Value addition to agriculture: Magic bullet or blind alley?

Monday February 23 2004

DAVID NDIIGitau Githongo ("Strong, Sweet Tea: Why Isn't it Making Us Rich," The EastAfrican, February 16-22) asks, rhetorically, whether adding value to agricultural products is the ticket to East Africa’s prosperity, answering himself thus, "If the presentations to a recent public-private sector retreat in Mombasa are to be believed, not only can it transform our region’s agribusiness sector, but reinvigorate the manufacturing and service industry as well." In so far as Githongo’s articles are faithful to the proceedings of the retreat, the presentations are not to be believed.

The first, and principal flaw in the proposition is failure to define "value addition." However, it can be inferred from the examples presented that by value addition, the author means processing and/or packaging a raw material into the final consumer good. This is true in some, but not all cases.

Let’s take tea (pun intended). The farmer produces a highly perishable commodity called green leaf. Farmers sell green leaf to a factory, which processes it into made tea, which leaves the factory ready for the pot. In effect, processing is not a "value addition" since exporting green leaf is well nigh impossible. Additional value to made tea comes from blending and branding, and that’s a whole different kettle.

Kenya is the world’s leading exporter of black tea; with 20 per cent market share, Kenyan tea ends up in very many different countries. Each of these countries has its leading tea brands. To add value by branding would entail developing competing consumer brands in these markets. This is a hugely expensive and risky undertaking – South African Breweries’ experience in the Kenyan market comes to mind.

That said, there is nothing at present, as far as I am aware, that prevents local entrepreneurs from venturing into foreign markets with own brands, to compete with Lipton and PG Tips in the UK, for instance. The point is, however, that this enterprise would not translate into value addition for the farmer, or the Kenyan economy. It would in fact be Kenyan "foreign investment" in the destination market. There is no compelling location advantage for the said entrepreneur to establish any physical operation in Kenya, or, for that matter, to repatriate profits.

One way to mitigate these risks is co-branding, that is, piggy-backing on existing brands in the target market, "Lipton’s Kenya Tea" for instance. Arguably, co-branding would then provide opportunity to export shelf-ready tea. This requires two things. First, it will require a market, that is, consumers with a taste for pure Kenyan teas, and secondly, cost competitiveness as a packaging location. This however is still a risky business venture. The question as to who bears the risk is of essence, and does not seem to have been addressed.

The second flaw is that of generalisation, which would seem to emanate from lack of product knowledge. Let’s change to coffee. To embellish the argument, he speculates that "the freeze-dried instant coffee that you are sipping as you read this was made with coffee bought from an East African farmer at a price of $1-2 a kilo by brokers at the notably opaque Nairobi Coffee Auction." Again, the underlying assumption is that processing equals value addition.

It is true that there are Kenyan coffees that sell at huge premiums in the gourmet market – between $10 and $20 a kilo on average. Incidentally, these coffees do not end up in two-dollar freeze-dried instant jars, but as freshly ground cappuccinos and caf lattes. The writer wittingly or unwittingly neglects to mention that these prices are for coffee beans, both roasted and unroasted. This shows that the price premium does not derive from processing. It is, in fact, a flavour premium.

The flavour of coffee depends on climate, soils, husbandry and the fermentation process. All these have already been determined by the time coffee leaves the primary factory for the mill. Information on potential buyers and prices is available to anyone at the click of a mouse. But it is useless to the farmer. Simply put, the problem with coffee is the trading monopoly conferred on the Nairobi Auction by the Government. Government paternalism is all pervasive. In theory, coffee belongs to the farmer until it is sold at the auction for export. In practice, the farmers lose control as soon as they harvest the coffee. They have no power to decide when the coffee is sold, to whom, for how much, and on what terms of payment, all in the name of protecting the small farmer. The government sees no irony when the same small farmer chooses to grow bananas and livestock fodder instead.

The third flaw is defective economic analysis. Take hides and skins. This is one area where processing is indeed value adding. According to the figures quoted in the meeting, East Africa’s hides and skins, worth $80 million in raw form, are potentially worth $300 million as finished leather and $920 million as leather products. This at first looks like an unassailable case for giving incentives to leather processors. Let us say we have a competitive firm that can compete with Brazil, Italy and Portugal in the global market for leather products. It can source hides domestically or import it. The difference between the two is primarily transport costs, which are not very significant, given that cost of hides is a very small fraction of that of a finished product, say shoes, a handbag or a jacket. As everyone who has had a bad fundi experience knows, the real value added in a garment is not the fabric, but the design and workmanship. In effect, we can export all our hides, and the industry can import all its leather. The value added to leather in the Kenyan economy will be determined by the quality and volume of leather products, irrespective of source of leather. Employment creation being of utmost urgency, it seems to me that the case for backward integration (shoes first, then leather) is far more persuasive from an economic perspective than forward integration (processing hides to leather).

There is considerable scope for value addition. Fruits, mangoes for instance, come to mind. Lots of them go to waste every year. Canning or processing these into concentrate would translate into additional value. Finding exports markets for fresh mangoes would be even better value.

But for some reason, the proponents of this value-addition theory seem to be most concerned with the agriculture products of which Kenya is already a successful exporter. Two years ago, the tanning industry successfully lobbied the Treasury to impose a five per cent export tax on hides and skins in the name of value addition (the tax was repealed in the subsequent budget). Rather than benefiting from value addition, the farmer would have ended up paying for it!

David Ndii is an economist and executive director of the Kenya Leadership Institute