Kenya Struggles to Reform Coffee Sector

By Shem Oirere

Coffee production in Kenya has been near the top of the country’s economic and political agenda since 2017 when the ‘Big Four’ agenda was unveiled by President Uhuru Kenyatta. It will be his legacy when he leaves office in 2022.

The 2017-2022 strategy for Kenya’s coffee sub-sector is focused on the revival, strengthening and adequate resourcing for more than 500 primary coffee cooperatives that receive, process, and market coffee, 99% of it arabica, from nearly 700,000 smallholder farmers across 32 counties.

“To reverse the negative trends in the coffee industry and assure the future of coffee farming in Kenya we will rehabilitate 500 pulping stations (processing factories) in 31 coffee growing counties,” said President Uhuru in a speech during the recently concluded 124th session of the International Coffee Council (ICC) in Nairobi.

There are several other measures government and private sector are pursuing to boost coffee production in this East African country, which has nearly 116,000 hectares under the crop. The focus on cooperatives (known as coffee societies) is deliberate because of their central role in the coffee sub-sector’s market chain. For the smallholder coffee growers, the primary society is the immediate point of call where their coffee first assumes its identity. Marketing commences as growers deliver their cherry for processing and grading. Currently, parchment coffee is separated into four grades: parchment 1, 2, 3, and lights. Delivery to any of the 17 coffee mills follows, paving the way for the commercial agents and coffee dealers seeking to sell into domestic and international markets.

During the 2017/18 coffee year, average prices for coffee from cooperatives increased by 23.6%. Earnings for coffee grown on estates fell by 22.6%.

In what could be a boost for increased production, Kenya’s Coffee Directorate reported expenditures of $6.9 million from the government during the 2017/18 crop year. These funds paid off debts owed by farm cooperatives and rural savings cooperatives, making it possible to substantially reduce deductions from coffee farmers’ earnings, which had hampered any interventions to revitalize the coffee sub-sector.

Kenya’s cooperatives paid off $16.8 million in price stabilization (Stabex) funds that had been advanced to coffee farmers. The funds, partly from the European Commission (EU), were channeled through the Cooperative Bank of Kenya to enable farmers to access farm inputs to boost coffee production.

“The debt waivers have enabled Coffee Cooperative Unions to build new coffee mills which have subsequently increased their efficiency, thereby reducing milling losses from 30% to 19% and increasing farm level prices from $0.45 to $0.58 per kilo,” according to the Kenya Medium Term Expenditure Framework of the National Treasury, headed by cabinet secretary Henry Rotich. Elsewhere, ongoing coffee reforms have seen some cooperative societies seeking necessary permits to market their produce to international buyers directly without going through the ‘farm-cooperative society-miller-auction’ process.

Progress has been made in coffee-growing counties of Kirinyaga and Nyeri in central Kenya although challenges still exist on issuance of permits to facilitate full private sector participation in the market value chain. Under the current legal framework, which is not necessarily being followed because of weak enforcement mechanisms, cooperative societies are supposed to pay the coffee farmer 80% of the total value of the delivered cherry although this rate could vary from 84.6% to 10.2% depending on the coffee growing region, the quality of the crop delivered, and the indebtedness of the cooperative society.

Moreover, the final payment to the coffee farmer in Kenya also depends on agreements between cooperatives and marketing agents, who sell the commodity through a central auction system that is managed by the Nairobi Coffee Exchange. The exchange, which markets 85% of Kenya’s coffee, operates under the direction of coffee industry representatives and other stakeholders. The remaining 15% is sold as direct exports. The paradox facing the Kenya coffee industry is that despite the fact its coffee varieties fetch premium prices in international markets, the majority of the country’s coffee farmers are yet to enjoy this benefit.

The irony of it all, said President Kenyatta in March is that “these premium prices do not trickle down to coffee farmers, who by and large are small scale producers.”

“This phenomenon, though not unique to Kenya, represents the single greatest challenge to the continued prominence of the coffee industry,” he said. However, in 2018, despite Kenya’s marketed coffee volumes having increased to 36,800 metric from the 33,700 metric tons in 2017, earnings were lower due to a reduction in the international prices of coffee. Germany, US, Belgium, Korea, and Sweden were the biggest buyers of Kenya’s coffee last year importing 15.8%, 15.7%, 14%, 12.1%, and 8.2% respectively.

A similar increase was reported in the overall quantity of coffee produced in Kenya, which increased by 7% from 38,700 metric tons in 2016/17 crop year to 41,400 metric tons in 2017/18 with the country specializing in Arabica varieties of SL 28, SL 34, K7, Ruiru 11, Batian, and Blue Mountain.

“This was as a result of new planting especially in areas west of the Rift Valley and improved productivity in central and in the areas east of the Rift and availability of subsidized fertilizer provided through the National Cereals and Produce Board,” said Zachary Zachary Chege, the director general of the Kenya National Bureau of Statistics.

He said that although the area under coffee production expanded from 114,700 hectares in 2016/17 to 115,600 hectares in 2017/18, driven largely by the smallholder cooperative societies, “coffee production on estates declined by 22.5% from 14,200 metric tons in 2016/17 to 11,000 metric tons in 2017/18 due to uprooting of coffee bushes in peri-urban areas to make way for real estate development.”

The future of Kenya’s coffee industry looks promising because of the recently announced initiatives to boost production and reform the marketing of the commodity locally and internationally. Kenya earns an average $230 million annually from coffee exports although production has fallen from an all high of 1.7 million bags to less than a million in 2018.

In fact, a report released in mid-May by the US Department of Agriculture on Kenya’s coffee industry warns of risk of falling production volumes in 2019/2020 market year. “While demand for Kenya coffee in the world remains steady, with the United States being one of the top export destinations, the future of Kenya’s coffee production is uncertain,” says the report prepared by Kennedy Gitonga for the USDA Foreign Agricultural Service.

The report identifies drought, low prices, and persistent shift of coffee producers to less risky enterprises as leading factors in a possible fall in marketed coffee volumes in 2019/2020.

“The sector is also losing competitiveness due to other factors such as increasing cost of labor and inputs, high incidences of pests and diseases, and poor governance of marketing cooperatives,” says the report.

Coffee farmers, the report observes, are “moving to less risky enterprises when opportunity presents.”

“In the meantime, the government of Kenya’s efforts to promote smallholder coffee production in non-traditional growing areas is countered by a surge in housing developments on farms located in peri-urban areas, leading to an overall stagnation of total coffee production,” according to USDA.

Going forward, revival and growth of Kenya’s coffee industry is likely to be driven by how effective the government will be in tackling causes of low farm productivity and also in creating competitive coffee cooperative units with full involvement of the private sector.

Doing Deals Dampens Ethiopia’s Bounty

Coffee was born in Ethiopia. Every strain of arabica that specialty roasters clamber for at auctions from Colombia to Kenya originated here, on Ethiopia’s rolling hills and lush plateaus that make for such perfect growing conditions.

 But while growing great coffee in Ethiopia may be effortless, running a business there is anything but. The developing nation holds plenty of challenges for farmers and exporters, ensuring that there is never a dull moment in the struggle to get these exceptional cherries from their trees in Ethiopia to the specialty roasters of Asia, Europe, and the US.

 Adam Overton knows plenty about that struggle. When STiR phoned him over WhatsApp for an interview, he was fraught with worry that we would be struck by that most dreaded terror of the modern age: an internet blackout.

 “It was like a total country outage,” he tells me of the unreliable connection for the past day. Overton relays a story of sitting in front of his computer in Ethiopia, just doing nothing. “But now it’s working. I don’t know how long,” he says.

 This is just one of many challenges facing producers in a country that is paradise for coffee trees but bothersome for international exporters. Ethiopia is a developing nation experiencing growing pains. And while a power outage is not life-threatening to East Africa’s coffee cherries, it can definitely put a damper on business activities.

 “With no internet this is a big deal. We just finished our auction,” Overton explains. Customers in Korea, Japan, and Taiwan, where he sells the bulk of his crop, could be waiting for updates, billing, or just a confirmation that he’s not doing a runner with their money into the African countryside.

 “And then we’re quiet all of a sudden, people start to freak out. It’s a developing country, so there’s always challenges. You have to always be ready to figure things out,” says Overton. Internet interruptions aren’t the only thing making business challenging in Ethiopia. After years of protest, Ethiopia faced a leadership change in 2018 as Prime Minister Abiy Ahmed took office after ousting an authoritarian regime.

 Overton says protests were mostly peaceful, but not conducive to the coffee trade. To get attention protestors often block key roads for days at a time, a nightmare for exporters trying to move truckloads of coffee across the country.

 “It was peaceful but it was a pain,” Overton said. At the height of protests, Overton spent 25% of his time on gathering intelligence, sending out trucks to test roads and calling friends along the route to see how he could get his cherries into the hands of waiting roasters.

Things have quieted, but life in Ethiopia is full of surprises waiting to disrupt the supply chain. Overton says the threat to investors and business figures like himself is low, but “It’s a rapidly shifting country, so you have to be smart,” he said.

Diligence is a price that producers are willing to pay in coffee paradise. Growing good coffee trees in Ethiopia isn’t rocket science. Overton explains that with even minimal effort growers harvest respectable coffee.

The best of the best

But a superior coffee land attracts ambitious coffee people. Overton isn’t just trying to grow good coffee — he wants to grow the best coffee. And that requires a a lot more work.

It starts with choosing the right seedlings, and it would be hard to go wrong with the famed Gesha variety. The strain originated in Ethiopia, but it got its fame via Panama, when family-owned plantation Hacienda la Esmeralda brought it onto the scene in 2004 and shocked the coffee world with its unique flavor. Last year a Gesha lot broke the Best of Panama auction record selling for $803 per pound.

The coffee it beat was another Gesha variety that sold for $601 per pound the year before, also grown in Panama. Swelling coffee markets are leading to a high-priced niche market for the world’s crème de la creme, and coffee connoisseurs in Tokyo, Seoul, Dubai, and Paris are willing to pay — as much as $68 a cup in Dubai, according to media reports.

The gold rush for top-shelf specialty beans is spurring producers to double down on quality. If Gesha coffees from Panama can break records year after year, it seems the birthplace of the variety might stand a chance of retaking that throne, or at least joining the upper echelons of vexingly expensive beans. If it’s done right.

Overton has chosen to run his estate, named Gesha Village, not far from the Gori Gesha forest where the bean originated. “What we’re doing is trying to squeeze out that last 10-20% to really be the top,” said Overton. “It’s more involved. Nobody is doing the management we’re doing.”

His estate employs the law of variety to achieve that goal. While most estates offer an average of eight samples, Overton and his partner at Gesha Village are chopping their 471 hectare plot so they can offer around 130 different samples and let roasters and judges choose the top scoring, best tasting coffees.

The fruits of that labor are mostly headed east, to his three largest markets, all located in Asia: Japan, Korea, and Taiwan. China will take some, Overton says, but despite its size the Asian giant is half asleep on the specialty coffee craze.

Overton’s situation is rare in Ethiopia. He owns a giant piece of prime coffee real estate. He can hire a great farm manager. He visits roasters in Seoul and around Asia. This doesn’t tell the story of the average Ethiopian coffee farmer, most of whom are garden coffee growers who balance their crop with vegetables to ride out the year after the coffee harvest. Many don’t have access to the internet or the funds to set up an office in Addis Ababa, Ethiopia’s capital. This makes it difficult for small farmers to engage in direct trade.

 “You have to be a certain size to afford a staff, a cupping lab. All that doesn’t work if you only have 50 bags of coffee,” said Overton.

 As such, coffee cooperatives and joint washing stations are essential. The Ethiopian Commodities Exchange (ECX) has done wonders in connecting smallholder farmers marketing their beans. Coffee accounted for 35% of the country’s export revenues between 2000 and 2014, divvied up between 4.2 million smallholders.

 ECX also has its problems, like stripping away recognition for small farmers and making traceability more difficult. But an amendment in 2017 attempts to remedy that, making traceability to local cooperatives and private mills easier. It also made it possible for farmers growing at least 20 quintals of coffee (units of 100 kilograms) to engage in trade directly. 

 The industry is still developing, and further reforms will help connect Ethiopian coffee producers with roasters around the world. That means higher incomes for farmers, which can add up to greater efforts and higher quality coffee. Nature decided a long time ago that Ethiopia was the ideal place for coffee. Producers in Ethiopia are doing what they can to harness that perfection and get it into cups around the world. But the true success of Coffee Brand Ethiopia will depend on keeping politics out of the way.