Nairobi Coffee Exchange Chief Executive Officer Daniel Mbithi on revitalising Kenya’s coffee production with technology and reforms that are set to boost competitiveness and prove why coffee is more than a cash crop.
Much like housing auctions that draw crowds each week to watch a pin-pong battle of prices before the agent yells “sold”, coffee auctions in Kenya attract a similar fanfare.
Producers and buyers travel from far and wide to watch crops go under the hammer at Kenya’s central coffee auction, the Nairobi Coffee Exchange (NCE), but in March 2020, the Kenyan government enforced the closure of its physical trading floor due to the looming threat of coronavirus.
Trading stopped for two weeks with NCE Chief Executive Officer Daniel Mbithi and his team seeking solutions to resume trading. As the auction could not fall back on a remote buying system, the sale of coffee became problematic.
“We couldn’t continue the auction in a safe way. COVID-19 cases were rising in Nairobi and there was a greater risk to have everyone gathered in a usually packed auction house. At first, I started using Google Sheets to record auction prices, but a more sustainable solution was needed,” Mbithi tells Global Coffee Report.
Belgium business automation specialist Aucxis came to the rescue. In 1998, Aucxis helped automate the coffee bidding process, changing the operation from the commonly known open-outcry model to push buttons. It delivered NCE with the first electronic auction system which is faithfully used as the main instrument for pricing coffee to the local market.
This time around, Aucxis presented Kosmos, a real-time auction system via ‘the cloud’. Kosmos had previously supported the ‘falling price’ mechanism, which is used as standard for the sale of agricultural products such as flowers, fruit, and vegetables, but never for coffee and Kenya’s ‘falling/rising’ principle.
In this auction method, the price on a clock counts down at a set speed until someone pushes a button. In contrast to the Dutch auction, no transaction is closed at that moment, but via a time bar which starts running during a set time. This is considered the “last call” to make a higher bid. If one or several other buyers also push their buy button before the time bar runs out, the price goes up at a set time interval. The process is repeated until one bidder remains.
With such precise needs, Aucxis faced important software changes to its Kosmos system before rolling out the upgraded clock model mid-2020. The result is a digital trading platform that means prospective buyers are no longer needed to physically come to NCE’s auction house in Nairobi’s gruelling traffic to attend weekly auctions, and they can participate in a “COVID-safe” way. Farmers can also watch the results unfold, with TV screens mounted at six stations in producing regions.
“We didn’t know what Kosmos was, how it worked or how to embrace it,” Mbithi says. “Initially there was some trepidation, but over time and with more consistent use, we have seen a significant increase in the confidence of buyers, participation, and competitive prices. It’s a unique experience for Africa. It’s made a big difference to our operations. It took us out of paralysis and spared the NCE. It transformed us.”
Mbithi wants to believe the Kenyan coffee market is becoming more competitive. After years of changing regulations, reforms, and low coffee prices, he is confident the country is turning a corner thanks to small improvements such as the new remote buying system, which he is confident will increase buyer participation.
“We can’t afford to be comfortable and not innovate. Thanks to the new Kosmos system it means more people will be pushing to buy a particular coffee, and they can do it from any country in the world via our platform. In fact, on 27 January a buyer participated in the auction all the way from India and managed to be the second leading buyer without hitches at all. That is a total transformation,” he says. “We have a system to connect Kenyan farmers to the world. We are no longer where we used to be thanks to coronavirus. Prior to Christmas we were securing coffees for well over US$6 per kilogram, the highest recorded price for the year. We are smiling. Even the prices are beginning to smile, and when we smile the farmer smiles, and when the farmer smiles the world smiles.”
History in the making
The NCE was created as a division of the Coffee Board of Kenya (CBK), first established in 1934 as a statutory body after the enactment of the coffee industry ordinance of 1933. The CBK was tasked with the responsibility of carrying out the regulation and marketing of Kenya’s coffee. As such, the first coffee auction took place in 1935 to enhance the quality of Kenyan coffee through grading assessment. This role has changed over time through the various law amendments to liberalise the coffee industry.
Until 2001, the CBK served as a regulator and the sole marketing agent for all coffee in Kenya. It’s mandate then changed to regulation only and Kenya Coffee Auctions ran the NCE for a period of time, followed by the Kenyan Coffee Producers and Traders Association.
Up until 2006, the NCE was the sole marketing channel for Kenyan coffee until a new legislation known as “the second window” allowed private export companies to trade directly with producers and form direct relationships, in what Mbithi describes as a “complement” more than “competition” to the NCE.
“We thrive on competition, so if we don’t offer what the farmer or producer is looking for, they have an option to bypass us and sell their coffee elsewhere. We have between 80 to 100 licensed coffee buyers who compete with the NCE and buy from all over the world – Asia, Europe, America – so to trade 85 per cent of Kenya’s total coffee through the NCE is pretty remarkable,” Mbithi says.
“There’s always alternative options, but what buyers can be assured of when they work with the NCE, is trust in our stringent systems, and consistent, traceable coffee. We have rules in place to ensure fair play on the trading floor, and that there is no manipulation. Coffee is not just allowed to go for any price, the farmer is allowed to set a price for their coffee and if it doesn’t attract this price it may be withdrawn from sale and sold in a subsequent sale. We try to empower the farmer as much as possible, but there’s still more to do.”
The importance of transparency in coffee trading was brought into the fold thanks to Kenya’s Crops Coffee General Regulations, 2019, and CMA (Capital Markets Authority) Coffee Exchanges Regulations, 2020. These laws mandate the regulation and supervision of coffee auctions and license the NCE and brokers acting as selling agents for farmers. Under these regulations, all industry players, including county governments, cooperatives and traders were required to digitise their operations in attempt to stamp out price manipulations by unscrupulous stakeholders.
“Most of the time, the producer has no idea what happens to their coffee after it’s delivered to the dry mill. They simply receive money in their bank account. We want to bridge the gap between the market and producer. It’s a very big gap. Unfortunately, many producers think we [the NCE] are a butchery to rip them off, but it couldn’t be further from the truth. We are doing everything we can for them to prosper,” Mbithi says.
The Capital Markets (Coffee Exchange) Regulations 2020 stipulates the establishment and operationalisation of a direct settlement system for expedited and transparent payment of coffee sales proceeds. As such prompt payments must be made to farmers within five days of purchase to ensure they do not miss out on price increments. Mbithi says the new laws will help ensure Kenya’s coffee market grow and display the continued importance of the industry to the country’s economy and millions of Kenyan livelihoods.
“With these changes the NCE is more empowered to offer better services to farmers. Whatever is sold through the NCE must be distributed via a central point, not from marketing agents, so that any credits to the producer are recovered,” he says. “It also means the possibility of growing NCE further, linking farmers to the international market, and disseminating the system to all players in the value chain. We are at the point of transition.”
The power to overcome
Mbithi says the major challenge for Kenyan coffee is its low productivity, which some attribute to poor prices, agronomic practices, the expense of fertilisers, and institutional weakness. Such challenges have even forced some smallholder farmers to abandon crops.
According to government reports, Kenya’s production has steadily been in decline from an all-time high of 140,000 metric tonnes to 40,000 metric tonnes annually, grown by an estimated 700,000 smallholder farmers. The government hopes to raise production to 100,000 metric tonnes annually.
In 2020, the Ministry of Agriculture launched a Sh1.5 billion (about US$15 million) coffee revitalisation plan, focusing on eight Kenyan counties that account for 70 per cent of coffee production in the country. The plan aims to help improve production and the quality of coffee for those counties that have been in a steady decline. It includes the revival of coffee farming, training, fertiliser subsidies, propagation of seeds and improved primary processing infrastructure, and the refurbishing of coffee factory and mills.
“The government is doing a lot of work to get coffee into people’s lives to make it a coffee drinking culture. Eighty per cent of Kenyans are Christians. When the missionaries came to Kenya, they pulled people from traditional brews to tea, not coffee. Coffee was only seen as an export product, so people naturally got used to tea more than coffee,” Mbithi says.
“Sadly, local consumption is about the economy of our pockets. We cannot afford to drink good Arabicas, so the majority of local consumption is imported coffee, but that’s what the government is trying to change. It’s even going into colleges and universities to promote and educate the community that Kenya does produce quality Arabica and increasingly Robusta coffee, and that it’s done right in our backyard.”
Committed to the cause
Mbithi is a proud Kenyan with coffee in his soul and farmer livelihoods in his heart. He grew up in the producing region of Machakos, Kangundo. His father was a small-scale coffee farmer, and has nostalgic memories of tending to his father’s crops each day.
“Before I went to sleep and each morning before going to school each day, I would pick two containers of coffee, and if it wasn’t done, I’d go to school late,” he recalls.
Mbithi has been part of the coffee industry ever since he left school. He entered the coffee industry in the early 90s, first working with the CBK, which, at the time, was the industry regulator and sole marketing agent for Kenyan coffee. He worked on its payment system until laws changed in 2002 permitting the creation of offshoot department, the NCE. Mbithi joined in 2006 as its sole employee, using the auction room as his office.
“I’ve worked in various positions in the industry but the NCE is where the action is. I want to be amongst it, working through the challenges, working face to face with farmers and traders to achieve the best results – price wise for the farmer and that the traders get the quality Kenyan coffee is known for,” he says.
“The NCE stands on its own. We still have room for growth, and the journey so far has not been easy, but I am committed to doing my best despite the challenges to ensure the farmer’s produce is accessible by traders and sold for a good price.”
With new reforms, enhanced technology and a renewed focus on how coffee can contribute to the growth of Kenya’s economy, Mbithi is excited by its potential and the role the NCE can play.
“We want people to know who we are and what’s happening in Kenya. The world needs to know we are doing everything to ensure consistency and quality of our supply. We want all eyes on Kenya,” Mbithi says.
“I truly believe this is a year for NCE to be on top of the treetops telling everyone what we’re doing as we continue to innovate. If I go home tomorrow, I can look back and smile at the position NCE is in.”
Images: Kybe Photography
For more information on the Nairobi Coffee Exchange, visit nairobicoffeeexchange.co.ke
For more information on Aucxis, visit www.aucxis.com/en/e-trade