An age-old conspiracy between regulators, millers, traders and brokers has deliberately kept Kenyan coffee prices down – even as our top grade Arabica variety continues to fetch premium prices at the international market.
Billions of shillings which could have been paid to local farmers end up in the pockets of these networks as farmers’ harvests are sold at knockdown prices at the Nairobi Coffee Exchange (NCE).
NCE is where Kenya’s coffee is traditionally auctioned to those holding dealer licences, previously issued by the Coffee Board, now Coffee Directorate.
This conspiracy, which involves the world’s largest coffee buyers and their local networks, is ironically supported by the Coffee Act that favours the top cream of the coffee industry — the brokers, the millers and the traders — and frustrates any new entrant not associated with the network.
Today, we reveal how this network functions and why it is partly to blame for the collapse of the coffee sector. We also reveal why the future of the coffee industry is at stake – and why local farmers have no chance in the current system unless there is an overhaul of the Coffee Act.
Over the years, these cartels have been stemming competition by positioning themselves at vantage points where they control the chain by building some sophisticated structures. They have made sure that they get Kenya’s coffee — the world’s second most lucrative commodity, second only to oil — at a cheap price.
Some seven years ago, the Coffee Act allowed the holding of multiple licences by the same firms which made nonsense of the level playing field at the Nairobi Coffee Exchange auction. When the whistle was blown in Parliament over this mischief, the law was changed.
But these companies, which share directors, have continued with their operations. With personal interests cutting across the firms, we are having a situation where companies holding miller licences also have marketing and dealer licences which has created a cartel or network in the industry and possible price-fixing at the Nairobi Coffee Exchange.
Smallholder farmers hardly know the implication of this arrangement.
“When you take your coffee to the miller as a co-operative society, he will grade your coffee and hand it over to your appointed marketing agent. In a case where the marketing agent is the same as the miller, they can collude on the quality of your beans which lowers the value. The marketing agent will collude with the dealer (also associated with the miller) and they will deliberately put a price that no other dealer would take or they will purchase the pseudo-low grade coffee knowing its full value,” says an insider.
When we visited the NCE sample room at Nairobi’s KPCU Plaza, we found samples taken from different lots arranged on the tables.
“The samples are what the various marketing agents take to the NCE as the true records of what is inside the bags,” said NCE chief executive officer Daniel Mbithi.
These samples are what inform the price the dealers pay for a particular lot. And since marketing agents are not paid by the quality but by the volume of coffee they sell, they take little interest in the grading.
Once farmers’ coffee has been sold, the dealer can add value to it through re-grading, sorting according to texture and colour, gravity separation, hand-picking and blending to match the needs of his customers. The same coffee could earn him more millions — which is never passed to the farmer, thanks to the pseudo-grading.
But NCE says that they are not to blame
“Farmers should take an interest in what happens to their coffee from the time they deliver it to the miller up to the time it is put on auction,” says Mr Mbithi.
It is this failure to follow up on their coffee that gives the marketing agents, who are the appointed brokers, a chance to rig the market.
Seven years ago, the government was asked whether they knew of this cartel. Interestingly, they knew:
“…The ministry knows exactly what is going on! You find that a company is licensed to market coffee, another one is licensed as a dealer…and they are the same people. All they do is register the name of a brother or a sister in the two sister companies. There are a lot of things that are going wrong…,” then assistant minister for agriculture, Kariuki Muiruri told Parliament.
But nothing changed. We have been informed that insiders in former President Mwai Kibaki’s government deliberately frustrated efforts to streamline the coffee sector.
“We almost managed to bring down this cartel. But they regrouped after Mr Kibaki was elected and that is why we are in a mess. The Narc administration had zero-interest in coffee and some of the Kibaki-government advisers and ministers had personal interest in the status quo,” says Njehu Gatabaki, the former Githunguri MP who led Coffee Tea Parliamentary Association (Cotepa) which was fighting for transparency and accountability in the tea and coffee industry.
“We told the government that this auction (Nairobi Coffee Exchange) is monopolistic. We wanted a situation where the farmer co-operatives were strengthened. We asked for our Cotepa members to be appointed into key coffee institutions to manage change. Nobody was interested,” says Mr Gatabaki. He finally gave up.
“I was the last coffee spokesman. Coffee is a very sad story,” says the retired politician.
The departure of Cotepa saw the strengthening of the Kenya Coffee Traders Association (KCTA) which was registered on April 17, 2002 in the dying days of the Moi regime.
KCTA brought together millers, marketing agents, warehouse men, coffee equipment suppliers and transporters and became the new voice of the upper echelons, the coffee connoisseur’s — or rather the wealthy part of the industry.
“The founders of KCTA wanted to run the Nairobi Coffee Exchange. They knew that if they controlled the coffee market chain at this level, they would determine the pricing and get the best beans at the lowest price,” says a source who used to attend the meetings.
While the Coffee Board was supposed to stand for the farmers and regulate the market, it for many years become an interested party by buying shares at the Kenya Coffee Auctions Ltd which was the monopoly auctioneer from 1950s until 1997.
Most of the founders of KCTA were foreigners connected with big coffee roasters in Western markets and had one desire — to get best quality beans at a cheap price. They had all defected from Mild Coffee Traders Association (MCTA), a body which had its roots in colonial Kenya and was led by a local coffee baron Abraham Mwangi.
With their departure, MCTA was left to inconsequential players in the coffee chain— mostly the under-funded locals. It went on to collapse and die. MCTA used to be powerful.
“During its heydays, one could not get a dealers’ licence without its approval,” says a source.
By 2004, the government allowed the three main millers — KPCU, Thika Coffee Mills and Socfinaf— to have marketing licences. This worried the industry and they said as much.
“The swelling cartel of coffee brokers was not very much bruised by the coffee marketing liberalisation…This is tantamount to taking away the premium bonus from the farmers to coffee racketeers,” Mike Maina, the owner of the giant Kibubuti Estate, said in a paid up advertisement in 2004.
“It is now not a secret that coffee produced and auctioned in Kenya does not arrive at the global markets as Kenya coffee…dealers proceed to blend the low quality coffee sourced from neighbouring countries with the premium Kenya tags,” he said.
Today, a lonely board listing MCTA’s past leaders hangs like a memento at the entrance of NCE. What used to be a floor with lively coffee activities looks ghostly. Even those who were insiders in the Kibaki government are now worried.
“Unless something is done quickly, there will be no coffee industry worth talking about in the next 10 years. The only people who are benefiting today are the private millers and their associated companies,” says Njeru Ndwiga, a former minister for Co-operative Development and Marketing. “What should be put in place is a coffee economic bloc and a strong co-operative movement. But the Jubilee government also killed the Co-operative ministry.”
A dealers licence is one of the most important documents in the coffee chain. Only those holding this licence can buy coffee on behalf of the big roasters at the exchange.
With KCTA in place, the blue-chip traders made sure that the small players were edged out. To be a full member, according to KCTA rules, an exporter must have purchased 0.25 per cent of all auction supply while a marketing agent must have had five per cent supply to the auction.
“This is how the small players lost the game,” says our source.
Unknown to many, KCTA was formed by the multinationals through their local networks to regulate the trade shortly after Cotepa stopped their parliamentary campaigns ahead of the 2002 general election. But there was one hurdle which the coffee multinationals had to jump over to get the auction back in their hands.
Following the liberalisation of the sector in 2001, the government had set up the Kenya Coffee Producers and Traders Association (KCPTA) to run the coffee auction. Its members were drawn from coffee growers’ organisations, millers, marketing agents, brokers, auctioneers, dealers and warehousemen.
This, for the first time, was to give farmers a say in the coffee chain. Also, some new millers had entered the market, increasing competition and disrupting the old networks.
Interestingly, KCPTA took over coffee auction functions from the Coffee Board and who controlled this body became the next battleground for both local barons and their Western counterparts. The battle was for control of Kenya’s coffee billions.
Insiders say that none of the two groups, MCTA and KCTA, was pro-farmer and they organised a coup within the new KCPTA by putting their own members in powerful positions.
Powerful dealers, today associated with KCTA, and led by Taylor Winch (Coffee) Limited, Sangara Commodities and Josra Coffee started complaining about the running of NCE and sought the removal of KCPTA.
“None of these two groups cared about the interest of the farmer. They wanted to control this lucrative market,” says a source who was working with one of the millers.
In May 2009, then Agriculture minister (now Deputy President) William Ruto had promised to do away with the auction system in a year’s time.
“This is a pipe-dream,” said Dirk Sickmueller, a major dealer at the exchange who trades under Taylor Winch (coffee) Limited in a published interview.
When the elections for KCPTA were called in 2012, a group sponsored by a powerful central Kenya miller took all the positions which meant they now had the auction.
“The small guys carried out a a coup to make sure that they can vote despite the quantity of coffee they delivered. That is how the Kisii Coffee Union got an auction number,” says an insider.
After this take-over, the Minister for Agriculture removed KCPTA from managing the Nairobi exchange and gave the powers to an exchange committee.
The matter ended up in court and Justice David Majanja acknowledged that “ there are serious disagreements and divisions among the stakeholders in the coffee trading industry” but refused to dwell on that. He allowed the removal of KCPTA arguing that the Coffee Act gave the minister those powers.
This meant that farmers were no longer directly represented at the NCE. In all these, the loser is the coffee farmer and the winners are the coffee multinationals which buy Kenya’s premium coffee for a song.
Email: [email protected], Twitter: @johnkamau1