Global Markets As Kenya Coffee example essay topic

CRISIS IN THE KENYA COFFEE INDUSTRY INTRODUCTION For many years, Kenya has been famous for its coffee. Described as strong in body and intense in flavor, Kenyan coffee, which belongs to the Arabica variety, is considered one of the world's most consistent sources of high-grade caffeine. And because of its good cash returns to local farmers, coffee has traditionally occupied a large share of the country's most productive lands, grown mostly on rich, red volcanic soil in areas with high and well distributed rainfall. However, the story has changed in the past decade. Like other nations, Kenya's coffee sector, which used to be the country's prime foreign exchange earner, has been badly affected by plummeting world prices and now trails behind horticulture, tea and tourism in the local economy. With world prices falling by almost 70 percent since 1997, coffee farmers have complained they now get very little return for their hard work.

Many now consider coffee to be a liability and, despite a law, which prohibits farmers from uprooting their coffee plants, the farmers are clearing their land for other crops. Coffee production has plummeted from a peak 130,000 metric tons in 1988 to only 52,000 tons in 2002. A further deficit is being projected due to big players like Kakuzi bowing out of the coffee industry, and Socfinaf stumping over 50% of their crop. This drop is largely attributed to lower productivity in the cooperative sector. The table below indicates the production from both estates and cooperatives. The increment in 2000 was stimulated by high prices in 1998, while drought in 2000 reduced output.

Thus, they have used (even certified) reputable farm's names to designate their purchases as authentic gourmet (single origin). Coffee board of Kenya (CBK) data indicates that the average F.O.B. price of re-graded coffee was US$6.81/Kg in 2002, more than four times the auction average of US$1.54/Kg. Experts have attributed the drastic fall in coffee prices on the international markets to the oversupply of beans, which has not been matched by demand. However, according to the British charity, Oxfam, the issue is more to do with fair global trade than just market demand and supply factors. In a report it released in September 2002, Oxfam stated that the deregulation of the coffee industry had pushed millions of coffee farmers in the developing world to destitution, while 'the coffee companies are laughing all the way to the bank'. It is heartening that so many businesses depend on coffee.

Direct, middle and long-term effects on social economic and environmental fronts would be devastating. It will be imperative that any policies and decisions made by the government will have producers' interests at heart. Otherwise, we won't have any coffee to sell in the next 3 years. Also, there are initiatives that are geared to setting up of different trade avenues, with a view to earning better premiums, and passing benefits realized to the farmer. I have in mind the Nairobi Stock Exchange / Kenya Leadership Institute joint initiative. Kib uga Kareithi and his team at the Tet u inc. are doing a wonderful job.

It is through the efforts of such men, that development is realized. Any organization would be lucky to have such individuals making policies. ABSTRACT The Situation Many people are willing to commence business relationships with producers in Kenya. But the only hindrance has been our inability to adopt a free-market approach to the sale of Kenya coffee. While a lot of people may feel that this approach will destabilize their income sources, the coffee producers are suffering high production costs, and low prices. The main factors attributed to the current coffee crisis have been globalization, oversupply (occasioned by new players joining the fray as producers) change in consumer tastes and preferences, sudden consciousness of products they may want to purchase, and environmental concerns.

With our big players starting to bow-out, it will only be a matter of time before small-scale farms (who apparently are the cause of the government insisting on the non-essential auction system) bow-out too. Restricting our farmers by means of legislation, to one trading system is not fair-trade. It should be understood that some of the issues that have prompted certification are of social, economic and environmental fields, and do not necessarily mean that some players within the supply chain are being targeted for "eviction". There is a fresh impetus to reduce green house gases and carbon levels within the earth's atmosphere, as manifested in the Kyoto Protocol. Coffee agronomy has now shifted to accommodate environmentally friendly, bird-shade grown coffee, as a secondary effort to achieve the above. Producers who comply with such structures, and who are subsequently certified, are in-turn guaranteed premium prices.

All of the above initiatives, which directly offer the farmers with a guaranteed and steady premium, can only be achieved if there is direct contact between the buyers and producers. I support the view that farmers should be given the opportunity to explore other trade ventures, alongside the current auction system. LITERATURE SURVEY Farmer Following the collapse of the International Coffee Organization treaty (ICO) treaty on sale of coffee through the quota system on the global market 10 years ago, the prices of coffee lost the original high stability index. Kenya was no more guaranteed coffee price protection. Even premium bonus on its traditionally high quality Arabica was hence forced at risk of being eroded. It is now almost non-existent in the bulk of marketable Kenya Coffee consignments.

The natural culprit to the ever-volatile prices is the coffee farmer himself. This consequently saw the farmer often producing coffee well below the production cost and since such a situation was unsustainable, many farmers stopped or relaxed on the standard farming practices. As expected, the output declined both in production and quality. In view of the foregoing, I wish to submit my analysis of some of the issues / situations that afflict the Kenyan Coffee farmers, and will continue to impoverish the entire coffee industry if nothing is done to stem them out this late.

Most of situations with negative impacts on the grower are nested in the marketing sector of the coffee industry as elaborated here below. Production By the end of 1999/2000, estimated national coffee acreage stood at about 420,000 acres (170,000 ha. ). Between years 2000 and 2003, a lot of acres have been uprooted or destroyed to create room for more competitive agricultural enterprises particularly Horticulture, Floriculture and Dairy.

This scenario has been witnessed all over the country but more so in Central and South Ny anza. This falling state of national coffee tonnage creates uncertainty to the major coffee buyers who have in the recent past, found themselves competing amongst themselves for a meager coffee volume not enough to give each one sufficient supply. Many dealers have been forced to look elsewhere in the eastern region but for lower quality Arabica. Consecutive years of making losses due to high cost of production relative to the persistently low prices, have forced farmers to resort to uprooting of this commodity crop. Kakuzi growers are the latest in the long queue of those who have uprooted coffee trees.

Liberalization of the Coffee Industry The wave of liberalization of the industry picked up from around 1996. From this time, the increasing trend of production changed direction and a decline took over which is still in motion. Is this one of the anticipated impacts of liberalization? Worse still, the Kenyan farmer seems to have lost the premium advantage on the bulk of production tonnage. It has become the norm for the poor farmer to sell coffee far below the production cost. Before the conclusion of the 2002/2003 coffee years, the Coffee Board of Kenya used to be the custodian of the coffee marketing.

The board was relieved of this portfolio to liberalize marketing down to the auction level, but the central auctioning system was retained. KPCU along with Thik a Coffee Mills and Socfinaf immediately inherited the milling and marketing on supposedly temporary arrangements. Tropical farm management (K) limited under the Neumann Kaffee Gruppe umbrella has taken over the milling functions of Socfinaf through a mutual agreement. This is in line with the experience that the Neumann Kaffee Gruppe has in the coffee sector. The government had and still has promised to register at least 6 marketing agents to re-ignite competitive coffee marketing but this process has been slow. Reading the recent developments in marketing monopoly, albeit possibly by default, is unfolding.

The sentiments especially made by the Honorable minister for cooperative development Nj eru Ndwiga just goes to show the unwillingness of the government to do more in the liberalization of the sector. His counterpart, the minister for agriculture, has not drawn a clear line either. Is this in line with positive liberalization of coffee marketing? Has KPCU proved itself a marketer superior to all others? Would KPCU monopoly augur better than CBK monopoly?

The swelling cartel of coffee brokers was not very much bruised by the coffee marketing liberalization move of provisionally appointing 3 major millers as marketing agents. This is tantamount to taking away premium bonus from the farmers to coffee racketeers. Currently, the bulk of fruits of coffee farming in terms of market proceeds go to the whole chain of coffee dealers leaving farmers with a paltry handout per 50 kg bag. For instance, the average price per 50 kg bag in the auctions for the last 2 yrs has been Ksh. 9000. The world price for the same has been Ksh 20,000 but sadly, what the poor coffee farmer received is Ksh 7,500.

The farmer labors for someone else. This contrasts greatly with the flower and dairy market where the farmers secure a fair portion of the final bid. Can the NARC government reverse this appalling order of coffee exploitation where the farmer is the perpetual sufferer? What are the market contributions of the coffee brokers?

In other words, do they add value to coffee products? Are they in the market register in the interest of the coffee farmer? Does this government view brokerage a menace to the future of the industry? How is the government assisting the coffee farmer to shorten this biased market chain? Is direct negotiation with primary / main coffee buyers possible in the next coffee season?

The main weakness with the recently attempted coffee liberalization is that it has not opened avenues for the Kenyan coffee farmer to access direct market for his own coffee. This contrasts greatly with the established marketing of dairy, floriculture and horticultural products where the farmer is in control of marketing. To ensure that the government regulates the excesses of liberalization in the coffee industry, certain interventions need to be put in place in regards to production and marketing. In production the government can chip in by regulating input prices.

It has given attention to this ailing sub sector. Also the government should treat the issue of introducing the stabilizing coffee fund with urgency and seriousness to help farmers' access soft credit to at least steer the industry in the next 5 years or until a national coffee tonnage of 150,000 metric tons is reached. In the marketing arena the government should audit prices throughout the year and come up with mechanisms of basic price setting paying due consideration to the production cost for each current year. Coffee Classification, Payouts and Blending In a number of coffee auctions, observations on coffee prices against overall class have shown poor responses between the two i.e. price and class standard. This has particularly been more obvious in the moderate classes of 4, 5 and 6. The coffee classifiers are quite objective in judgment but the auction very often turns out to be subjective.

These occasional anomalies should not be left to the farmer to be the ultimate victim. To counter this anomaly, the farmer should be guaranteed a price in all classes that at least exceeds the reserve, which also must satisfy the average production costs. This will double up as an incentive to farmers to produce better grades. It is now not a secret that coffee produced in Kenya does not arrive at the global markets as Kenya coffee.

This happens because Kenyan dealers proceed to blend the low quality coffees sourced from neighboring countries with the premium Kenya coffee tags. This undermines the image of Kenya coffee in the global markets as neat Kenya coffee and not adulterated Kenya coffee. This is the only way to protect and sustain the premium bonus offered to Kenya coffee at the global market. The Kenya government should act this way, viewing blending as an economic offence against Kenya coffee growers and Kenya as a country. Coffee Prices Prices of all agricultural commodities do fluctuate. However, the fluctuations witnessed in the last 10 years have yielded price depressions very frequently falling below the production cost.

To alleviate the negative effect of price depression the government is called upon to intervene by contributing to a mechanism of managing the reserve price in the coffee auctions according to the grade, against production cost whose margin must be positive. The other area the government is invited to intervene is in countering the negative effects of low global prices. The third option would be to award nominal premium incentives to the best (premium) coffee classes 1, 2 and 3 as a national stimulant to quality coffee production. This should be a complement to the mechanism of reserve pricing hinged on production cost.

Finally, as large-scale coffee growers, we urge our government to treat the desperate and extreme action taken by Kakuzi as a pointer to intended action by many growers i.e. Socfinaf. It does not make any economic sense to operate in a loss situation year after year for reasons beyond ones control. Conclusion / implications For other initiatives- government or private sector driven, coffee production has to have the following characteristics if it is to have a future and make a real change in the current situation: Sustainable coffee production, post-harvest processing and trade should be sustainable along the three pillars of sustainability. A sustainable coffee sector shall meet social, environmental and economic goals. All actors in the coffee chain have to be able to compete effectively in the long term with other market participants and achieve prices that cover production costs and allow them a decent livelihood. Therefore, the challenge is threefold. o To internalize environmental and social costs as well as the costs for providing essential support services to farmers into commodity prices. o To improve consumer awareness and preference for sustainably produced and processed coffee of consistently good quality. o To assist farmers in marginal areas to diversify into other crops or sustainable activities.

Sustainable coffee production should be mainstreamed. All coffee farmers in Kenya should be able to adopt sustainable practices and to have the possibility to sell coffee produced along these practices on the market. In order to effectively encourage the development of mainstream sustainable coffee production, a number of tasks need to be tackled. These include: o Participatory development of a common sustainability code for coffee. o Identification of suitable indicators of sustainable practices allowing verification of progress. o Participatory development of implementation guidelines. o Broad implementation of sustainable production, post-harvest practices and trade. This shall be realized gradually over time by a market-based approach and through involvement of all the food-chain and related stakeholders - including inter-governmental organizations (I GOs), government and non-governmental organizations (NGOs) that support this change in financial, technical and political terms. Gradual and continuous increase in the amounts of sustainable coffees traded and consumed worldwide.

Harmonization of mainstream sustainability approaches. In addition, a neutral entity, which hosts the practices, indicators and verification systems, could be explored. The Common Code for the Coffee Community and the Sustainable Agriculture Initiative Platform work independently but in regular cooperation with these common approach and goals. We encourage the government, all other organizations, initiatives and individuals to join in the efforts geared towards reviving the ailing sector.