Improved infrastructure supports Kenya's agricultural exports

Agriculture is Kenya’s largest economic sector, and held its position as a major growth driver in 2015, with ideal weather conditions improving food security and cash crop export earnings. Despite economic uncertainty, the sector has been one of the most resilient in Kenya, with ongoing efforts to improve irrigation and bolster foreign investment succeeding, even as stakeholders continue to grapple with limited mechanisation and irrigation, spending cuts and insufficient value-added.

Reducing reliance on rain-fed agriculture will be a critical priority for stakeholders as they seek to maintain the sector’s momentum in 2017, with a number of major irrigation projects providing new opportunities for private sector investment. Ongoing initiatives to boost value-added production, in addition to a rising middle class within the EAC, may also see investment in food processing, manufacturing and logistics surge in the coming years, keeping the sector at the forefront of the country’s economy.

Economic Driver

Agriculture is the most important pillar of the Kenyan economy, employing roughly 75% of the population during FY 2015/16, according to statistics from the Ministry of Agriculture, Labour and Fisheries (MALF), and accounting for nearly two-thirds of total domestic export revenues.

Kenyan agriculture is dominated by rain-fed production of staple crops, most notably maise, with 2015’s El Niño weather phenomenon providing ideal growing conditions, leading the sector to resume its position as a leading growth driver, in addition to improving food security across the country. At the same time, development of high-value cash crops has driven the sector to become the country’s largest foreign exchange earner. Kenya is a major global producer of tea, coffee, fruits, vegetables and fresh-cut flowers, with the majority of its cash crops recording a positive performance in 2015.

Sector Oversight

Established in 2013 with the promulgation of the Crops Act, MALF oversees agricultural development at the national level, working in partnership with a host of directorates under the Agriculture and Food Authority, which was formally launched in August 2014 as an umbrella agency for sector-specific organisations including the Coffee Board of Kenya, Sugar Board of Kenya, Tea Board of Kenya, Coconut Development Authority, Cotton Development Authority, Sisal Board of Kenya, Pyrethrum Board of Kenya, and Horticultural Crops Development Authority. Major industry lobby groups include the Kenya Flower Council (KFC) and the Fresh Produce Exporters Association of Kenya (FPEAK), which help steer development of the country’s lucrative cash crop segment.

Lands

Equally important to the sector’s development are the Ministry of Land, Housing and Urban Development (MLHUD) and the recently created National Land Commission (NLC). The MLHUD retained responsibility for title issuance following a high-profile December 2015 court decision, but the NLC’s role as independent regulator is also set to expand, with the commission standing as one of the few agriculture departments which received a spending boost in the FY 2016/17 budget. Its priorities include an electronic land registry system which should help ameliorate longstanding challenges in land allocation that have become particularly pressing as the country’s industrial and real estate sectors’ expansion has put stakeholders into conflict with farmers and agricultural estates (see analysis).

Growth Strategy

As the sector’s primary policymaker, MALF is guided by Kenya’s Vision 2030 economic development plan, which emphasises value-added agricultural production and investment to improve mechanisation and productivity, as well as the Agriculture Sector Development Strategy (ASDS), launched under the previous administration of President Mwai Kibaki in 2009 and running until 2020, and Vision 2030’s second medium-term plan (MTP), spanning 2013-17. The ASDS aims to utilise agricultural development as a poverty reduction tool, with sectoral expansion expected to drive the number of citizens living below the poverty line to less than 25% by 2020, reduce food insecurity by 30%, and increasing the sector’s contribution to GDP by KSh80bn ($780.6m), Meanwhile, the MTP targets reduced reliance on rain-fed agriculture by increasing the amount of land under irrigation to 408,000 ha, reducing fertiliser and other input costs, and implementing regulatory reforms to streamline oversight.

Recent Growth

Agriculture was an important growth driver in 2015, matching broader GDP growth and expanding by 5.6%, according to the Kenya National Bureau of Statistics (KNBS), up from 3.5% in 2014. KNBS reports the total value of marketed agricultural production rose 11.3% from KSh333.2bn ($3.3bn) in 2014 to KSh371bn ($3.6bn) in 2015, while total earnings from crop sales increased 15.5% to KSh271.8bn ($2.7bn). In July 2016, KNBS reported the country recorded its highest first quarter GDP growth levels in five years – 5.9% – driven by 4.8% growth in agriculture, compared to the sector’s 2.9% expansion in the fourth quarter of 2015, with agriculture’s total contribution to GDP standing at 34% in the first three months of the year. The bureau attributed this to rising value addition in the tea and horticultural subsectors. FY 2016/17 BUDGET: Public spending on the sector as a percentage of total spending is set to decline, although the government remains focused on providing input subsidies, expanding irrigation schemes, and injecting capital into high-priority sub-sectors. According to a report by the International Budget Partnership, FY 2016/17’s planned KSh21.61bn ($210.8m) of spending on the Department of Agriculture comprises just 1.33% of the total budget, compared to KSh34.5bn ($336.2m) of spending worth 2% of the budget in FY 2015/16. Importantly for meat production, the Department of Livestock will receive a budget of KSh13.3bn ($130m), according to FY 2016/17 estimates, comprising 0.82% of GDP, and an 87% increase over FY 2015/16’s KSh7.1bn ($69.3m), which was worth 0.49% of total spending. The Department of Fisheries will receive KSh4.2bn ($40.7m) under the FY 2016/17 budget, a slight decline from KSh4.5bn ($44m) in FY 2015/16, meaning its share will fall from 0.31% to 0.26%.

Galana Cutback

The government is also reducing spending on planned big-ticket agricultural projects including the Galana Irrigation Project, a five-year, 404,685 ha, KSh250bn ($2.4bn) irrigation scheme involving construction of two dams on the Galana River, one on the Tana River, and a milling plant for maise. The authorities initially anticipated the scheme would transform Kenya into a net maise exporter with double the productivity per ha from levels recorded in 2014.

In January 2016 local media reported that the scheme’s budget had been cut in half, after certain components of the planned 10,000-acre farm were scaled back. Originally expected to receive KSh14bn ($136.6m) of public funding in FY 2016/17 , the scheme will now receive a budget of just KSh7.2bn ($70.3m), with Eugene Wamalwa, water and irrigation cabinet secretary announcing to the media that the government is abandoning plans for a milling plant and focusing instead on building up infrastructure in the area.

Private Sector Opportunities

However, this presents new opportunities for private players, with Wamalwa reporting the milling plant will be offered up for private development As of January 2017 government spending on the project stood at KSh2.5bn ($24.4m), with the remaining KSh5bn ($48.7m) to be funded through a loan from the Israeli government. Indeed, in the FY 2016/17 budget statement, MALF announced it was pleased by the progress recorded at the pilot project so far, with plans to irrigate a further 40,468 ha, both in the Galana area and elsewhere, under a “viable business framework that involves the private sector”. Irrigation initiatives have had a dramatic impact on rice production in the country, with KNBS reporting that total paddy output rose by 24% in 2015 to hit 119,094 tonnes, including a 30.1% production increase at the Mwea irrigation scheme to 91,624 tonnes, comprising 76.9% of total production. The gross value of rice output simultaneously rose by nearly 50%, from KSh4.5bn ($43.9m) to KSh6.7bn ($65.4m).

Value Addition

Irrigation gains will further support the long-term target of boosting value-added agricultural exports. MALF reports that production in agriculture rose from 3.5% in 2014 to 6.2% in 2015 – still low by international standards, but indicating that the government’s long-term goal of exporting value-added agricultural products is paying off.

The private sector is already active in all segments of the value chain, with a number of large multinationals maintaining operations, including Del Monte, which has invested roughly KSh1bn ($9.8m) annually in its Nairobi-based pineapple canning, sugar milling, juice processing, and cattle feed facilities in recent years, and Unilever, which owns an 8700-ha tea estate in Kerico employing over 12,000 people. Other major players include Nestlé Foods Kenya, which processes raw production into fast-moving consumer goods, investing $25m to upgrade its Nairobi production hub between 2012 and 2014, and Proctor & Allen, which opened a KSh1.8bn ($17.5m) manufacturing plant in Limuru in February 2015. Media reports from early 2015 also indicated that Kellogg’s was planning an expansion into the Kenyan market, although the company has since moved to invest in new production facilities in Egypt and Nigeria, with no new investments announced for Kenya.

Investor Attractiveness

In a bid to improve its attractiveness to international agricultural investors, the Kenyan government has undertaken a number of reforms in recent years, and the Kenya Investment Authority reports opportunities on offer to foreign investors include the planned privatisation of state-owned cotton and sugar factories, in addition to export-oriented agri-business, horticulture, oil crop processing and irrigation schemes. The country’s well-established export facilities at the Port of Mombasa are complemented by affordable labour and ongoing land reforms which will increase the availability of land, in addition to clarifying and streamlining the land acquisition process. The government has also announced a number of new tax incentives for potential investors in the horticultural segment (see analysis).

However, foreign direct investment (FDI) in the sector is not keeping pace with sectors such as utilities and manufacturing, according to the government’s Foreign Investment Survey 2015, which reports that agriculture’s share of total FDI in Kenya fell from 5.3% of total liabilities, or KSh19.9bn ($194.5m) in 2012, to 4.6% of the total in 2013, despite rising by 4.6% to hit KSh20.9bn ($203.5m) in the same year.

Current Priorities

Investment in agriculture, particularly in cash crops and irrigation schemes, is expected to rise in 2017. While the sector’s share of public spending contracted in FY 2016/17, the government continues to channel resources into expanding public irrigation schemes and providing input subsidies.

In total, KSh20.8bn ($202.9m) was allocated to irrigation projects in the FY 2016/17 budget, including Galana, the Mwea Irrigation Project and the largest of seven public irrigation projects under the National Expanded Irrigation Programme. The government allocated KSh4.9bn ($47.8m) in fertiliser and seed subsidies in FY 2016/17, and KSh1.6bn ($15.6m) for procurement of strategic food reserves, and KSh8.4bn ($81.9m) for the acquisition of offshore patrol vessels to monitor fisheries, modernise the Kenya Meat Commission, revive the pyrethrum segment, support a livestock and crop insurance scheme, and mechanise some processes. KSh1bn ($9.7m) was allocated to the Crop Diversification Programme in the Meru region, and KSh2.4bn ($23.4m) for a coffee debt-waiver programme.

Staple Strength

Ideal weather conditions in 2015 improved food security in the country for that year. Production of maise, which is the country’s largest staple crop and a critical support for hundreds of thousands of rural families, rose by 9%, from 39m bags to 42.5m bags owing to adequate rainfall brought on by the El Niño weather phenomenon, and reduced incidence of Maise Lethal Necrosis Disease. However, the value for marketed maise also fell by 11.4% from KSh9.6bn ($93.6m) in 2014 to KSh8.5bn ($82.9m) in 2015.

Other staples and cereals performed better, with KNBS reporting that although potato production fell from 2.3m tonnes in 2014 to 2m tonnes in 2015, production of beans and sorghum rose by 25% and 10.5% to reach 8.5m bags and 2.1m bags, respectively, in 2015, while wheat production rose by 4.2% to 238,600 tonnes, and wheat earnings increased by 7.9% to hit KSh8.2bn ($80m), compared to KSh7.6bn ($74.1m) in 2014. Kenya’s food self-sufficiency index simultaneously rose from 74.4% in 2014 to 75.2% in 2015.

Cash Crops

Tea, coffee, horticulture and dairy are the nation’s key cash crops, and these have also performed extremely well, with the country’s dominant cash crop, black tea, witnessing a 39.5% earnings increase in 2015, despite a 10.3% production decline, from 445,100 tonnes in 2014, to 399,100 tonnes in 2016. However, the sector is facing a host of challenges, including rising labour costs which have significantly impacted coffee production and are set to hit the tea industry in 2016, as well as falling prices in to 2017.

Tea

Tea is arguably the country’s most critical agricultural sub-sector. According to a 2013 report published by the US Department of Agriculture’s Foreign Agricultural Service, tea cultivation and manufacturing is spread across 15 of 47 Kenyan counties, providing income and employment to over 600,000 smallholder households. Smallhold farmers account for 60% of production and about 150,000 workers are employed at tea estates, the largest of which are owned by multinational firms like Unilever and Finlays. The majority of Kenyan tea is auctioned by factory name and grade at the Mombasa Tea Auction Centre; the world’s largest tea auction, according to international media reports.

Tea Performance

Despite falling global tea prices, which have had a dramatic impact on markets such as Sri Lanka and India, Kenya’s tea industry thrived in 2015, with the value of tea production rising by nearly 40% to hit KSh118.4bn ($1.1bn) as international prices for Mombasa’s tea rebounded on fears of drought and shilling depreciation. The total area of tea planted in Kenya simultaneously rose by 3.2%, from 203,000 ha to 209,400 ha, primarily from smallholders.

However, domestic troubles could weigh on the industry in the coming years, after labour disputes erupted in July 2016, following a court decision to uphold a 30% wage increase for tea pickers across the country. In June 2016, the Industrial Court upheld a 30% pay increase for tea workers in Kenya, with the Kenya Tea Growers Association telling local media that labour costs, which comprise roughly 50% of production costs, were expected to rise by 9% as a result, even as tea prices at the Mombasa auction plummeted, with the KNBS reporting in the same month that auction prices in Mombasa hit an average of KSh213 ($2.1bn) per kg in April 2016, a 37% decline from prices in August 2015. Although tea exports surged ahead of horticulture to comprise KSh123bn ($1.2bn) in 2015, compared to KSh100bn ($975.7m) for horticulture, the industry’s outlook for 2017 remains mixed. Tea workers later protested when companies failed to implement the salary increase, resulting in production shutdowns across the country: on July 4, for example, local media reported that 11 tea factories in Nandi County were on strike, costing farmers an estimated KSh300m ($2.9bn) of cumulative weekly earnings.

Another challenge being seen in the tea industry is the additional cost posed by the certification process. “To a certain extent, the tea industry is burdened by over-certification for things such as fair trade or organic. This ultimately drives up costs for the producer and makes us less competitive on the global market,” Moses Changwony, managing director at Sasini Tea and Coffee, told OBG.

Coffee

The issue is not a new one for high-value cash crops, and the country’s coffee industry has also struggled to grapple with rising labour costs. The KNBS reports that coffee production fell by 16% in 2015 to hit 49,500 tonnes, while earnings declined by 27.1%, from KSh16.6bn ($161.9m) to KSh12.1bn ($118m.) Like the tea sector, coffee production has been impacted by the rising cost of labour and farm imports, with the KNBS also attributing production declines to poor corporate governance at grower institutions, while media reports have blamed unscrupulous marketing agents. Yields have also been in decline, falling by 13.3% at estates and 17.2% at cooperatives in 2015, to hit 589.5kg/ha and 317kg/ha, respectively, and dampening the 2017 production outlook. Despite a weakened outlook for the tea and coffee industries, other cash crop segments retain great potential for future growth. Domestic sugar production, for example, rose by 4.6% in 2015 to hit 6.8m tonnes, according to KNBS data, while earnings from cane deliveries rose by 5.5% to hit KSh21.4bn ($208.8m). Horticultural exports rose by 7.5% to reach KSh90.4bn ($882m), from KSh84.1bn ($820.5m). Dairy production also rose, with the volume of marketed milk jumping by 10.9% in 2015 to hit 600.4m litres, and earnings rising by 10.1% to reach KSh20.7bn ($202m), from KSh18.8bn ($183.4m) in 2014.

Sugar Investment

Outside of irrigation, horticulture and value-added processing, the country’s sugar sector is also witnessing a surge of new investment, with government plans to privatise state-owned sugar mills further bolstering its long-term prospects, despite regulatory uncertainties on taxes. Sugar investment in Kenya ramped up in December 2012, when Mauritian firm Omnicane announced it had purchased KSh1.7bn ($16.6bn) in equity in the Kwale International Sugar Company (Kiscol). In August 2015 Mauritian firm Alteo Sugar acquired a 51% stake in the Transmara Sugar Mill, with plans to more than double capacity through a two-year, $30m investment programme. Local media reported that the expansion will make Transmara Kenya’s second-largest miller after the state-owned Mumias, which has an annual crushing capacity of 2m tonnes, while other players – Sony Sugar and Kiscol – each have 900,000 tonnes of annual capacity.

In May 2015, the government announced plans to privatise at least 75% of five state-owned sugar mills within one year. In addition to boosting productivity and competitiveness, the move is expected to attract much-needed investment in capacity expansion, helping the country meet a domestic shortfall which saw its sugar deficit reach 253,559 tonnes in 2015, as consumption rose to 889,233 tonnes, against 635,674 tonnes of production. The government also announced in July 2016 that it is considering relaxing import quotas to prevent a shortage, which have kept Common Market for Eastern and Southern Africa and EAC imports to less than 15,000 tonnes of brown table sugar each month, as mill privatisation has progressed slower than anticipated: in April 2016 courts halted the process as officials debated over how best to absorb the companies’ collective KSh100bn ($975.7m) of debt, although local media reported in July 2016 that plans are still in the works to sell a 51% stake in the Sony, Chemelil, Nzoia, Muhoroni and Miwani sugar milling companies, while a 24% stake will be held by farmers and employees, and the remaining 25% privatised through an initial public offering once the mills have regained profitability.

Outlook

Despite domestic policy and labour challenges, Kenyan agriculture remains on track to continue driving national economic growth in 2017. Investor interest in food production remains robust despite delays in some privatisations, while irrigation schemes offer another opportunity to enter the sector. Although production remains dependent on weather conditions, long-term strategies aimed at bolstering mechanisation and reducing rain-fed production should see the sector remain a growth driver for several years.