What drives the agriculture pricing of maize, potatoes, and milk in Kenya? Part I of a post by @kwambokalinda of M-Farm
In commercial agriculture, as in any business venture, the aim is to make a profit on an investment, within the environmental and policy framework available for the sector. It is, however, not in question that there exist unsavoury practices practically the world over. Recent potato, maize and milk shortages in the weeks between March 2017 and the present day illustrate as much.
That said, it is pertinent that fault is placed where it lies, and speaking to traders in the Kenyan potato, milk and maize value chains, it was gathered that low rainfall in November 2016, as well as with the rains in April, led to price fluctuations in the weeks after February 2017. Mitigating circumstances lowered prices during the same period, when traders sourced their produce in areas that had rainfall in November 2016, such as;
- In the case of potatoes, this included Narok and Mau Narok, which are blessed with forest rains and fertile lands in Tanzania.
- With milk, rains in April meant that costs to access to main roads went up – and with farmers unable or unwilling to ease traders’ burden, the costs are being transferred on to consumers.
- As for maize, a 90-kilo bag which a farmer sold at Kshs 2,200 in December, had doubled by March 2017: Meanwhile, millers have been consistently buying the maize at Kshs 4,700 per bag
We have to remember to factor such matters into our plans and budgets as Kenyans. Also, we have learned that it takes the government a lengthy period to act or even plan for such occurrences. It would help to have neutral sources of data alongside that of the government to help shape the response to food security challenges in Kenya.
See also, Secrets of a Farm Middle Man
$1 = Khs 103
Many people in Nairobi and other towns and in the diaspora are ‘telephone farmers’. These are people who own or have bought, or inherited land, buildings, equipment on rural farm that they now support. They send money a few times a month for salaries and for operations of agricultural ventures that never seem to have any significant payback.
The owners probably read the Saturday newspapers with envy as they see other farmers holding up rabbits, bananas, watermelons or other bounty from their farms which earn them thousands of shillings every week or month.
The difference between them and the typical telephone farmer is that they are active investors as farmers, not passive which is what a faraway telephone farmer is. That leads to the first point about telephone farming.
- The goal of telephone farming is asset preservation, not income generation, and doing some economic activity on a distant farm protects it from invasion by squatters or grabbers.
- The social aspect: Telephone farming sustains the local community; it keeps a line of communication open and allows for the community to have a stake in the preservation of the asset as they go about their business. The picture (above) depicts what should be a banana farm, but clearly the beans the workers are growing in the same field are doing much better. There might be pilferage, misuse of equipment, or other losses: but they should be within tolerable limits and not erode the underlying assets.
- The costs of farming are much lower for telephone farmers compared to other businesses investment in urban areas. E.g. labour costs are much lower: an amount of Kshs 2,000 is a salary on many farms, but that could be an electricity bill in Nairobi.
- A good rule of thumb for the telephone farmer is to be present at the farm during major operations like planting and harvesting.
There was a weekend discussion over this article by the standard which looked at the different prices paid by the Kenya Tea Development Agency (KTDA) as tea bonuses to farmers in different parts of the country. KTDA had just announced a record Kshs 84 billion earnings from small holder tea farmers for the year, a 32% increase of which 62 billion will be paid out to tea farmers ar a rate of Kshs 50 per kilo on average. (25% covers the costs of production). Few could believe that farmers in Ketch, the widely accepted centre of Kenya’s tea could earn half of what farmers in other regions get.
(source: KTDA site)
The Standard had a story had headline blame your tea for low pay, South Rift farmers told and in it
- Farmers in Kericho and Bomet have complained of low bonuses they expect (South Rift farmers will only receive Kshs 13 billion). KTDA’s region five comprises Kericho and Bomet counties with seven tea factories and an equal number of satelite factories. From the region, the highest paying factory, Momul, will give farmers Kshs 35 per kilo of green leaf as bonus, while the lowest paying, Litein and Chelal, will pay Kshs 26 per kilo. In the Eastern region, also known as Region Three, however, the highest paying Munuga Tea Factory will pay suppliers Kshs 48.35 per kilo of green leaves as bonus.
- A farmer threatened that they would break away from KTDA and establish a new tea auction in Kericho. “There is no doubt that Mombasa Tea Auction is controlled by cartels who manipulate tea prices.
- Kericho Governor Paul Chepkwony says they will source for tea markets in the US, UK, China and West Africa. “Our idea is the direct tea sale concept, which has been tried successfully by the management of Kokchaik Sacco which, through Finlay’s Tea Company, earns $3 (Kshs 303) per kilo. There is no reason at all why KTDA should pay farmers as low as Kshs 26 per kilo of tea as bonus,” says Chepkwony.
- Richard Cheruiyot, a former KTDA executive operations director, lamented that..there were still numerous taxes and levies being charged on tea (which all amount to about Kshs 6.10 per kilo of tea annually)
(source: KTDA site)
This is not the first time the variance has been challenged and last year KTDA published a piece explaining the tea bonus calculation:
- Each factory had a specific rate (bonus) which it pays to its farmers based on the factory directors’ approval.
- KTDA is a tea marketing agency..owned by smallholder farmers who hold shares in their respective tea factories .. and 560,000 smallholder tea farmers in Kenya are shareholders of KTDA through their factories.
- It is important to note that farmers receive monthly pay at the rate of Kshs 14 per kilogram of green leaf delivered to the factory in addition to the 2nd payment (bonus).
- Factories process varied volumes of tea depending on the size of the catchment areas and the volumes of tea produced. This determines factory capacity utilisation and hence cost efficiency.
- Teas from the factories also fetch different prices at the markets – either through the auction or direct markets. Consumer preferences also affect pricing, with some markets preferring teas from specific factories. The quality of green leaf is further determined by ecological and climatic features such as types of soil and quantity of rainfall, as well as the quality of farm management practices such as application of fertilizer, pruning and plucking. Further, the cost of production varies from factory to factory based on labour and energy efficiencies, cost of credit and investment income.
- Factories with expansion projects that are financed by loans will incur higher finance costs than those which are not expanding. Given the current interest rates regime, such costs can be substantial. On the other hand, factories with healthy cash flows and which have no need to borrow will ultimately invest their surplus and earn more income. It is this combination of factors that determine what income individual factories pay their farmers.
An older article in the Nation on tea bonuses mentioned:
- (that) Historically, factories around the Mt Kenya region have fetched higher payments than those in western Kenya based on a skewed marketing concept and buyer preferences at the auction.
- (also that) Factories west of the Rift Valley are highly indebted to banks for loans to expand processing capacities to match increased acreage.
- 11 factories in the Western Rift are satellites (do not enjoy full status) which means they cannot market their tea at the weekly Mombasa auction, and neither can they elect directors.
Finally, the 2016 Kenya Economic Survey noted that:
- The area planted with tea increased by 3.2% from 203 thousand hectares in 2014 to 209 thousand hectares in 2015, primarily from small holders. Despite the increase in area under tea, production decreased significantly by 10.3% from 445.1 thousand tonnes in 2014 to 399.1 thousand tonnes in 2015.
- The unit price of one Kilogram of tea recorded 42% increase to Kshs 293 in 2015 due to international supply constraints.
- Tea was the leading source of foreign exchange with revenue from the commodity rising by 31% to Kshs 123 billion in 2015.
$1 = Kshs 101
The middle-man* is widely derided, as one of many layers of between farmers and consumers, who squeeze the farmers prices lower, and increase the cost of foods to consumers. But what does a middle man-do, and why do they do it?
- The money is insane. e.g. Middle-men get paid Kshs 50 per (90kg) sack of potatoes at the village, and others get Kshs per sack at the market. With every lorry having over 100 bags, a middle-man can make over Kshs 10,000/= per day just dealing at a market. But how much he /she has to share this cut, with others around the market system is another story.
- Taxes: Cess/market fees are paid at the market of origin only. Along the highway, there are weigh-bridges, but lorry with perishable items can’t afford to stay and queue while items go stale or rot. So they pay Kshs 2,000 per lorry to bypass the weigh-bridge, and they don’t have a cess receipt, its Kshs 1,000 to pass a police road block.
- The farther the market is from the farm source, the bigger the profit for the transporter or middle man e.g transport all the way to Mombasa, or to Tanzania where a lot of Kenya produce ends up, and vice versa.
- It does not tolerate strangers. A farmer can’t just drive up with his lorry, and expect buyers to embrace him/her. It can even be murderous.
- It’s a relationship business. They have to network & know where to find and sell produce and deliver on time.
- Middle-men value and deliver on quality. If several lorries are waiting to clear at at a market, they can choose the ones with produce from a certain area that is desirable compared to that from others. Also lorries with produce from single farms are desirable over those collected from many different farmers or areas.
Middle men travel far to search for farm products.
- We are the reason they exist. Hotels and restaurants need food like chips every day of the year, regardless of where the potatoes come from. The middle-man economy ensures that this happens.
- The business is hard work. The trades and operations are done very early in the morning, and end at about sunrise. This may tie in with the Equitel loans that start at 1 a.m. peak and are disburse by 5 a.m. before Equity Bank branches even open. When you visit a market in the day time, you see retail trade & prices, while the wholesale business has already been completed.
- There is honor in this: Middle-men will under-cut each over deals, but will not cross each other on payments, which they do via mobile money or bank deposits.
- When farmers talk to middle-men about the money they make, some immediately want to abandon farming, while forgetting that they have one resource that the middle-man doesn’t – their land.
- * There are lots of women in the business – so middle man can also mean middle woman
- $1 = Kshs 100