While much of Kenyan agriculture is comprised of subsistence and small-scale farming of crops like maise and sorghum, cash crops have become the country’s greatest foreign exchange earner. The country’s largest earners – tea and horticulture – had been in decline due to falling commodities prices and delays in arranging new trade treaties, but investment in processing facilities has created investment opportunities and helped these segments to play an important role in reducing raw exports and boosting value-added earnings.
Cash Crop Earnings
With Kenya’s agricultural sector the biggest growth driver in 2015, rising to comprise 30% of total GDP, cash crops remain a critical source of income, both for farmers and the broader economy. Tea is the country’s main cash crop, agricultural export earner and employer, bringing in KSh120bn ($1.2bn) in foreign exchange earnings in 2015.
Horticultural output is the next key earner, particularly fresh cut flowers; vegetables, including French beans, capsicum and snow peas; and fruits, like mangoes, pineapple and passion fruit. Horticultural exports rose from KSh88.6bn ($864.5m) in 2011 to hit KSh89.9bn ($877.2m) in 2012, moderating in 2013-14, before rebounding to KSh90.4bn ($882m) in 2015, meaning that tea and horticulture cumulatively contributed approximately KSh210bn ($2bn) to the agricultural sector in 2015, out of total crop production of KSh1.39trn ($13.5bn), according to the Kenya National Bureau of Statistics (KNBS.) There are other important export products as well. The dairy and coffee subsectors contributed KSh20.67bn ($201.6m) and KSh12.1bn ($118m) in earnings, respectively, in 2015.
Kenya’s largest source of foreign exchange, following foreign remittances, is tea – the country’s most significant cash crop. The country is a major producer of tea and stands as the world’s fourth-largest producer after China, Sri Lanka and India, and it is the largest exporter of black tea, through the Mombasa auction. Tea purchased at auction or sold directly by estates is transported by containers to processing facilities globally, where it is blended with other teas from the world market. The US Department of Agriculture’s Foreign Agricultural Service reports that the volume of tea sold annually at the Mombasa auction rose six-fold between 1980 and 2011 to reach 300,000 metric tonnes, owing in large part to the introduction of high-yielding plants and the expansion of land under cultivation.
Although production volumes dropped by 10.3% in 2015, according to the KNBS, tea bucked the trend of falling prices in competitor markets – Sri Lanka, for example – and earned better rates in the world market, with the value of tea exports rising 39.5% to hit KSh118.4bn ($1.2bn). The KNBS reports that prices paid to farmers per 100 kg of tea rose 55.6% from KSh19,063 ($186) in 2014 to hit KSh29,656 ($289) in 2015.
The industry’s upwards trajectory continued in 2016, with local media reporting in May 2016 that tea earnings in Kenya rose by 24.5% year-on-year in the first quarter of 2016, bolstered by the shilling’s depreciation against the US dollar, which pushed earnings to KSh33bn ($322m), compared to KSh26.5bn ($258.5m) in the first quarter of 2015, and prices hit a record high in January 2016. In total, 480.3m kg of tea was exported in 2016, compared to 443.4m kg in 2015. However, earnings dropped by nearly 3.6%.
Tax & Labour Challenges
The industry faced several challenges that affected earnings in 2016. The strengthening shilling pressured earnings, down from KSh120bn ($1.2bn) in 2015 to KSh115bn ($1.1bn) in 2016. A shifting tax regime is also worrying stakeholders: in April 2016, the Ministry of Agriculture, Livestock and Fisheries (MALF) announced it was reviewing taxes, following complaints from producers over a 1% levy on tea sold at the Mombasa auction, in addition to a 16% value-added tax on tea processed and consumed locally.
These tax issues have been exacerbated by rising input and labour costs. Kenyan courts upheld a 30% salary hike for tea pickers in June 2016, leading to costly protests and halted production at some estates due to lack of enforcement of the new wage policy, and meaning rising labour costs have become one of the most significant impediments to future tea industry growth.
Horticultural growth, particularly flo-riculture and the export of fresh-cut flowers, has been robust in recent years. The KNBS reports that the value of horticultural produce rose 7.5% from KSh84.1bn ($820.5m) in 2014 to KSh90.4bn ($882m) in 2015, and experienced a 20% jump in earnings in the first nine months of 2016, up KSh77.8bn ($759m).
Like the tea industry, horticulture’s outlook is mixed due to delays implementing an Economic Partnership Agreement (EPA) between the EU and the EAC. The agreement will offer EAC members duty-free export access to EU markets, but requires ratification from all EAC members. As of March 2017, the three remaining EAC members yet to sign the EPA were expected to do so by mid-year.
Kenyan horticultural products have enjoyed duty-free access to EU markets since 2015, after the European Commission announced that it had approved the renewal of a “market access regulation” agreement for Kenyan exports, which expired in late 2014. The EPA is meant to replace the market access agreement as part of ongoing EAC integration initiatives. Although authorities announced in June 2016 that they expected the EPA to be signed by August 1, the results of the June 2016 Brexit referendum, in which the UK voted to leave the EU, threw trade negotiations into doubt. Jane Ngige, CEO of the Kenya Flower Council, told OBG Brexit would have a negative impact on floriculture exports, although the effects have not yet been felt in the industry. “There has been anxiety over the pound tumbling and the impact Brexit could have on our business viability, but we have not seen any cancelled orders from the UK yet, and the demand is still there in Europe.”
With international volatility clouding Kenya’s cash crop outlook, the government is moving to encourage investment in domestic value-added processing, in a move to further support and mature the industry. In June 2016, for example, Richard Lesiyampe, principal secretary of MALF, announced that in addition to offering a zero-rated, value-added tax, and giving duty exemption for irrigation-related equipment for the horticultural sector, the ministry was in the midst of reviewing its policies and regulatory framework for the sector to improve the business environment and encourage investment, particularly in the floriculture segment. Indeed, value addition through the establishment of new processing facilities is expected to be critical to future growth of cash crop export earnings. The KNBS reports that value addition in agriculture rose from 3.5% in 2014 to 6.2% in 2015, with the majority of agricultural exports, including valuable cash crops, exported raw. Foreign investment in new processing facilities to boost value addition stands as the most promising growth strategy for the country’s cash crops.