. The bottom line is that so long as Kenyan coffee farmers cannot make regular and sustainable incomes, they will not be interested in continuing with coffee production.

One key recommendation that I have a personal affinity for and that I have discussed with various players and which needs to move to implementation is the need to set up a coffee stabilization fund. All farmers should be assured that they can get at least US$ 4 per kg of good grade coffee. Any earnings above US$ 4 would be diverted to this fund and any earnings below would be subsidized by this fund. Of course quality parameters will need to be adhered to.

Dr. Caesar Mwangi is the Former Managing Director of Sasini Ltd, a publicly listed Agribusiness involved in the growing processing and marketing of Tea, Coffee and Dairy Products in Kenya and Adjunct Faculty of Strathmore Business School