Kenya Coffee Reform is Pioneering a Sustainable Coffee Value Chain for a Thriving Future

Photo Credit- MARA COFFEE EXPORTS

In January 2023, the Kenyan government made a change. They put the NCE under the control of the Capital Markets Authority (CMA) in and effort to strengthen the Kenya’s coffee value chain. This means that licensed brokers, not private millers, now handle tasks like classifying coffee and getting it ready for sale.

The previous value chain was long and consisted of several consolidations that made it easy for the prices to be manipulated for the benefit of the large corporations and too much pain for the coffee producers.

A smallholder farmer would join a wet mill commonly referred to as a factory. The farmers own this wet mill and are usually part of a Cooperative society. A cooperative society is made up of one or more factories.

The factory’s main mandate is to offtake coffee cherries from the farmers, process, store and hand the processed coffee to the millers for further processing. 

The millers would then receive the coffee from the cooperatives for milling, grading, bagging, temporary warehousing, and preparation of milling statements for the farmers.

After the milling process is done, the coffee is handed over to the Marketing agents. That concluded the involvement of the millers but was not the end of the value chain as the millers were still to be involved in the payments.

Marketing agents were entities charged with the task of presenting coffee on behalf of the farmers to the auction. Marketing agents would draw 9 kilos of each coffee lot that they were to present to the auction and this would be distributed to all the participating coffee buyers.

Each marketing agent was appointed by the cooperatives in an annual general meeting before the beginning of each coffee year which starts on 1st October. The marketers would compile all the coffee under their charge onto a Catalog which would then be available to the participating coffee buyers.

After a successful sale at the auction, the marketers would invoice the buyer and after payment, they would issue coffee warrants to signify the change of ownership from the farmer to the buyer.

The payment process began after the successful sale with the buyer paying the marketing agent. The marketer would then deduct their fees from the proceeds and remit the money to the miller who would deduct their fees as well and the remainder would be deposited to the account of the cooperative who would determine the coffee rates to be paid to the farmers.

Watson Njugi has been farming coffee in Kirinyaga for over 20 years and knows all about the production sector. He says, “The biggest problem is not just prices. Poor prices but also the delay before we get paid is a huge disappointment”.

Watson explains that they would sometimes wait for over 5 months before they were paid for the previous season’s crop. This, he says, is a huge challenge because the farmers need the money to prepare for the new season. The money is needed for inputs, chemicals, labor among other things and for daily expenses.

In Summary

• A farmer delivers cherries to the Wet Mill for processing.
• Wet mill primary processes, dries and hands the parchment to the Miller.
• Miller mills, grades and bags and delivers to the Marketing Agent.
• Marketing Agent arranges for warehousing and offers the coffee for sale at the auction.
• Coffee buyers buy from the auction and payment is made to the Marketer.

Challenges.

The setup was in such a way that collusion of the sector was possible with a coffee miller being a coffee marketer and a coffee buyer at the same time. Firstly, it requires significant financial resources to establish and maintain multiple companies. Owning and operating businesses in different stages of the value chain can be capital-intensive, requiring investments in infrastructure, equipment, and skilled personnel.

Moreover, there is a potential for conflicts of interest. As the miller is simultaneously a marketer and a buyer, there is a risk of favoring their products over competitors’. This could lead to anti-competitive behavior or exclusion of other market players, which may be detrimental to the overall market dynamics.

There might also be concerns regarding concentration of power. Owning multiple companies in the value chain can give the miller significant control and influence over the market. This concentration of power could hinder competition and innovation, potentially leading to higher prices or limited choices for consumers.

Overall, while owning multiple companies in different stages of the value chain can offer advantages such as increased control, coordination, and cost savings, it also poses challenges related to conflicts of interest and concentration of market power. The success of such an arrangement depends on effective management, good governance, and adherence to fair competition practices.

This would create avenues for collusion and manipulate the prices offered at the auction with most of the coffees being undervalued to the detriment of the farmers’ earnings.

This is one of the major changes that the current policies seek to eliminate. Very few companies controlled the entirety of the coffee value chain in Kenya which led to very low prices with thousands of farmers getting very discouraged to a point where they uprooted their coffee bushes.

Coffee production has been on a downward trend for the last few years and farmers opted for higher-grossing crops such as macadamia and avocados. Subsequently, the quality produced plummeted owing to the high costs of production and erratic weather conditions.

Direct trade was introduced as the “Second Window” option of coffee trading in Kenya to try and lessen the grip the consolidation had on the sector. Still, the efforts have continually been frustrated by the entities who viewed the freedom of the farmers as a threat to their dominance with direct trade contributing less than 10% of the total amount of coffee traded in the country.

New Dawn

The government formed a coffee reforms task force to try and streamline the sector and empower the farmers. Earlier this year the reforms began getting implemented and threw the sector into chaos and confusion.

The Kenyan Deputy President has been leading the reforms. DP Rigathi Gachagua says, “We are taking back our coffee from the cartels who have for a long time benefited from the sweat and efforts of honest farmers”.

He says that the government plans on revitalizing the KPCU (Kenya Planters Coop Union) to enable the farmers to market their coffee more efficiently. He added that the government plan will also strengthen the Coffee Research Institute.

Many licenses were rescinded while others were revoked with re-licensing requiring rigorous vetting before it was reissued. Licensing is ongoing with strict oversight of the affairs of the licensees to ensure conformity to the regulations.

One of the major highlights of the new policies is the introduction of the DSS (Direct Settlement System). This ensures that the farmers are paid promptly after a successful sale of their coffee.

The settlement system allows for direct deposit of funds from the buyers to the seller – producers – within a day. A settlement account has been established where all the proceeds are deposited with a requirement of having Zero balance at the end of the business day.

This offers a solution to the longstanding issue of farmers having to wait several months to receive their payments. This delay has disrupted farmers’ financial planning, forcing them to rely on loans to cover the costs of fertilizers and other essential agricultural inputs. The new system will ensure timely payments to farmers, enabling them to make informed financial decisions and eliminate their reliance on debt

Another notable highlight of the new reforms is the abolishment of the office of the marketing agents. These have been replaced by licensed coffee brokerage firms that are responsible for selling the coffee at the auction on behalf of the farmers.

Counties that are major contributors to coffee production are obtaining licenses to present their unique coffee varieties at auctions. This practice not only enhances transparency but also fosters the independence of the farmers involved. Additionally, these counties have gained the authority to provide substantial support to farmers and administer licenses.

With the new process (Auction)

• Farmers deliver cherries to the cooperative.
• The cooperative arranges for milling and payment to the farmers.
• Coffee brokers arrange for warehousing of the graded, bagged coffees on behalf of the farmers and for offer to the central coffee auction.
• At the auction, only registered and licensed coffee buyers bid for the lots on offer after which the broker invoices for the lots.
• The money is then deposited via the DSS to the cooperative’s account.

The process for direct trade remains the same where farmers with the capability to do their own marketing get in touch with buyers who buy directly from their farms. Brokers can also arrange for direct buying by connecting farmers with direct buyers.

The coffee directorate remains the regulator of all coffee trading and oversees the direct trade to ensure it complies with the regulations and to protect the producers and for arbitration.

Key Highlights of the New Reforms

1-DSS (Direct Settlement System): Farmers will now be paid directly for their coffee within a day of a successful sale, eliminating the lengthy delays they previously faced.

2-Elimination of Marketing Agents: These intermediaries have been replaced by licensed coffee brokerage firms, ensuring transparency and accountability in the coffee trading process.

3-Empowered Counties: Coffee-producing counties will now have the authority to present their unique coffee varieties at auctions and provide support to farmers.

Impact on the Kenyan Coffee Industry

These reforms are expected to have a positive impact on the Kenyan coffee industry in several ways:

1-Increased Farmer Income: Farmers will receive a fairer share of the profits, incentivizing them to invest in their farms and increase production.

2-Enhanced Transparency: The new system will be more transparent, reducing opportunities for price manipulation and ensuring that farmers are paid promptly.

3-Improved Coffee Quality: With increased investment from farmers, the quality of Kenyan coffee is expected to improve, making it even more sought-after in international markets.

Moving ahead

The nation’s coffee production was facing a multitude of challenges that demanded a radical shift in its operations. The proposed reforms are both timely and essential to reinvigorate the industry and incentivize farmers to return to full-scale production.

Eliminating the structures that have facilitated the sector’s consolidation should serve as a catalyst for its revitalization. Each stakeholder should focus on a specific area of expertise within the coffee value chain. Millers should concentrate on milling, and so forth. This specialization will foster efficiency and enhance overall productivity.

H.E. Rigathi adds, “It is not going to be smooth sailing at first, I beseech our farmers to be patient. Maybe, for one year things will be difficult but eventually, you will see the fruits. All these efforts are aimed at benefiting the coffee farmer”.

The direct settlement system presents a promising solution for farmers, enabling them to receive payments promptly and plan effectively for the upcoming season. By minimizing the number of intermediaries handling their funds, this system reduces the likelihood of misappropriation and ensures that farmers receive their fair share of the profits.

Watson adds, “we are yet to see how the DSS works, but from what we have heard, we are extremely hopeful that these problems of delayed payments will be over. Timely payments will help us a lot in planning for the new season”.