The rush by coffee farmers to purchase their own milling plants could land them in a debt trap, experts have warned.
The experts say that low production and uncertain prices globally could put farmers’ investments at risk, making it difficult for them to service loans secured to fund the mills.
Coffee societies started buying their own mills after the Kenya Planters Co-operative Union was placed under receivership in 2009, leaving farmers at the mercy of private millers who they accused of charging exorbitant prices.
So far, there are 16 coffee societies that have put up plants, or intend to do so, according to sources at the ministry of Co-operative and Marketing.
“We have tried to talk them out of buying new milling machines but we have been unsuccessful. We fear that most of them will end up in unserviceable debts. The farmers seem driven more by sentimental rather than economic reasons,” said a source at the ministry who requested not to be named.
Farmers, according to the source, are guided mainly by the new dispensation of county governments in deciding to put up milling plants within their areas.
The government has so far waived Sh8.2 billion owed by coffee farmers in the past 10 years, most of it borrowed in the late 1980s when coffee prices were good, but which could not be fully serviced after prices tumbled in the 1990s.
“Coffee farmers could be getting into new debts that will be difficult to service if they are not prudent in their borrowing,” said Mr Kimanthi Mutuerandu, a former KPCU chairman.
An engineer involved in the installation of the milling plants estimated the purchase price at between Sh25 million and Sh40 million, depending on the capacity and the source, with other added costs of installation and construction bringing the average price to Sh100 million.
Agents of Pinhalense, a manufacturer of machines from Brazil operating under the Braz-Afric group, have camped in the country to sell their machines due to high demand.
Kenya Planters Co-operative Union operated as a monopoly until mid 1990s when the sector was liberalised, opening the door to private millers.
The union’s market share was progressively eroded to 4 per cent by the time it ceased milling in October 2009, when it was placed under receivership by KCB (then Kenya Commercial Bank) over a Sh644 million debt.
Over the past four years, there has been a frenzy to buy own milling plants following high international prices that peaked last year, with some farmers earning Sh150 per kilogramme of cherry delivered to the factories.
The prices have since fallen to an average Sh50 per kilo of cherry, which translates to lower income for farmers.
The trend, according to some players in the coffee sector, also puts into doubt the intended revival of the union that elected an interim committee to kick off the process two week ago.
Co-operative and Marketing minister Joseph Nyagah said the country had 90,000 tonnes installed milling capacity against an average of only 40,000 tonnes of coffee production per year.
This has led to idle milling capacity, which some players blame for increased theft of coffee in the factories and farms as some private millers, a number still servicing debts, seek to increase their business.
Coffee production has not increased as dramatically as was expected despite the government initiating several programmes to encourage farmers to return to their farms, with most having abandoned the crop in the 1990s when prices fell.
“With the prices reducing by more than half from last year and production remaining low, the possibility of some coffee societies returning to insolvency is very possible,” said Mr Wachira Mwago, a former chairman of the Coffee Board of Kenya.