The proposed Coffee Act 2023 has serious limitations and the reforms it recommends may fail to halt the rapid decline of a crucial sector that is in dire need of an urgent rescue agenda to restore it to its former glory.
The Bill currently before parliament does not sufficiently address the question of how it will tackle the twin challenges facing the coffee sector – an opaque marketing system that has over the years been accused of defrauding smallholder farmers who largely sell their coffee beans through the Nairobi Coffee Exchange (NCE) auction, and decline in production and productivity as farmers struggle to buy costly farm inputs in the face of dwindling returns, or abandon coffee farming altogether to pursue more lucrative ventures.
Strangely, the proposed Bill – first mooted by the previous regime of President Uhuru Kenyatta – is also seeking to isolate coffee from a legal regime that has been governing the production, processing and marketing of scheduled commercial crops since 2013. The Crop Act was enacted in 2013 after agriculture was devolved under the 2010 constitution to enable the consolidation or repeal of various statutes related to specific crops and create the conditions necessary for the development of these crops.
Also enacted in 2013, the Agriculture and Food Authority Act that created the Agriculture and Food Authority (AFA) defines the authority’s regulatory and operational functions in implementing the Crop Act 2013 and makes provisions for the respective roles of the national and county governments in crop production, processing and marketing. The new AFA Act collapsed several institutions into AFA directorates and repealed the statutes that had created them. The major casualties of the laws that were repealed included the Coffee Act of 2001 that had been revised in 2012, the Sugar Act of 2001, the Tea Act (Cap 343) and the Cotton Act, among 13 other Acts.
Although the other crops have also failed to achieve the results envisaged by the Crop Act 2013 for various reasons, coffee has been of particular interest both politically and economically at the national government level and at the level of the county governments in regions that produce it, especially Mt. Kenya, a vote-rich region whose voting pattern could easily be swayed by the prevailing economic situation during an election period. Despite the numerous challenges facing the coffee sector, thousands of smallholder farmers still hold on to the crop, optimistic that every successive government will turn it around.
Production has declined significantly over the years and a crop that once yielded over 130,000 tons annually in the late ‘80s, earning smallholder farmers huge fortunes, only managed a paltry 34,512 tons of clean coffee in 2021 and just over 53,000 tons last year. The poor farm gate prices that accrue to those farmers – largely smallholder ones – auctioning coffee through cooperatives at the NCE have provoked debate among politicians, farmers and other affected industry actors. There have been claims of cartel-like dealings along the marketing value chain, with corrupt government officials looking the other way as dealers at the auction profit from dubious deals unchallenged, making the sector reforms a Herculean task for any establishment.
One of the leading problems associated with these unfair practices is the role of the marketing agents, who are accused of colluding with the millers and buyers to manipulate prices to the disadvantage of smallholder farmers. They are appointed by officials of cooperative societies to look after smallholder farmers’ interests at the auction, where 25,126 of the 34,512 tons of coffee produced in 2021 were sold. The election of cooperative officials is itself marred with malpractices and a lot of external interference.
Before the current Bill was drafted, there was an attempt by Moses Kuria, the then Gatundu Member of Parliament, to change the Crop Act in 2019 to allow only the export of processed coffee. According to Kuria, by disallowing the export of raw coffee from the country, the proposed amendment would ensure a favourable balance of trade and payment.
“Clause 2 of the Bill seeks to amend section 40 of the Crop Act 2013 to compel the Cabinet Secretary in consultations with the AFA and County Governments while making regulations, to ensure the coffee is exported only in processed form having been roasted, milled, parked and branded and clearly labelled ’a made in Kenya’ inscription,” Kuria’s memorandum read.
However, the proposed Bill now before parliament deviates from this intention. It instead allows only roasters and small businesses to buy coffee from the NCE for processing to promote local consumption. The Bill does not address the main challenge facing coffee marketing. It does not insulate farmers from the unfair practices that industry stakeholders have raised in the past. A buyer, a roaster, a grower miller, or a broker appointed by the grower will continue to be allowed to trade at the Exchange where the coffee will continue to be sold in its raw form.
Sceptics argue that without dismantling the cartels running the coffee sector, which requires the political goodwill that has been lacking, the ongoing reform efforts in the coffee sector will fail. Addressing a coffee reform forum convened in Meru recently by Deputy President Rigathi Gachagua, Embu Governor Cecily Mbarire named three companies that she claimed control Kenya’s coffee marketing. She accused the three companies of buying coffee at the Exchange through different company subsidiaries whose directors work closely to manipulate prices in collusion with corrupt government officials. Agriculture CS Mithika Linturi’s threat to revoke the licences of all those involved in the corrupt practices within a week came to nothing.
The problem starts with how the marketing agents are appointed. This is done by the officials of cooperative societies who are elected periodically by members. The elections have in the past been cited as citadels of corruption that have been infiltrated by actors in the coffee value chain who influence the choice of officials to maintain the status quo.
In 2021, former Agriculture Cabinet Secretary Peter Munya, who led the first phase of the coffee reforms, spoke about mismanagement in the coffee sector cooperative societies, saying that farmers lose their earnings through a flawed management of the chain of production and marketing. The proposed Bill recommends democratising the process of selecting millers and marketing agents by farmers through the holding of factory meetings where several bidders pitch their services. However, this process will require strong goodwill and is not fully insulated from manipulation by well-coordinated cartels.
Agriculture CS Mithika Linturi’s threat to revoke the licences of all those involved in the corrupt practices within a week came to nothing.
If the Bill does not address the need for the cooperatives to have independent marketing agents at the auction who will serve the farmers’ interests and not those of buyers and millers, the fortunes of the farmers will remain unchanged. The success of the proposal that millers make all the necessary disclosures to enable farmers to arrive at an informed decision – disclosure on milling costs, handling and storage charges and other fees and milling losses that the Bill caps at US$40 per ton – will depend on who serves as the marketing agents, how they will be appointed and their inclinations. Although the Bill requires a commercial miller to ensure that the grower or grower’s representative is given reasonable notice to be present during the milling, this will not enhance accountability if the process of appointing the marketing agents is not transparent from the outset.
Direct sales will not offer any reprieve since the Bill requires the prices to be favourable to those at the NCE. The Bill also requires that a commercial miller or a broker appointed in consultation with a commercial miller prepare a sales catalogue for all coffee in licensed warehouses in consultation with the Exchange and the growers. Cases where marketing agents have downgraded coffee to depress prices and offered reserve prices that are too high – and that can easily be leaked in a cartel-like marketing regime, making the coffee unsalable at the first auction and resulting in the downward scaling of prices at subsequent auctions – have in the past been cited as some of the ways by which farmers are exploited.
However, other provisions address administrative issues such as settling the proceeds of the auction in a direct system operated by the Capital Markets Authority (CMA), thus prohibiting a broker or an agent appointed by a grower and other service providers from receiving the proceeds on behalf of the growers and holding them for other commercial activities not related to the coffee sector. Currently, marketing agents trade with farmers’ money through forex conversion, fixed deposit earnings and by making loan advances to unsuspecting farmers at prohibitive interest rates with the connivance of the societies.
A past report of a task force led by Prof. Joseph Kieyah, Chairman of the Presidential Task Force on the Coffee Sub-sector, recommended prompt payment to farmers for coffee delivered to coffee mills, the opening up of the Exchange for farmers to directly trade at the auction, and the creation of a coffee production subsidy. The report also called for reforms in the coffee cooperatives to strengthen them and to enable farmers to hold them to account, and proposed such measures as capping administrative expenses at 15 per cent and penalties for entities that fail to comply with the law.
The industry now seeks a multi-pronged approach to be included in the proposed reforms, which includes the processing and promotion of specialty coffee from Kenya to global markets as is the case in Ethiopia, which has won trademarks for three of its specialty coffees. Coffee is Ethiopia’s main export commodity, contributing to the livelihoods of more than 15 million smallholder farmers and other actors in the sector.
According to the Ethiopia Coffee and Tea Authority (ECTA) report, Ethiopia’s six-month coffee export revenue grew by US$274 million in the first half of the 2021/22 fiscal year. The country also has an impressive local consumption of coffee, with an estimated 42 per cent of the coffee produced going to the domestic market, of which around 5 per cent is smuggled in cross-border trade and traded on the black market. The rest is traded and exported through the Ethiopia Commodity Exchange (ECX), which sells around 80 to 85 per cent of the exported coffee.
The price of coffee in Ethiopia has continued to rise. The ECTA introduced “Vertical Integration” into the sector, a scheme that was approved in 2021. The new regulation allows exporters to bypass the ECX and buy coffee directly from aggregators or small washing stations.
With the liberalisation of the coffee market, farmers can decide where to deliver their berries based on the price offered. Moreover, demand has continued to rise and local cooperatives such as washing stations are benefiting from higher competition among buyers.
On 28 January 2020, in collaboration with the National Bank of Ethiopia, the ECTA issued a directive called the “Export Coffee Contract Administration” that fixes a minimum coffee export price based on the global weighted average price attributed to the different grades of coffee from various regions. Exporters submit their contracts to the NBE at the end of each day. They are submitted to another team that compares the prices with international and local coffee prices and uses an average weighted method to calculate a new minimum price upon which coffee exporters base their contract prices the following day.
With the liberalization of the coffee market, farmers can decide where to deliver their berries based on the price offered.
The Bill currently before the Kenyan parliament has introduced a very strong regulatory regime at both the county and the national level. It has failed to allocate any significant roles to the private sector in reviving the sector in areas such as production. Industry stakeholders cite resource constraints facing both the county and national governments and the underfunding of the agriculture sector as issues of major concern. Coffee dealers argue that the correct prescriptive policy would have been for the government to create a conducive environment to allow the private sector players room to grow the sector.
Two agricultural sectors stand as an example of why the immense and ambitious roles that the Bill allocates to both the national and county governments at the expense of the private sector could be a dangerous policy decision.
Let us start with the cashew nuts sector. Despite policy deficiency, the sector showed promising signs when local private processors (through Kenya Nuts Processors Association – NutPAK – which had pushed hard for a ban of raw nut exports) teamed up with growers’ associations, researchers at the Kenya Agricultural Research Institute (KARI; now renamed Kenya Agriculture and Livestock Research Organisation – KALRO), and the coast provincial administration to revitalise the cashew nut sector. This was after President William Ruto, then Agriculture Minister, banned the export of raw nuts in 2009 following a report by a task force that had collected views from industry stakeholders and recommended such a move to enable processors who have created more capacity to obtain enough raw materials.
The revitalisation team agreed, as a first measure, on a minimum farm gate price every harvest season, the establishment of collection centres to rid the industry of middlemen, and increased production and productivity by replacing ageing and unproductive trees with high-yielding, fast-maturing varieties to be developed by KARI and supplied through nurseries managed by farmers.
The efforts kicked off well in the two years preceding devolution. However, when the agriculture function was devolved and the provincial administration – which was championing the revival efforts – was restructured, the initiative failed to transition into the new governance order. While the county governments in the cashew-growing regions have spoken about the importance of the cashew sector over the years since devolution, they have failed to develop policies and plans for the revival of the sector and have allocated very few resources to agriculture and to the cashew nut sector in particular, leading to a significant drop in production.
Coffee dealers argue that the correct prescriptive policy would have been for the government to create a conducive environment to allow the private sector players room to grow the sector.
Although drought was blamed for the decline in production in 2021, in reality, the cashew nut sector has been in free-fall since 2013. The 2022 AFA Year Book of Statistics reports that production in the coast region during the year under review decreased from 12,668 tons in 2020 to 9,121 tons in 2021.
Once a top earner for the coast region, the value of the cashew nut produced decreased from KSh587.25 million in 2020 to KSh457.4 million in 2021, with less than 20 per cent of the processed crop destined for export. The rest was processed through cottage industries and consumed locally, a strange turn of events for a crop whose harvest could attain over 40,000 metric tons in its heyday. The low volumes have kept the big players out of the scene, with the newly created processing plants struggling to obtain the raw material to keep their production lines running.
The other crop that illustrates the danger presented by the proposed increased control over the coffee value chain is macadamia, which is, coincidentally, largely produced in the Mt. Kenya region where coffee is also popular. Although a Bill to regulate the nut sector has been tabled at the national level, the sector has grown in the last decade largely due to the immense support of a competing private sector seeking to increase production to utilise their installed capacity. However, since 2021, several factors have conspired to threaten it: the emergence of more macadamia-producing countries in the world including China, and a decline in the quality of nuts harvested due to poor and uncontrolled harvesting techniques, a regulatory issue that can only be tackled by both the county and national governments.
Despite the significant growth of the sector, the county governments in macadamia-growing regions have failed to consolidate the gains of the previous decade. Today, farmers receive not more than KSh30 per kilo of nuts at the farm gate, down from the KSh200 they received in the pre-COVID-19 period. The sector now faces collapse due to the emergence of other competing cash crops.
The proposed Coffee Bill 2023 seeks to revive and restructure the defunct CBK but fails to assign production and marketing roles to traders despite their huge investments; millers, processors, marketing agents and other dealers do not see any goodwill in the revival efforts. According to Pius Ngugi, who has operated Thika Coffee Mill for many years and is one of the biggest indigenous coffee processors in the country, this is likely to affect the proposed reforms to be undertaken by the revived CBK and the county governments.
Although drought was blamed for the decline in production in 2021, in reality, the cashew nut sector has been in free-fall since 2013.
The stated objectives of the 2013 Cash Crop Act that the current Bill appears to reverse were the need to circumvent regulatory bureaucracy in the crop subsectors and remove unnecessary regulations and levies, and the reduction of overlap and duplication of roles to promote the competitiveness of the crops, and more importantly, attract and promote private investment in agricultural crops.
Even at the CBK board level, traders do not have representation. The proposed members include a chairman, the Principal Secretary in charge of trade, the Principal Secretary in charge of cooperatives, two smallholder farmers, two coffee estate farmers, a nominee from the proposed Coffee Research Institute (CRI), one person from an association of farmers and the Chief Executive Officer, who will also double as the Board’s secretary.
The previous Coffee Act, which was repealed when the sector was placed under the AFA as a Coffee Directorate, provided room for the inclusion of players from the private sector and gave the minister in charge of agriculture the opportunity to appoint board members based on their interests and expertise in the coffee industry. The composition of the CBK board would have borrowed a leaf from Oils and Nuts Development Bill 2023, also in parliament, which suggests a similar board with the inclusion of a processor with ten years’ experience to grow nuts the sector. The proposed CBK board also contrasts with the provisions of the proposed Nuts and Oil Crops Development Bill 2023, which seeks to play a similar role as the CBK that proposes the inclusion of a processor with at least ten years of experience in its board.
The government, through the CBK and the county governments, has a crucial regulatory role to play to protect all the industry stakeholders. This regulatory role should create room to allow various investors in the sector to fill the investment gaps that affect the production, processing and marketing of coffee. For instance, the proposed Bill requires the county governments to offer extension services in the areas of sustainable production, primary processing of coffee and climate-smart agriculture, all of which are resource-intensive activities that it is doubtful they will fund satisfactorily.
The Bill also gives the CRI the responsibility – in collaboration with the county governments – of disseminating coffee production and processing technologies, propagating coffee planting materials, supervising nursery operations, issuing seeds, mapping out areas suitable for coffee production in Kenya, and capacity building, all costly undertakings that the private sector has a proven record of successfully performing. These roles can be played by the private sector with much ease and innovation based on their growing needs and market knowledge.
Despite the significant growth of the sector, the county governments in macadamia-growing regions have failed to consolidate the gains of the previous decade.
A good example of this will suffice to illustrate the point. A KSh240 million cashew nut production revival project has successfully been undertaken in a partnership that includes the European Union and the Visegrád Group of countries (V4) – Czech Republic, Hungary, Poland and Slovakia – and Tensenses Ltd, now Grow Fairly. Close to 1 million new high-yielding cashew nut trees have been planted at the coast from a nursery that was created five years ago when the project commenced. The 15,000 farmers registered to grow organic cashew nuts were provided with materials and other support while the coast county governments subsidised the purchase of seedlings from the nursery. Early this year, the company opened a new factory that will process 2,400 tons of cashew nuts per year once the new crop is fully established.
Under the repealed Coffee Act, commercial millers could give farmers credit in the form of money and farm inputs to be recovered from the proceeds of coffee sales. The proposed Bill has thrown this out of the window and barred millers and marketing agents from providing loans or advances to coffee farmers at an interest. This, according to the thinking of the drafters of the Bill, will encourage the farmers to access berry advances at a rate of 3 per cent.
In effect, in October 2023 the government approved a KSh4 billion advance for coffee farmers that is expected to boost their earnings. However, agriculture ministers from coffee-growing counties have decried the low uptake of the KSh3 billion berry advance that the previous government had provided over the previous four years.
In December last year, Kiplimo Lagat, the Nandi County Executive Committee (CEC) member in charge of Agriculture and Co-operative Development argued that, from its inception, the fund was poorly crafted and thus failed to attract farmers who were wary of its unclear objectives and fearful of its outcomes.
“There is a need for the government to rethink the concept under which the fund was established to make it more attractive to the farmers. Perhaps the fund is suffering from structural challenges thus scaring away farmers,” he said.
The fund was established in early 2019 to help coffee farmers across the country resolve the problem of delays in the coffee payment cycle. According to the top management of New Kenya Planters Cooperative, by December last year, only KSh401 million had been advanced to farmers in the coffee-growing counties since the inception of the fund. James Wachihi, Nyeri CEC member in charge of agriculture, could see no clear reasons for the low uptake of the fund.
According to Ngugi of Thika Coffee Mills, the government should confine itself to ensuring a conducive environment for increased production and promote marketing. The private sector has enough resources, he observed, adding that the government should encourage millers and other industry stakeholders to get involved in increasing coffee production through estates or by contracting farmers and providing them with farm inputs and other services via the cooperative societies to which they belong.
The existing environment does not leave room for such an arrangement since there is no guarantee of securing the raw material from the farmers once the support has been provided. Production has been in decline due to lack of resources and high poverty levels among the smallholder farmers, the high costs of farm inputs, and the lack of a supportive framework that would include the provision of extension services.
Under the repealed Coffee Act, commercial millers could give farmers credit in the form of money and farm inputs to be recovered from the proceeds of coffee sales.
Farmers have also divested from coffee to go into other lucrative ventures. Coffee is now grown in 33 counties, the major coffee-growing counties being Kiambu, Kirinyaga, Nyeri, Murang’a, Kericho and Bungoma. In 2020/21, the coffee sub-sector recorded a 6.4 per cent decline in production, down from 36,873 tons to 34,512 tons of clean coffee – particularly in the high-production counties. Kiambu, the biggest coffee-producing county, saw estate farms record a decline in acreage from 12,627 hectares in 2019 to 10,520 in 2021, with cooperatives recording a drop from 11,724 hectares to 8,585 hectares during the same period, according to AFA numbers. In much of the land lost, coffee ceded ground to real estate.
The KSh4 billion fund may have political connotations. It comes at a time when the sector is undergoing political turmoil, with the current efforts by Deputy President Gachagua, who is spearheading reforms in the sector, receiving divided views from various actors. The fund was created after President Ruto offered the six government-owned sugar millers in western Kenya a KSh117 billion lifeline. Mathioya Member of Parliament Edwin Mugo and Kiambu Women Representative Gathoni Wamuchomba decried the move publicly.
Buyers and traders have also kept away from the Exchange due to the confusion reigning in the licensing regime. In August this year, auctions dropped by over 95 per cent, reaching only 192 tons compared to over 4300 tons in the same month last year.
A significant amount of political goodwill is needed to revive the coffee sector. The county governments, which will implement national government policy on agriculture as prescribed in the constitution, must create synergies and integrate all stakeholders in implementing multi-pronged measures in order to put back cash into the farmers’ pockets. Given the resource constraints at both the national and county government levels, the focus should be on creating a conducive environment for the private sector to drive the ongoing efforts to revive the coffee sector.