Coffee industry can learn value addition from cut flower sector

What you need to know:

  • With international prices shooting up in recent years and this trend looking to hold, how to make more Kenyans benefit from coffee should be a key challenge for the next government
  • In a natural resource-based production, the lowest economic value is generated if the resource is sold raw or unprocessed. Kenya can add value to the product by adopting the best technologies and practices to reduce costs in production, processing and packaging of exported products
  • Value addition along the coffee chain has been dismally low and skewed against the farmer. First, farmers are only involved in primary production, missing out on processing, mainly milling and roasting
  • The cut flower sector has invested heavily in new technologies — greenhouses, machinery, irrigation systems and cold storage — which enhance value addition

Agriculture contributes 24 per cent of Kenya’s Gross Domestic Product and provides about 70 per cent of total employment.

The coffee and tea sectors provide 45 per cent of the wage employment in agriculture.

Yet coffee production has been declining, from 130,000 tonnes in 1987/88 to 54,340 tonnes in 2006/2007. In 2010, coffee accounted for only 4 per cent of Kenya’s exports.

With international prices shooting up in recent years and this trend looking to hold, how to make more Kenyans benefit from this cash crop should be a key challenge for the next government. One way to ensure this is to promote value addition.

In a natural resource-based production, the lowest economic value is generated if the resource is sold raw or unprocessed. Kenya can add value to the product by adopting the best technologies and practices to reduce costs in production, processing and packaging of exported products.

Streamline markets

This is something the cut flower sector has done with a lot of benefits over the years. It has employed efficient production, streamlined markets and adopted modern technology.

Though the value adding activities in the two sectors are characteristically different, they both have comparable stages in production, processing, delivery and retailing of a product.

On average, small scale coffee farmers receive 7 per cent of the market value (auction price) whereas those in cut flower receive at least 42 per cent.

Value addition along the coffee chain has been dismally low and skewed against the farmer. First, farmers are only involved in primary production, missing out on processing, mainly milling and roasting.

Poor governance and inefficiencies in cooperatives result in delays in input, credit and payments. High cost of fertiliser and pesticides have, in some cases, forced farmers to reduce application of these inputs, resulting in delivery of low quality cherries and substantial loss of small cherries during pulping stage in processing.

Coffee roasting is done in consumer markets abroad. The structure of the market is such that, beyond milling, value adding activities are dominated by a few global corporations. Yet it is at roasting stage that the bulk of added value accrues.

In comparison, the largest portion of cut flower processing is within Kenya and farmers are involved in almost all stages. The cut flower sector has invested heavily in new technologies — greenhouses, machinery, irrigation systems and cold storage — which enhance value addition.

Another difference is the inability of coffee farmers to sell directly to exporters or buyers at retail level. The Coffee Act (2001) regulations not only require smallholders to process coffee through a cooperative, but prohibit direct purchase from farmers.

The auction method is the only legal mode of selling coffee, which must be done through a marketing agent. This significantly reduces value addition at farmers’ level with millers and marketing agents receiving more than 10 times what farmers get.

Though most of cut flower produce is done through the auction outside the country, cut flower farmers have no restriction on whom to sell to and often sell to wholesalers and supermarkets in consumer countries and to individual retailers within the country.

The vertically integrated value chain makes the sector respond quickly to changing consumer preferences and international competition.

Within the coffee value chain, there is no clear mechanism to facilitate the flow of information to farmers. There exists no forum for marketing agents to give feedback to small scale farmers regarding quality and auction prices.

Comparing the two value chains, it is notable that, given supervisory powers vested in Coffee Board of Kenya, coffee sector in Kenya is overly regulated.

For instance, CBK continues to be the only licensing agent for millers and marketing agents. The inefficiency in licensing has resulted in many players in distribution and marketing of coffee, and this possibly explains the long payment cycle for smallholder farmers.

Similarly, the regulatory framework imposes excessive burden on farmers in the form of statutory charges that include auction commission fees, CBK levy, county council ‘cess’ and research deductions.

The history of regulation in coffee and the performance of the sector in Kenya illustrate that the choice to use statutory agents to regulate growth of the coffee industry has had a negative impact.

In contrast, the regulatory system in cut flower sector is less restrictive and plays a facilitative and supportive role, with the Horticultural Crops Development Authority (HCDA) playing a very limited interventionist role in the value chain.

Despite the existence of three coffee membership associations, they are ineffective as media for self-regulation These associations lack clear focus on their mandates and most smallholders hardly know anything about them.

Therefore, these associations have been largely ineffective in addressing the challenges facing the coffee industry.

This in contrast to associations in the cut flower sector which have played an active role in representing the interest of farmers by lobbying the government on business environment and instituting self-regulation for compliance to local and international standards, in addition to being conduits of information feedback.

There are several developments in Kenya that the coffee sector can leverage to increase value addition and competitiveness. The country still has soils and terrain, as well as climatic conditions, which favour coffee production.

Since 2003, road networks in the country have improved, new information communication technologies have sprang up and the political environment is generally stable. Kenya Arabica coffee is globally acknowledged as high quality. Further, demand in Middle East as well newly industrialised countries like China is increasing.

The existence of well-established cooperative movement and large private investors in the industry creates huge potential of improving logistical infrastructure and inter-firm subcontracting.

The availability of both skilled and semi-skilled workforce in Kenya is important for the coffee industry which is a largely labour-intensive sector.

To improve value addition in coffee sector requires the following:

Institute new governance structures in cooperatives, millers and Coffee Board of Kenya. For instance, cooperatives can be transformed into corporate bodies with ownership remaining with farmers, but management hired on performance basis.

Regulatory reforms, particularly revisiting the relevance and scope of Coffee Board of Kenya. The licensing of millers and marketing agents should promote a greater role of private sector in the value chain.

The government should support the formation of networks and alliances among coffee farmers. This will result in effective membership organizations that self-regulate the sector in areas of compliance to standard specifications, environmental preservation and integrity with respect to all stakeholders.

This helps to have certain levels of productivity, efficient use of inputs, uniform application of labour laws and enhanced quality of coffee.

Enhance incentives to encourage coffee branding through what is normally referred to as the Geographical Indication (GI) for single-origin coffee.

Coffee branding according to the zones of origin widens the market through segmentation. The farmers could use this incentive and strategically position themselves, through partnership, to reduce price spread between producer and retail level.

This may be achieved through joint ventures in investment that allow local roasting and packaging before export.

Further, the partnership can take the form of contract farming. Contract farming has ancillary benefits in form of credit arrangement for critical inputs and may also embrace insurance schemes.

The government may need to play a role in mediating and establishing the ground rules for these arrangements.

The government also should pursue aggressive marketing of Kenyan coffee and offer fiscal incentives to encourage foreign investors to engage in contract partnerships with coffee farmers.

Dr Chege is a Policy Analyst at KIPPRA