Market Reports

Eastern Promises: Kenya’s plans to value-add to coffee with foreign investments

Among the few seeming certainties as the Olympics got underway in London in July was that the Kenyan national anthem would be among the most frequently played once the action began on the running track. The formidable strength of Kenya’s athletics team also prompted a large government delegation to follow them to the UK’s capital in an effort to capitalise on their anticipated success by pushing commercial opportunities in East Africa’s biggest economy. Pride of place at the “Kenya House” pavilion in east London’s Olympic park was being given to coffee – one of the country’s most important export earners. On show were plans for a “coffee park” outside the Kenyan capital, Nairobi, where authorities hope to lure foreign investors with the chance of turning the country’s high quality beans into a range of coffee products for the regional and international markets. The park envisages a soluble coffee plant alongside roasting and packaging facilities within easy reach of Nairobi’s international airport. The same roadshow has already made two visits to China – stopping in Beijing and Shanghai – as the Kenyan coffee board steps up its “look east” bid for Asian investment. Sitting at her desk back in Nairobi, the CEO of the coffee board, Louise Njeru, says that industrial facilities that will allow the producer nation to export value-added products rather than just raw Arabica beans will be key to stabilising what has historically been a volatile sector.
“Despite a lot of government input into the industry we’re not seeing any significant growth in production,” says Njeru. “The farmers are disgruntled and they believe the real money is being made elsewhere.” In pride of place on the wall behind her the CEO keeps a framed graph that tells the troubled story of Kenyan coffee over the past 40 years. A jagged green line shows epic rises and falls both in production and the price of coffee on the global market. It’s a reminder, she says, that the overriding priority is to bring stability and growth to a sector where farmers have been burned too often in the past. The biggest dips on the graph come in 1991 and 2000 when coffee prices collapsed, bankrupting many of Kenya’s 700,000 small producers and making a generation of growers wary of the sector. “I don’t think any nation can fully develop just as a producer of raw materials,” says Njeru. “The producer nations like us are always the most affected by price volatility.” Last year saw the best prices in 34 years at Nairobi’s coffee auction but even those rates have done little to stimulate production. Historically production of Arabica has peaked at around 50,000 tonnes per year. Last year’s relatively poor harvest – 36,260 tonnes – pushed prices to record levels earning US$261 million, but the area under cultivation has remained rooted at 160,000 hectares, 10,000 less than in 2006. Production this year is expected to rise to 45,000 tonnes and income is projected to rise to US$285 million, up from $115 million seven years ago. The record prices and high quality of much of the Kenyan crop prompted a number of investors – particularly from China – to look at buying coffee estates in the country. But they found themselves facing the same constraints that have stymied existing growers: powerful competition from surging real estate sectors in growing areas, urbanisation and the dominance of small-scale growers. “Unfortunately most of the suitable growing areas are already in the hands of smallholders,” says Njeru. “Coffee cannot compete with the mushrooming real estate prices in and around Nairobi which used to be the best estates.” Despite the limiting factors, the Kenyan CEO has set herself the target of growing coffee from 5 per cent of the country’s export earnings to 10 per cent. It’s clear, she says, that Kenya is not going to be able to expand the area under cultivation sufficiently to achieve its goals. The strategy for getting there is laid out in what she admits is for now a “shopping document” showcasing plans that would make Kenya the hub for coffee in the region. The coffee park would host packaging businesses, trading houses, roasting facilities, a soluble coffee plant and an academy to train the next generation of growers, traders and marketers. There are also discussions underway that could see Nairobi’s successful coffee auction augmented to become a regional auction for growers in Rwanda, Uganda and Tanzania that are currently direct selling. Land has been set aside at two locations, one site on the Athi River outside of the capital and the other at Thika, an hour’s drive out of Nairobi towards the central province and the main growing areas. It already hosts a coffee research station where work is underway on developing higher yielding and more drought resistant varieties as well as the largest cluster of existing coffee mills. Provisional estimates for the coffee hub put the cost at more than US$100 million and means that private investors will have to be found to work with the Kenyan government agencies. New legislation before the Kenyan parliament will establish a legal framework for the kind of “public-private partnership” needed to make the coffee park a reality. Both sites have been earmarked for Export Promotion Zones (EPZs), where businesses will be offered tax breaks to encourage foreign currency earners. Among coffee farmers – who are estimated to support as many as 5 million Kenyans – there is already widespread support for further industrialisation. “Having value-addition done locally would be very beneficial to us because we would be able to place a true value to our produce,” says James Gichangi, a farmer with two acres of coffee trees in Kiambu, near Nairobi. “Presently our coffee is flown out in its raw form and we lose out in terms of low prices offered to us, yet blenders and processors out their make a fortune from the refined end products.” Peter Kamau, one of the so-called middle-men who helps source coffee for some of Kenya’s larger trading firms, says that processing in-country would be the only way the country can get more out of the sector: “The gains of value addition are immense even if we as a coffee-producing country may not witness the fruits immediately. Efficiency in terms of technology use and affordable input is vital in setting prices that will ensure our processed and value-added products remain competitive in the market.” Not everyone is prepared to start cheerleading for the coffee park though. Dick Sickmuller, owner one of Nairobi’s biggest trading houses, remains sceptical. He points to neighbouring Uganda where Robusta production alone is four times the size of Kenya’s entire crop but industrial investment has proven elusive. The additional capacity plans by Indian industrial giants Tata to build the region’s first soluble coffee plant collapsed two years ago after it became clear that the facility would struggle to be profitable. “There has been talk about value addition for years but there’s not enough production to warrant a soluble plant,” says Sickmuller. “It would be ludicrous for Kenya to go down the route of low quality production for soluble coffee, when Kenyan Arabica is so highly prized.” Others remain convinced that a production boost is possible and are looking to the lower grade Robusta to supplement Arabica and supply the planned processing plants. They argue that the way forward for Kenyan coffee, given the constraints on farmland in suitable highland areas, is to relaunch Robusta production at the lower altitude of Western Kenya towards the shores of Lake Victoria. With climate change already being blamed for events like last year’s epic drought, which lowered the Arabica harvest in the highlands, there is increased interest in new drought resistant varieties – including Robustas – which can do well in the hotter and more humid lowlands near the border with Uganda. Isaac Muchomba, head of the Kenyan coffee traders’ association, says there were already signs that production which was decimated in Western Kenya during the last price shock 12 years ago was starting to return. The Lake Victoria Basin Development Authority, based in Nairobi, has put together a finance plan for rebooting Kenya’s Robusta sector which historically counted for 5 per cent of the country’s production. “Historically there has been Robusta production in these areas,” says Muchomba. “It’s already happening. We’re seeing more planting there and around the Rift Valley.” He also sees scope for the import and repackaging of beans from neighbouring producers if Kenya can get the investment needed to build the infrastructure for a soluble plant and more advanced roasting and packaging facilities. At her Kahawa (Swahili for coffee) House headquarters in the city centre, Njeru sums up her approach as looking both West and East for growth. Look West for new planting grounds inside Kenya and a boost in Robusta production and look East to China and India for new investment to turn that into consumer products. “In China the expansion in coffee consumption is astronomical,” says the CEO, who has been in Shanghai and Beijing in recent months to meet potential investors. “The European markets have matured and the real growth is going to come in the East so that’s where we’re looking for investment.” A South Korean delegation was expected in the Kenyan capital in August to look at the coffee park plans. For now, the gap between the plans and the reality of the East Africa nation’s coffee sector remains significant. The coffee board HQ is largely unchanged from when it opened in the 1960s and the technological picture in the rest of the sector is the same, she admits. “In terms of processing technology we’re still stuck in the 1960s. Our mills and processing plants need a lot of water.” Njeru sees the development of a domestic demand as the key to stabilising prices and production, but believes that is more likely to happen through instant coffee rather than the small batches of high quality roasted beans, 70 per cent of which currently find their way to the European market. For now many of her compatriots simply assume that the imported soluble products they are buying like Nescafe or AfriCoffee are actually Kenyan. She is determined that in the future there will be a genuinely Kenyan alternative: “We’re really excited about the emerging middle class in Africa and Kenya and we think they are going to drink more coffee, but they are likely to start with instant.” GCR

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