Kenyan Coffee: the once acclaimed black gold losing its place in the economic pecking order

Kenyan Coffee Beans

Kenyan Coffee Beans

The coffee industry in Kenya is noted for its cooperative system of production, processing, milling, marketing, and auction system. About 70% of Kenyan coffee is produced by small- scale holders.

It was estimated in 2012 that there were about 150,000 coffee and farmers in Kenya and other estimates are that six million Kenyans were employed directly or indirectly in the coffee industry. Coffee production in the 2013/14 season came in at 850,000 (60kg) bags.

Kenya’s coffee sector is an important part of the country’s economy, although it is inefficient even by regional standards. Yield weakness, combined with a declining area harvested as a result of urban sprawl, has led to stagnating production in recent years.

It is not all gloom though; the sector began showing an improvement in 2011 as the government introduced new coffee varieties to improve production through better disease prevention. Batian, as the new strain is known, is resistant to both berry disease and leaf rust.

High prices and better crop husbandry are also likely to improve output. Kenya has traditionally sold premium Arabica coffee blends, which command high prices on international markets.

Due to better crop husbandry, analysts predict output in 2015 to exceed 900,000 bags, placing coffee as a key substitute for dwindling Foreign Exchange Reserves due to poor tourist numbers as a result of insecurity issues, and a slowdown in horticulture and tea exports.

Kenya does not have a particularly well-established coffee culture, with most people preferring tea. This is mainly due to perceptions of coffee as an export good as well as the fact that it is relatively unaffordable to the average consumer.

Indeed, consumption growth over the last decade, at 1%, has been minimal. However, consumption trends are starting to change as economic growth makes coffee more affordable and a growing number of retail chains in large urban areas make coffee more accessible.

Over the long term, production is expected to improve on the back of government support. Specifically, the Kenyan government has increased the sector development fund to $15 m with the intention of boosting output, and it will also provide some debt relief to small farmers.

Another factor aiding production will be the new Batian trees, which can be planted at higher density than traditional trees, meaning higher average yields. Despite the increase, the total figure remains well below production figures seen in the 1980s.

Global prices to remain under pressure

Global (ICE) coffee prices will continue heading lower as the Brazilian real depreciates and 2015/16 production in Brazil looks more assured. Global players continue to forecast a global market surplus for the upcoming 2015/16 season and see downside risks to below-consensus forecast for prices to average USc160/lb.

Early 2014 saw the worst drought in decades in Brazil, significantly damaging the 2014/15 up-year crop and resulting in a temporary prices spike.

Although coffee prices began receding in April 2014, occasional news releases about a crop downgrade (largely from analysts not affiliated with the Brazilian government) periodically sent prices higher.

Throughout 2014, prices repeatedly retreated from overbought conditions, only to move swiftly higher again on the news of another downgrade or weather problem in Brazil. Examples include dramatic price rebounds in April, July and September 2014.

Nestlé works to improve coffee production

Switzerland-based food company Nestlé’s Kenyan unit partnered with Coffee Management Services (CMS) in November 2014 in an attempt to boost coffee yields and crop production in the country.

Nestlé Kenya has offered technical support to farmers to help improve the quality of their produce. One of the objectives of the programme is to persuade women and young people to increase their participation in the coffee sector.

Nestlé and CMS will implement the programme in the rural counties of Kiambu, Murang’a, Kirinyaga, Nyeri, Embu and Meru. The nine farmers’ cooperative societies involved in the programme have accomplished increases in coffee production between 70% to 400% during the period from 2011 to June 2014, according to CMS managing director Kamau Kuria.

Kenya lags behind Uganda and Ethiopia

Uganda and Ethiopia will remain the pre-eminent coffee exporters in East Africa over the next decade, though Ugandan exports could surpass those from Ethiopia despite lower production growth. We highlight Tanzania as the country best-placed for coffee production growth in the region, though government initiatives will boost production across the region.

Aside from Ethiopia, East African coffee producers have seen either stagnation or outright declines over the last 20 years. Production in Uganda and Kenya peaked in the late 1990s, while output in Tanzania failed to sustain a level above 1mn bags for at least two consecutive years.

In contrast, Ethiopia has significantly increased production since the early 2000s, raising output by more than 125% between 2000/01 and 2012/13 to 6.3mn bags. Ethiopia and Kenya produce Arabica coffee almost exclusively, while Uganda predominantly focuses on Robusta production.

Tanzania farms both crops. Though East Africa is one of the world’s largest producers of Arabica coffee beans, with total production of around 17mn bags, it remains well behind Brazil, which produces between 35mn and 40mn bags in any given year.

The main reason behind the recent stagnation in Ugandan, Kenyan and Tanzanian coffee production is falling or stagnant yields. Both Kenya and Tanzania have suffered from declining yields while area harvested has remained largely static.

Uganda, on the other hand, has seen volatility in its yields, which have averaged around the 6,500 hectogram per hectare (hg/ha) level for the last 50 years. Tellingly, Ethiopia has also seen yields fall over the last 20 years and has only boosted output by devoting a significantly greater area to coffee production.

Uganda and Ethiopia have together been the region’s leading coffee exporters for the past 10 years. Over that time, there has been a growing divergence in coffee exports between these two countries and Kenya and Tanzania.

Though exports from the region have risen considerably over the last decade, the export share relative to total production has remained the same. As Ethiopia has been the only country in the region to record a meaningful rise in output, this suggests domestic coffee consumption has risen dramatically in the country, as opposed to the rest of the region.

Ethiopia’s exports as a percentage of total production has not markedly increased over the last five years despite a severe devaluation in the Ethiopian birr relative to the euro (the Eurozone is Ethiopia’s largest destination for coffee) over the last five years.

The country’s currency has depreciated almost 80% since May 2009, while domestic prices for Arabica coffee up to the start of 2014 were on a declining trend from mid-2011.

Though Ethiopia’s stagnant export percentage growth can be attributed to weakening global coffee prices over the last three years, it also signals a positive Ethiopian consumer story. Despite being the poorest nation in per capita purchasing power parity terms out of the four major East African coffee producers, Ethiopia has increased its domestic consumption of coffee by 85% between 2000 and present.

In order to boost coffee production, the governments of Kenya, Tanzania and Uganda are implementing ambitious growth strategies. Kenya is implementing legal and institutional reform in the coffee sector, and is providing grants for farmers to adopt improved varieties of coffee (for example disease-resistant strains). Uganda and Tanzania have employed more concrete goals by setting production targets.

The Tanzanian government has committed to a 10,000ha increase in the coffee area in order to double production by 2021, while Uganda is aiming to achieve output of 4.5mn bags by 2018.