Working paper 4 - Increasing Kenya’s Agricultural Competitiveness: Farm Level Issues

Author(s):  Nyoro, James; Wanzala, Maria; Awour, Tom

Introduction

The agricultural sector like the rest of the economy continues to perform poorly. From a high rate of 4.8% in 1994, growth in the sector has declined year-by-year to reach its lowest level of –2.3% in year 2000. Similarly, the performance of key food commodities has also been poor over the same time. Between 1994 and 2000, maize and wheat production declined by 24 and 60% respectively (Republic of Kenya 2001) Production of other food commodities like rice milk and sugar has also declined. Export commodities have also not been spared. Coffee production has declined by more than 50% in the last 10 years. Equally other crops such as sugar cane and pyrethrum have recorded dismal performance in production.

The decline in food and exports has adversely affected food security, a decline in employment opportunities and an increase in overall poverty in rural areas. The decline in food production has taken place against a backdrop of growing demand for food caused by, among other factors, high population growth that has caused structural deficits in key food commodities like maize, wheat, rice, and sugar.

To meet the deficit, the country continues to depend on imports of key foods commodities. In the last year, for example, Kenya imported 409 tons of maize valued at Ksh 4.7 billion for commercial and relief purposes (Republic of Kenya 2001) Similarly, large volumes of wheat were imported to bridge the ever-increasing gap between production and consumption. Kenya today can get maize from neighboring countries like Uganda and Tanzania, and sometimes from as far as Brazil, South Africa, and Mozambique at prices lower than that of domestic production. Similarly, the domestic horticultural production is now facing stiff competition from imports of products that traditionally have been provided from local sources.

The local domestic horticultural market is now being supplied with fresh and processed horticultural products such as oranges, apples, onions, bananas, grapes, marmalades, jams, and tomato products from Tanzania, Uganda, South Africa, Italy, Spain, Egypt, and Israel. These imported commodities are well known for their top quality, as they are more attractive and are more consistent in color and favor than the locally produced ones. They are also available throughout the year. Prices of some of these food imports are sometimes lower than that of local food production. Policy makers have responded to this situation in Kenya by imposing tariffs on food imports to protect domestic production.

High domestic food production cost compared with imports creates a “classic food price dilemma.” Because while this policy protects sellers of cereals – a relatively narrow segment of the rural population – it penalizes consumers who have to pay high food prices and is also inconsistent with international and regional agreements (Jayne et al. 2001). The high food prices also hinder the transfer of resources from food systems to other parts of the economy as it takes more resources from non food sectors to purchase a unit of food.

In addition, high food prices force consumers to demand higher wages, which makes industries and manufacturing less profitable and competitive internationally. Protectionist polices force consumers to bear the brunt of farmers’ low productivity. With the trend toward integration of regional and international markets, protectionism will increasingly create political problems with neighbors.

On the other hand, domestic agricultural production is the center of the country’s economy because of the proportion of people who depend on agriculture for income and employment. Over dependence on imports is likely to displace the only livelihood of the local population. Kenya must ensure that it continues to supply the bulk of its food needs through improvements in agricultural productivity and reduced production, transportation and marketing costs. This would make prices of domestic production comparable to the import prices of similar commodities.

The key strategy for the country should focus on reducing costs – productivity growth – not raising output prices. Efforts to reduce costs allow farmers to compete in international markets and countries to bargain from a standpoint of strength in international trade agreements.

On exports and other commercial production, high domestic costs of key crops like coffee, pyrethrum, tea, and export horticultural commodities have hampered the translation of the longterm comparative advantage into a competitive one. Traditional markets for these commodities are now being faced by stiff competition from other producers whose costs are lower. Where markets are not entirely lost, high production costs juxtaposed by declining world commodity prices have squeezed profits, rendering the production of these crops unprofitable.

Producer incomes have been adversely affected rendering most of them poor and unable to meet their basic needs. A new strategy to reinvigorate productivity and competitiveness of this commercial production, is necessary to stir up growth in smallholder incomes and generate employment in the rural areas. The achievement of the twin objective of poverty reduction and economic growth will require renewed initiative in revitalizing productivity growth in the commercial and food crops. The agricultural productivity growth pertains to the entire food system, including production, processing, and marketing. Such growth will allow farmers to compete in international markets and allow them to bargain from a standpoint of strength in international trade.

It is productivity growth that will enable the local producers to become competitive in the international markets and use the emerging opportunities such as the African Growth Opportunities Act (AGOA). Productivity growth means producing greater output at lower costs. This will, in turn, reduce costs of production and marketing.

The objective of this paper is to address the farm level issues that affect the production costs and so the competitiveness of domestic food and commercial production. It compares domestic production prices of key food commodities with the equivalent parity prices to assess the extent to which the domestic prices for maize, wheat, and sugar, and export and domestic crops are competitive. This paper identifies and assesses the factors that influence domestic production costs. It also identifies strategies that could increase food and export crops’ productivity, by that reducing production costs and encourage competitiveness of the domestic production. The paper is divided into three parts. The first parts analyses the domestic production costs of maize, wheat and sugar, domestic horticultural crops and dairy and compares the costs of local production costs of maize, wheat, onions with imports prices. The second section analyses production costs for some export crops such as coffee and identifies factors that influence the domestic production. The final part identifies policies that could reduce production costs and enhance productivity in order to enhance Kenya’s competitiveness in agricultural.

 

 

Increasing Kenya's Agricultural Competitiveness: Farm Level Issues