More firms licensed to market Kenya’s coffee

State-backed marketer KPCU’s dominance of coffee dealership is set to come under a renewed attack as the government moves to open the gates to a large number of private players into the lucrative business.

Beginning next month, more than 40 private companies will fight it out in the marketplace for a share of the Sh7 billion business most of which has been under the Kenya Planters Co-operative Union (KPCU), raising hopes for better pricing for growers.

State-backed outfit, the Kenya Co-operative Coffee Exporters Limited, is among new players who have been gazetted as qualified for licensing as marketing agents and dealers during the 2009/2010 crop season.

Seven companies have applied for licensing as marketing agents – signalling the level of competition that old players will be up against. Some 34 new companies have also applied for dealership licenses while two firms want milling permits.

Coffee farmers already have eight marketing agents and 63 dealers for their produce but many have complained that cartel-like behaviour among these players has prevented the benefits of better world pricing from trickling down to the farm gates.

“Our intention is to enable the applicants to offer services as specified in licences applied for,” Coffee Board of Kenya (CBK) managing director Loise Njeru said in a notice.

The entry of Kenya Co-operative Coffee Exporters Limited and other new players is however expected to trigger changes in the marketing and dealership platform with farmers as the main beneficiaries in terms of lower charges, better services as well more competitive pricing.

“This is a deliberate move by the government to lock out ineptitude. The writing is on the wall for the once dominant but inefficient players who have failed to deliver better services at competitive prices,” an industry player Etiene Delbar said.

CBK also said the action is aimed at breaking the cartels that dominate the dealership and commercial coffee marketing in Kenya.

Good news
“The good news is that more players want the marketing and dealer licences. Even better news for the industry is that the new export company is among those making an entry in the segment for commercial marketing and dealership that has for long been abused by cartels,” said a source.

The entry of Kenya Co-operative Coffee Exporters Limited comes as a victory for the Co-operative Development ministry that has been championing it in response to widespread outcry from growers who feel cheated of their earnings by unscrupulous brokers.

The misery of growers has been further compounded by the shaky co-operative societies and millers who have failed to pay farmers promptly after selling their produce.

Co-operative Development minister Joseph Nyagah said the state-backed marketer and dealer will be financed by the Co-operative Bank of Kenya to sell produce at the most competitive rates and farmers are promptly paid.

“It will seek the best prices in the market and the bank will pay the farmers on delivery,” he said. Co-op Bank has set aside Sh1 billion to pay farmers on delivery.

Ministry of Agriculture officials said “teething problems” in the re-organisation of the troubled KPCU had necessitated the new move.

“This is about opening alternatives other than KPCU to market coffee. The government is keen to help growers, who are crippled by KPCU problems, recover,” Mr Delbar told Business Daily.Run-ins between the state and the giant KPCU are however not new.

In 2007, the government in a surprise action that almost sounded the death knell for the state-owned firm threatened to block it from offering services to its 700,000 members mainly comprising small-scale farmers, pending the clearance of outstanding debts owed to various State agencies such as the Coffee Board of Kenya (CBK), the Coffee Research Foundation (CRF) and farmers.

Though KPCU made a formal application for a milling licence for the 2007/08 season, regulators have demanded that its management offers a permanent solution to persistent debt problems.

Top among the complaints leveled against KPCU is that it has for decades collected cess but failed to remit the same to the relevant authorities. It has also been accused of marketing coffee on behalf of growers but failing to pass the proceeds to them.

KPCU won the war after the government licensed it on “humanitarian grounds” citing the suffering of farmers.

The two parties had yet another showdown early this year when the Government ordered that KPCU be locked out of the weekly Nairobi Coffee Exchange (NCE) over a Sh50 million debt. The dispute landed in court before the parties opted for an out- of- court settlement.

KPCU managing director Gerald Masila however said the differences with the regulator had been settled and the company is headed for good 2009/2010 season.
He said that although the government tipped the Kenya Co-operative Exporters Limited to help reform the industry, the firm may find it a tall order shoring up sufficient volumes for trade.

This is because the new firm is making an entry into the scene as a commercial marketing agent without direct link with the growers.

Critics of the new state-backed company have also argued that the fundamentals that drive the market are “free playing” and would not be influenced by the entry of an individual company or group of them.

“Apart from the large number of new entrants we don’t expect much because what drives pricing is not dependent on the number of players,” a dealer at the NCE said.

Industry inquiries however revealed portions of growers were already angling towards the new company amid anticipation for better earnings and services.

Proponents of the new company have leveraged on the partnership with Co-operative Bank, saying it guaranteed professionalism and ethical business practices unlike has been the case in past where growers remained at the mercy of brokers. Co-operative Bank has since seconded Ms Lucy Murumba to the new company as chief executive officer.

The Economic Survey 2009 showed that the coffee sub-sector registered a 21.3 per cent decline in production from 53,400 tonnes in 2006/07 to 42,000 tonnes in the 2007/08 crop season mainly on effects of weather.

The industry has also witnessed general decline in productivity on reaction by farmers disillusioned by low earnings even when other international players enjoyed firm earnings.

Lack of financing facilities to support good crop husbandry has also impacted on the fortunes of the industry as cash starved growers turned to other cash crops deemed easy to manage.