How the mistake of small-holder farm unions made Kenyan sugar unviable

If there is a sugar company that was jinxed from the start, it is Chemelil. The company, declassified government records show, was branded a disaster even before it started milling, an experiment that would go awfully wrong.

“The planning in itself was superb, but the implementation was hurried,” complained J K arap Cheruiyot, a regional MP at the East African Community in the 1960s, of Chemelil’s birth.

Part of the problem was that the crop was ready before the factory was set up and thousands of acres were littered with “useless cane”. Chemelil was unable to cater for all the farmers who had been enticed into the scheme, and as a result they could not sell their produce, hence running into debt.

“The lucky ones are those who refused to participate in this government-sponsored project,” wrote Cheruiyot in a confidential letter to Mr Bruce McKenzie, then the Agriculture minister.

That bad start, unfortunately, was not a Chemelil peculiarity, as it is replicated in many other companies along Kenya’s sugarcane belt.

Our assessment of the companies’ wobbly footing is based on State documents that highlight, in great detail, the push-and-pull games played inside the highest offices in the land in the 1960s, and how those games have informed the structures of the country’s sugar companies since then.

UNCO-OPERATIVE OUTGROWERS

The failure of the cooperative experiment at the Chemelil zone kick-started a blame-game between senior government officials and informed the future organisation of cane farmers. Today, more than 40 years later, the farmers are still grappling with a structure that was forced on them by the Treasury, then under the powerful Kenyatta insider Phillip Ndegwa, and the donors. Mwai Kibaki was then the minister for Finance.

The same problems at Chemelil were replicated in Mumias. For instance, on the afternoon of February 1, 1972, a draft document was placed before the under-secretaries of Treasury, Agriculture and Co-operatives ministries at Rhodes House, along Nairobi’s Kenyatta Avenue.

The intention of the afternoon meeting was to discuss how to create what was to be known as Mumias Outgrowers Organisation Limited, an outfit mooted to create a buffer between the farmers and the Mumias Sugar company.

There was a reason for that: in 1971, it had became apparent that there was need to form sugar cooperatives in Mumias, which had registered 525 outgrowers cultivating 2,218 acres. The co-operatives were supposed to offer farmers inputs at subsidised rates and organise the cane harvesting and planting.

But the formation of such cooperatives started with suspicion. “I regret to say that the outgrowers are unco-operative,” said S M Muchoki, the Western Provincial Co-operative officer, in a letter to J Muthama, the then Commissioner of Co-operatives.

“In one meeting… none of the 48 outgrowers showed up. In view of this poor response, I see no point of wasting our time.”

This turn of events worried the Mumias investors, Bookers Agricultural Holding, who foresaw trouble if the farmers were not organised. In a letter to the Ministry of Agriculture, the Bookers’ project manager M N Lucie-Smith suggested that the freehold land owners need “a great deal of indoctrination” to accept the cooperatives.

Initially, it had been thought that, since the 22 locations which had been covered by the outgrowers scheme were mostly occupied by the Wanga and touching on the Marama and Butsotso, this would favour the emergence of a strong cooperative because of clan links.

“It is going to be mutual and fraternal,” a report on the feasibility on Mumias cooperatives had promised. But it worked the other way.

The Treasury, then under Kibaki, started pushing for an outgrowers’ organisation — rather than a co-operative — but the move created animosity between the Commissioner of Co-operatives and Treasury. In a protest letter to the Permanent Secretary for Agriculture, Joe Kibe, Mr Muthama, the Commissioner of Co-operatives, dismissed the outgrowers organisation as nothing new.

“In our view, this type of organisation is not a new innovation as it has been tried in Muhoroni Sugar Settlement without success.... The proposed outgrower organisation will be viewed by the local people (as) investors or at best (a) government tool rather than an outgrowers representative.”

HANDS OFF

He then added a rider: “I doubt if those people who propose it intend it to be (an outgrowers’ representative).”

Another co-operatives technocrat, Laban J Murungi, then an assistant commissioner for co-operatives, suggested in a different letter to Mr Muthama that rather than set up an outgrowers organisation “which will never work”, the funds should be used to set up a strong cooperative.

Kibe was not amused: declassified documents show that, as the Permanent Secretary for Agriculture, he had learnt that Muthama and his officers were opposed to the establishment of an outgrowers company. Kibe called a high-level meeting in his office and asked Muthama to attend.

The meeting, on March 23, 1973, was a stormy affair. Kibe and Muthama had exchanged harsh words in letters after Muthama dismissed the outgrowers proposal as an “ineffective and expensive temporary palliative”. During the meeting, and in a follow up letter, Kibe also told Muthama that co-operatives had become ineffective.

“I can quote areas where use of producer co-operatives and co-operative unions has not worked effectively,” Kibe wrote, and mentioned the failures at Chemelil.

Rather than stage a battle that had only him against Treasury and Agriculture, Muthama abandoned his idea of sugar co-operatives and washed his hands off the project.

“Let the Ministry of Agriculture go ahead with their outgrower organisation idea,” he wrote in a note to his field officers the next morning.

That July of 1972, the government made a decision that Mumias Outgrowers Company will be formed, owned by the government, the outgrowers and Mumias Sugar Company Limited. It was a decision that would cost the company a lot in terms of efficiency and crop yields, and today it finds itself unable to operate at full capacity as farmers opt for other crops.

Across the sugar field in Chemelil, when the idea of a sugar company was mooted in 1964/65, the then 40-year-old private-owned Miwani Sugar Mills was approached to sell their 5,000-acre Chemelil Estate to form the nucleus for the new government-run factory. In return, they were to get 5,500 acres in “Luo land units”.

Miwani was a success story and had pioneered large scale production and processing of sugar in 1924 near Kisumu. Today, it is under receivership and moribund as the government struggles to sell its stake to a private investor.

From the onset, at Chemelil, the government brought in a German co-operative adviser, Mr J Prassel, to work on the project, but although bureaucrats in Nairobi thought he had performed well and wrote letters asking for an extension of his contract, it is now known from other official correspondence that Chemelil was being treated as a failure in government circles.

Four cane production societies had been set up in Masaka, Orago, Simbi and Nyatao; and, according to 1970 minutes of the Kisumu District Agricultural Committee chaired by J Mwangovya, the co-operators had “all along been faced with problems associated with outside forces”.

The Chemelil cooperatives lacked money to help farmers plough, or purchase fertiliser. One proposal put at the district level was to reorganise the cooperatives by injecting “new blood” and also giving them financial aid.

At about the same time, the Nyanza Provincial Commissioner, Charles Murgor, was unhappy with a Mr G Stern, a Crop Officer who had been attached to Chemelil. Mr Murgor thought Mr Stern was condescending to other officers.

Murgor protested to the Chairman of Central Agricultural Board that Mr Stern, although a qualified agriculturalist, was “quite incorrect” when he criticised him as chairman of Provincial Agricultural Board.

WHO CARES?

The problem was on the application of gypsum on sugar0cane land on the Chemelil zone. The factory was on the verge of closure and the application of gypsum was the only solution to the soils.

“We did not propose a blanket application, as it referred to specific type of soils,” said Murgor.

Stern had wanted the issue of gypsum side-stepped “for no good reason”. “All the evidence points to the company having tried to ignore the whole problem of gypsum application on the outgrowers blocks, possibly because of the expense involved,” said Murgor

The other problem that faced agricultural experts was that nobody seemed to listen to them. G C Hill, a senior dugar officer, wrote to G Stern about farmers’ attitude to planting new cane varieties. In a December 1969 letter, he said:

“Our greatest trouble is the attitude of people who listen politely to everything we say, without any comment at all, and who then proceed as if we had never spoken. If only people were prepared to argue, we could convince them; but they are not, and the fact that none of the large companies follow our advise, except by coincidence, does not help.”

Tomorrow: The tariff windows that allow sugar cartels to make a killing out of Kenya’s ailing sector.

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HIGH COSTS

The bitter state of Kenyan sugar

A LOT has been said about the health of Kenya’s sugar industry since President Uhuru Kenyatta met with his Ugandan counterpart Yoweri Museveni in Kampala a few weeks ago. Much of the discussion has revolved around what the importation of Ugandan sugar into the Kenyan market means for the hundreds of thousands of sugarcane farmers in western Kenya.

While the concerns are legitimate, especially if the importation of the commodity is not properly policed, there is an even bigger elephant in the room for Kenya; and that elephant has everything to do with the unsustainable cost of producing sugar locally.

Kenya, statistics show, Kenya needs to lower its cost of producing sugar by almost 40 per cent if it is to be competitive with other Comesa countries. The country produces sugar at Sh45,750 per tonne on average, making its yield more expensive than that from Sudan, Egypt, Swaziland, Zambia, Malawi, Tanzania and Uganda, which spend about Sh15,000 per tonne, according to the Kenya Sugar Board (now Sugar Directorate).

The Uganda Sugar Manufacturers Association reports that Uganda produced 426,000 tonnes of sugar and consumed 403,874 tonnes during the 2013/14 financial year, resulting in a surplus of 22,126 tonnes. The surplus increased by nearly 20 per cent to reach 26,034 tonnes in 2014/2015, and appears set to grow.

In contrast, Kenya produces about 600,000 tonnes of sugar annually, against a requirement of 800,000 tonnes. Last year the country produced 591,658 tonnes of sugar, which represented a 1.4 per cent decline from the record production of 600,179 tonnes in 2013.

SPECIAL SAFGUARDS

Were the existing sugar factories run more efficiently, they would produce 883,691 tonnes of sugar a year, turning Kenya into a surplus country. But statistics from the sugar directorate show that the average factory capacity utilisation is only 56.3 per cent. The three factories running on the highest capacity in Kenya — Butali, Kibos and West Kenya — are privately owned, but their share of the sugar market is small.

Yields are also dropping. Figures from the cane census carried out by the KSB show that average industry yields dropped from 65.5 tonnes of cane per hectare (TCH) in 2012 to 60.54 TCH in 2014, a 7.6 per cent decline over the two years.

Trans-Mara had the best yields, at around 71 TCH, followed by Sony Sugar with 66 TCH and Sukari with 63 TCH. The poorest industry yields were in Mumias, which reported 57 TCH. The census attributed the decrease to the area under cane as farmers had opted to grow other crops, especially in the Mumias zone

In the first five months of 2015, the country imported 120,752 metric tonnes of sugar; if the commodity were imported for the rest of the year at a similar rate, about 290,000 metric tonnes would be shipped in.

From 2013 to 2014, the amount of sugar imported into Kenya declined from 238,000 to 192,000 tonnes, partly due to the extension of special safeguards on the importation of duty-free sugar from the Common Market for Eastern and Southern Africa (Comesa).

Last year, Kenya’s sugar imports were about one-third of production, a drop from 2013, when imports were 40 per cent of production. The 2013 figures were also a drop from 2010 and 2012, when sugar imports were almost half of annual production. Some of the sugar imported was of special quality, specifically meant for manufacturing purposes.

What should be of concern to industry players, though, is the fact that the cost of producing sugar in Kenya is more than 60 per cent higher than it is in Uganda and Tanzania, and 50 per cent higher than it is in Zambia. While producing one tonne of sugarcane in Kenya costs between Sh41,500 and Sh50,000, the same quantity of sugarcane is produced in Uganda for between Sh14,000 and Sh18,000.

According to the Sugar Directorate, the cost of production in Kenya needs to drop by at least 39 per cent to be in line with Comesa levels. However, the Kenya Sugar Industry Strategic Plan (2010-2014) argues that such a drop in less than three years is drastic and requires major cost reduction strategies for the industry.

The report indicates that, of the eight sugar mills in production, only three, namely West Kenya, Mumias and Kibos and Allied Industries, are equipped with modern facilities that can process sugarcane more efficiently, and that only these would survive if the Comesa safeguards were to be lifted.

PRIVATE ENTERPRISES

Sugar millers in Kenya also have to contend with poor cane yields. Provisional 2014 data from the Economic Survey shows that the land area of cane harvested last year, excluding land from non-contracted farmers, was about 34 per cent of the total amount under sugarcane.

This represented a drop of six percentage points from 2013, when the proportion was 40 per cent, and a drop of 16 percentage points from 2010, when the proportion was 50 per cent. During the same five-year period, from 2010 to 2014, sugar production decreased by three per cent while the area harvested reduced by more than 15 per cent. Average yield increased 14 per cent, but a review of data from 2005 to 2014 shows that average cane yield (tonnes/ha) has dropped by more than 10 per cent over ten years.

Statistics from the United Nations Food and Agricultural Organisation (FAO) reveal that Kenya’s sugarcane yield (hectogram per hectare) is lower than Uganda’s and other Comesa countries like Zambia and Malawi. Industry players attribute the poor yields to inadequate and untimely application of fertilisers; harvesting of young, premature cane; and low cane management standards.

Kenya has sought protective measures for its sugar industry in the past, arguing that the country needed time to restructure the industry and become globally competitive. The safeguards were first granted for a year in 2002 and then extended for another year. When the deal lapsed, Kenya successfully negotiated another four-year extension, which upon expiry in 2008 was extended several times. In March this year, a one-year extension of the sugar safeguards was again granted to Kenya.

Part of the restructuring process involved passing a Privatisation Act and setting up a Privatisation Commission, which has approved the sale of five state-owned millers. A combined 37 per cent of market share in Kenya is held by Nzoia, Sony, Chemelil and Muhoroni, which are state-owned. The Government also owns a minority share (20 per cent) of Mumias, which is the industry leader with a market share of 30 per cent.

On the other hand, West Kenya, Butali, Kibos and Allied Works, and Soin are private companies with a combined market share of 25 per cent. In Uganda, the government owns a minority share (30 per cent) in only one factory, Kinyara Sugar Works Limited. The remaining five large factories and seven small ones are privately owned.

- Dorothy Otieno