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May 2003

Government’s dilemma over the coffee industry

Deremo Maiko

As the new government gets down to business, much focus is now on how it tackles the complex problems dogging agriculture, which contributes 25 per cent of the Gross Domestic Product (GDP) and provides livelihood for 75 per cent of the population. But while the new Agriculture Minister Kipruto Kirwa has 42 parastatals in his docket to worry about, apart from sugar corporations, his main test is expected to be in coffee and its regulator Coffee Board of Kenya (CBK).

Since the 1980s, the coffee sector has been on a slow death due to mismanagement and falling international prices even as new producers like Vietnam enter the fray. Whereas Kenyan coffee is of premium grade and is usually used to blend other coffees, it has not been spared its inevitable fate.

At present, the sub-sector is in suspended animation as a vicious battle for marketing shapes up. As a result, farmers have been holding thousands of tonnes of clean and perchment beans as they await licensing of their affiliated marketers.

The current impasse dates way back to the early 1990s when the government, mainly under pressure from the World Bank, agreed to liberalise the industry. Freeing of trade in the industry principally entailed liberalising the marketing function. After years of wrangling by protagonist forces, the government took the plunge in 2001 and replaced the half-century old Coffee Act Cap 333 with the Coffee Act 2001.

To be sure, the new Act has been described as a masterpiece but has never been implemented despite coming into effect in March 2002. While a board of directors was inaugurated after grassroots elections in June 2002, it is yet to license a single marketer. The stopgap marketers – millers Kenya Planters’ Cooperative Union (KPCU), Socfinaf and Thika Coffee Mills – who replaced CBK are still in place up to the end of coffee year on September 30.

CBK has purported to license three others, Large and Small operating around Thika and Kiambu District in Central Kenya, the privately-owned Allied Coffee and Eastern Kenya-based Mount Kenya East Marketing Agency (MKEMA). The licensing, apparently done without strict adherence to law, has been nullified by the Minister, invoking section 13 of the Coffee Act, which gives him sweeping powers.

To detached observers, the Minister has a point. Players in all the marketing agencies have in the past been accused, sometimes by government probe reports, of participating in the looting of the industry. Indeed, if the minister assents to the licensing of some, it will put the industry not known for integrity in further doubt.

On the other hand, failure to license the three would be viewed as a move to shore up KPCU. The latter mills and markets about 70 per cent of the coffee. Bringing together cooperatives and plantations, it has been faced with increased competition, first from licensing of the two competing commercial millers and now from the marketing agencies. The Union argues that investment by the competitors using money from farmers who have built KPCU would amount to double investment.

To some extent they have a point. At the peak of production in 1987/88, coffee production in the country totalled 129,000 metric tonnes. As of 2001/2002, this had slumped to 50,000. Total earnings on the other hand have plunged from $314 million in 1997 to $73 million last year. Milling capacity has from early ‘90s more than doubled, with more private and commercial millers entering the market. Some industry players have mentioned that efforts should go into returning the production back to its heyday before opening competition in milling and marketing.

Analysts believe KPCU is also motivated by selfish interest in opposing competition. After years of mismanagement, it has accumulated antiquated technology and inefficiency. Whereas it is in the process of modernising, its precarious financial situation does not favour competition. The marketer’s cash flow has much improved with the assumption of the marketing function, which it fears could change if farmers engage the competition.

In addition, competition is likely to induce farmers who owe KPCU monies to move away without paying. In the coffee industry, advances for input are made against future stocks and deductions thereafter effected. KPCU at present is already owed US $57 million by growers, Cooperative Bank of Kenya US $85.7million, while the regulator CBK owes millers US$9.1 million in total.

Movement of farmers from miller to miller or marketer to marketer has made deductions in the industry hard to make. To add to the confusion, Co-operative Bank has thrown its lot behind MKEMA, Allied and Large and Small, spawning a major war with KPCU. The bank fears it will, besides losing a major source of liquidity, forfeit the money it has advanced to farmers. Either way, one of the two institutions is set to lose financially in a major way.

On the whole, the government appears to be more sympathetic to KPCU whose marketing licence is yet to be confirmed. The government says it will have confirmed the six licences when the new coffee year opens in October. But it is clear that marketing wars will commence thereafter as production dwindles. However, long-time observers believe the market will even out, albeit painfully, and the most efficient players take control.

Trouble for the industry can be traced to government interference in the 1980s. On several occasions, it put its sycophants at the helm of the then milling monopoly KPCU and Coffee Board to the detriment of efficiency. This unfortunately came soon after the coffee boom of the late ‘70s had worn out. As international prices tanked, worse inefficiency in the grassroots cooperative movement units that feed the millers meant farmers went for months without pay. Subsequently most farmers have ditched coffee.

Kenyans are now waiting with bated breath to see how Mr Kirwa, formerly a focal government critic on agriculture policy, handles the complex industry. If successful, coffee could reclaim its slot as Kenya’s number one foreign exchange earner, a position it lost in 1987.

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