Crisis in the Kenya Coffee Industry

Topics: Coffee, Cost-of-production theory of value, Ethiopia Pages: 8 (2766 words) Published: July 6, 2005
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.

Year1995/6 1996/7 1997/8 1998/9 1999/00 2000/1
Cooperatives56,885 38,261 33,584 40,08662,265 24,753
Estates32,795 29,73722,05028,591 38,585 26,989
Total89,680 67,99855,63468,677 100,850 51,742

Dealers are aware of the consumer market differentiation, more so the high potential for Kenya coffee as a specialty. 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. Kibuga Kareithi and his team at the Tetu 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.

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...
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