By: John Kamau
An age-old conspiracy between regulators, millers, traders and brokers has kept the Kenyan coffee prices down — even as the country’s top grade Arabica coffee continues to fetch premium prices on the international market.
Billions of shillings that 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 of Kenya, now the 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 — brokers, millers and traders — and frustrates any new entrant not associated with the network.
Today, we report on 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 stifling competition by positioning themselves at vantage points where they control the chain by building sophisticated structures.
They have made sure that they get Kenya’s coffee, the world’s second most lucrative commodity after oil, at a cheap price.
Seven years ago, the Coffee Act was amended to allow companies to simultaneously act as millers, marketers and dealers at the NCE auction.
This tilted the balance in favour of multinationals and effectively locked small farmers out of the coffee sales and value chain.
It reduced farmers into impotent producers with no say on pricing of their crop.
When the whistle was blown in Parliament over this mischief, the law was changed, but never enforced to the letter.
Multinationals, and their local partners, only registered new companies with the same directors for milling, marketing and sales (dealers) and continued with their operations.
RIGGING THE MARKET
With personal interests cutting across these companies, Kenya finds itself in a situation where companies holding miller licences also have marketing and dealer licences, which has led to the emergence of a cartel, setting the stage for possible price-fixing at the coffee exchange.
Smallholder farmers hardly know the implication of this arrangement.
“When you take your coffee to the miller as a cooperative 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 who could not be named for fear of reprisals.
When the Daily Nation team visited the NCE sample room at KPCU Plaza in Nairobi, samples taken from different lots were 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,” the NCE Chief Executive Officer, Mr Daniel Mbithi, said.
The samples inform the price the dealers pay for a particular lot. 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 coffee has been sold and paid for, 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.
Thus the same coffee could earn him more millions — which is never passed on to the farmer, thanks to the pseudo-grading.
The NCE says it is 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,” said Mr Mbithi.
But this is easier said than done because the farmer’s input ends when they deliver their harvest to the cooperative society.
This has given marketing agents, who are the appointed brokers, an opportunity to rig the market.
Successive governments were aware of this anomaly, but took no steps to address it.
“The ministry knows exactly what is going on,” Mr Kariuki Muiruri, then the Assistant Minister for Agriculture told Parliament seven years ago.
“You find that a company is licensed to market coffee, another one is licensed as a dealerand they are the same people. All they do is just register the name of a brother or a sister in the two sister companies. There are a lot of things that are going wrong”
However, nothing changed despite the revelation.
Sources said that insiders in the Narc administration deliberately frustrated efforts to streamline the coffee sector.
“We almost managed to bring down this cartel. But they regrouped after President 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 advisers and ministers had personal interest in the status quo,” says Mr Njehu Gatabaki, the former Githunguri MP who led the Coffee Tea Parliamentary Association (Cotepa), which was fighting for transparency and accountability in the tea and coffee industries during the Kanu era.
“We told the government that this auction (Nairobi Coffee Exchange) is monopolistic. We wanted a situation where the farmer cooperatives were strengthened. We asked for our Cotepa members to be appointed into key coffee institutions to manage change. Nobody was interested,” laments Mr Gatabaki.
“I was the last coffee spokesman. Coffee is a very sad story,” the retired politician said in an interview with the Nation.
Besides Cotepa, there was also the Coffee Traders Association (KCTA), which was registered in April 2002 in the dying days of the Moi administration. KCTA brought together millers, marketing agents, warehousemen, coffee equipment suppliers and transporters and became the new voice of 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,” said a source who used to attend the meetings.
Most of the founders of KCTA were foreigners connected with big coffee roasters in Western markets and had one desire – to get the best quality beans at a low price.
They had all defected from Mild Coffee Traders Association (MCTA), a body that had its roots in colonial Kenya and was led by a local coffee baron, Mr Abraham Mwangi.
With their departure, MCTA was left to inconsequential players in the coffee chain – mostly under-funded locals before it collapsed.
“During their heyday, one could not get a dealer’s licence without their approval,” said 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,” complained Mr Mike Maina in a 2004 newspaper advert. Mr Maina owns the giant Kibubuti Estate.
“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 coffees 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 Narc administration 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,” said Mr Njeru Ndwiga, who was the minister for Cooperative Development and Marketing in the Kibaki administration.
“What should be put in place is a Coffee Economic Bloc and a strong cooperative movement. But the Jubilee government also killed the Cooperative Ministry.”
A dealer’s 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 Nairobi Coffee 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,” said one source.
Unknown to many, KCTA was formed by multinationals through their local networks to regulate the trade shortly after Cotepa members stopped their campaigns ahead of the 2002 General Election.
But there was one hurdle that the coffee multinationals had to jump to get the auction back into 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 see farmers have a say in the coffee chain.
Also, some new millers had entered the market, increasing competition and disrupting the age-old networks.
Interestingly, KCPTA took over coffee auction functions from the Coffee Board and it became the battleground for Kenya’s coffee billions, pitting local barons and their Western counterparts.
Insiders say that none of the two groups, MCTA and KCTA, was pro-farmer.
“None of these two groups had interest of the farmer. They wanted to control this lucrative market,” said a source who was working with one of the millers.
In May 2009, Agriculture minister (now Deputy President) promised to do away with the auction system in a year’s time. But this was never to be.
“This is a pipe-dream,” said Mr Dirk Sickmueller, a major dealer at the exchange, who trades under Taylor Winch (Coffee) Ltd, 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 for the first time, gave the local millers and agents control of the auction.
“The small guys did 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,” said an insider.
The big boys ganged up and successfully lobbied the minister for Agriculture to remove KCPTA from managing the Nairobi Coffee Exchange. He transferred 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.
The removal of KCPTA meant that farmers were no longer directly represented at the NCE.
In all these, the loser has been the coffee farmer and the winners are the coffee multinationals that buy Kenya’s premium coffee for a song.
SOURCE: DAILY NATION