The cost structure of the Kenya coffee industry

Abstract

Coffee is Kenya's major export crop and an important source of the foreign exchange needed for planned economic development. Also, coffee is a major domestic industry.. Kenya has signed the International Coffee Agreement and. now faces a limit on the amount of coffee which she may export to traditional markets, but production is Likely to exceed export quotas and domestic demand in the foreseeable future. Therefore, coffee output will have to be reduced. But, any reduction in output must be based on an ability to identify" the higher cost producers within the industry, This study describes the present structure of the industry and the historical reasons for the development of the two separate production sectors, the estates and the smallholdings. The determinants of the cost of production are examined, and the results of two extensive sample surveys are incorporated. The samples and the method used to obtain opportunity cost estimates are discussed, the cost-output relation is examined, and it is concluded that there are decreasing average costs as the size of production increases in both sectors. Also, it is found that a number of the producers in both sectors are already operating at a loss if their full opportunity costs are taken into account. Alternative possible explanations for the findings are discussed, and it is argued that direct comparisons of the cost of production between sectors must be treated with care. It is recommended that a system of loans and innovation insurance be operated through existing institutions to induce a number of the smaller producers in each sector to shift to another crop, and that general diversification funds be used to develop the infrastructure of the present coffee areas in order to create a greater range of alternatives to coffee Also, it is recommended that .the distribution of rights to sell coffee on ,the export quota market be introduced as a means to ensure that the best quality coffee from T.he lowest cost producers will be sold where it will fetch the highest prices; the residual would then be disposed of on the non-quota and domestic markets on a competitive basis6 It is further recommended that greater efforts be made to induce the coffee drinking habit in the domestic market where coffee is not price competitive with other beverages. To this end, it is suggested that greater flexibility be allowed in the processing and distribution of coffee for the domestic market. The sample survey questionnaires and the resulting data and information are presented, together with other material, in a set of appendixes.