Markets & Finance

Crisis looms as rural economy is hit by a dip in cash crop prices

coffee

A woman picks coffee berries at a Nyeri farm. Coffee earnings have dropped in the first quarter. FILE

Prices of key agricultural commodities that support rural Kenya’s economy plummeted in the past six months, eroding the incomes of millions of households and raising the prospect of increased poverty countrywide.

The latest official data shows that farm gate prices of milk, tea, coffee and sugar cane dropped by more than 20 per cent in the first quarter of the year, reducing the incomes of close to two million households that derive their incomes directly from the produce.

The producer price of milk fell 25 per cent from Sh40 per litre in December to Sh30 at the end of March while the farm gate price of sugarcane dipped 28.6 per cent from Sh4,200 to Sh3,000, reducing the farmers’ earnings by similar margins.

Tea prices at the weekly auctions dipped by nearly 30 per cent from last year’s peak of Sh389.87 per kilo to an average of Sh237.73 per kilo last month.

Similar movements have been reported at the Nairobi Coffee Exchange where prices have continued to drop in the first quarter of the year despite rising global demand that has kept prices fairly high in the international market.

READ: Coffee, tea farmers hit by fall in prices to seven-year low

Economists said a prolonged depressing of commodity prices could widen the rural-urban wealth divide as rural incomes collapse and dependency ratio grows.

“The fact that prices of major commodities are declining by wide margins at about the same time presents a very alarming scenario,” said Matthew Muma, a policy analyst at the Kenya Institute of Public Policy Research and Analysis (KIPPRA).

Mr Muma said the scale of unemployment arising from loss of farm jobs could pile the pressure on rural dwellers to leave for the towns and frustrate any efforts to put the country on a more balanced development path through the devolved system of government.

The government disbursed Sh194 million to the 47 counties as part of a plan to promote equitable development across the country.

“If prolonged, we are likely to see more farmers abandoning time-tested crops for high-value ones like horticulture or purple tea which may not necessarily be suitable for their localities,” Mr Muma said.

Black tea remains Kenya’s top forex-earning crop that raked in Sh114 billion last year. Horticulture, which earned the country Sh84 billion, came in second while coffee netted Sh22 billion during the period.

READ: Horticulture export earnings drop again

The small-scale farmers who form the backbone of Kenya’s agriculture sector have been hit particularly hard by the fall in commodity prices.

In the tea industry, which supports about 300,000 smallholder families, prices have plummeted in the wake of increased domestic production and instability in Egypt — one of the key markets for black tea.

Data from the Kenya National Bureau of Statistics (KNBS) shows that production of tea rose eight per cent to 44,970 tonnes in January.

Officials say the aftershocks of the price volatility have spread far beyond the farm gates to the savings and credit cooperative societies (saccos) that advance loans to the growers.

The saccos are currently grappling with a growing number of farmers who are unable to meet their loan servicing obligations within the agreed period.

“We have been forced to reschedule the loans by up to one year for a good number of farmers who are unable to repay their loans,” Edwin Chepkwony, the executive officer of the Nandi Hekima Sacco, told the Business Daily in an earlier interview.

Unlike tea and coffee whose prices are dictated by international markets, sugar and dairy industry insiders blame poor handling of increased supply resulting from favourable weather and illegal imports for the collapse of prices.

“For sugar, the market is full of illegal imports that are increasingly finding their way onto the shelves of major retail chains,” Kenya Sugarcane Growers (KSGA) secretary-general Richard Ogendo said on Monday.

Sugar cane production has risen steadily in the past three years even as factories scale down their operations (and demand for cane).

Cane production rose from 5,716.3 thousand tonnes in 2012 to 6,671.7 thousand tonnes last year, according to KNBS data. 

Local factories have, however, lowered their monthly production, processing 53,994 tonnes in December compared to 54,752 tonnes in November.

The price of a tonne of sugar cane is tied to the ex-factory price of a 50 kilogramme bag of sugar that currently stands at between Sh3,000 and Sh3,100.

KSGA officials said 453,000 farmers who are directly dependent on sugar cane are running out of options as ex-factory prices continue to fall below economically viable levels.

Sugar cane farmers get loans from the millers to buy inputs and prepare their farms on the understanding that the money would be deducted from their earnings.

It is currently estimated that about 37 per cent of sugar cane farmers’ earnings go to settling transport expenses even before the loan deductions are made.

“The current pricing means most small-scale farmers are ending up with negative balances yet they have households to run,” said Mr Ogendo.

Last year, a 50kg bag of sugar sold at ex-factory price of Sh7,750 or more than double the current price.

The farmers have also questioned the high per capita sugar consumption that stands at 22 kilogrammes per person per year in Kenya compared to global average of 14 kilogrammes. 

READ: Sugar brokers gain as prices drop to Sh60

The KSGA officials believe the overstatement of figures is meant to open the flood gates of industrial sugar imports (fixed at 10 per cent of annual consumption), most of which end up on retail shelves.

“The just-negotiated extension of Comesa safeguard measures ending next year demands that the sugar industry must begin to do things differently,” Agriculture principal secretary Sicily Kariuki told industry players at a recent workshop.

The fall in prices of the four main agricultural produce exposes at least 10 million people, who derive their income from a value chain that stretches from farming, manufacturing, marketing and transportation to increased impoverishment.

The dairy sector, which has 150,000 farmers, and coffee, which employs 150,000 farmers, are all battling falling prices. 

The fall in milk prices has particularly hit farmers in Rift Valley, Central, Eastern, Coast and Western regions hard.