TRALAC - Trade Law Centre

Entrepreneur uses AGOA to showcase Kenyan hope in global race for coffee billions

Thursday, 12 October 2017 Published: | JOHN KAMAU

Source: Business Daily (Kenya)

Hidden in the industrial godowns of Ruiru town, some 26 kilometres north of Nairobi, is a coffee story of hope — faith and endurance.

Peter Muchiri, who turned 40 last August, is driving the story forward by engaging in what coffee cartels and foreign multinationals do not want Kenyans to do: add value to their green coffee and find markets abroad.

“I will do it because the government appears clueless on coffee farming and markets,” he tells me as I gaze at his new Sh250 million ($2.5 million) venture with a Turkish-made Garanti coffee roaster and grinder.

At the moment, the former University of Nairobi graduate has managed to get to the US market after his Rockbern Coffee and roasting factory got US Food and Drug Administration (FDA) approval. It all boils down to quality and persistence and Mr Muchiri knows it.

The young entrepreneur is taking advantage of the US African Growth and Opportunity Act (Agoa), which allows Kenyans to export processed coffee — and other listed products including textiles — to the US markets duty free.

In return, the US traders get preferential treatment for their products including sale of anything from aircraft spares to mitumba clothes.

Mr Muchiri is now banking on the extension of the Agoa initiative, which was expected to end in 2015 but was extended by US lawmakers for another period of 10 years.

He is also banking on outstanding quality of the Kenyan coffee, which is highly regarded in the international market.

No smooth ride

But getting here was never a smooth ride: “The US is very cautious about quality and there is a lot of paper work and regulations involved before one gets approval. You have to do it the way they want,” he says of the FDA requirements and regular inspections on his factory.

The US is a huge market and Mr Muchiri hopes to get a slice of it.

While an estimated 2.25 billion cups of coffee are consumed around the world each day, the Americans alone drink about 400 million of those and they keep guard to the quality of coffee sold in their market while also protecting their multinationals.

All products are regulated and must meet the same requirements, whether imported from abroad or produced locally.

But more than that, Mr Muchiri is entering a complex market where some Western countries engage in “tariff escalation” by increasing taxes on processed products from African markets than on the raw material.

rockburn coffee kenya900

High tariffs

For years, this has been blamed on the lack of industries in the coffee-growing nations, which are forced to export their unprocessed beans to Europe and America due to the high tariffs charged on processed and packaged coffee.

To have his coffee sold on the Amazon platform, Mr Muchiri coped with the same frustrations that local entrepreneurs face while trying to enter the Western markets with value-added products: huge investments, regulatory hindrances and a lack of local support which is required to build capacity to produce Agoa-eligible products.

“No local bank would dare listen to me. They couldn’t trust me but today, they are all trying to sweet-talk me,” he says.

The problem that Mr Muchiri was facing is the same that many local start-ups face — reluctant financiers.

“I found that they were just wasting our time,” he says of local banks.

Mr Muchiri had to turn to a Mauritius-based private equity firm, after burning a lot of his money to chase his dream and without local support. But he had to develop the right pitch and a five-year strategic plan.

But Mr Muchiri is not out of the woods yet and his search for markets abroad is still an uphill task.

“We are trying to get our products to the European Union market, but we are still being told ‘No’. They don’t want our value-added coffee.”

But so far, he is ebullient that the US market is ready for him.

While Agoa approval provides incentives for investors arising from the duty-free market access, the risk associated with the short and uncertain life of the law lowers the potential benefits substantially. And that is what makes Mr Muchiri a daredevil in this multinational trade.

Investors entering this market have for years been concerned about making large investments, such as in efficient high-technology processing plants, fearing that they may not recoup their capital before the expiry of Agoa period.

For Mr Muchiri, this is compounded by other barriers that coffee investors face in order to break even.

These include infrastructural and institutional weaknesses with run-down coffee cooperatives and lethargy by government officials.

That farmers in the countryside are abandoning coffee is a story that worries Muchiri.

“Our coffee is still the best money can buy. But what is the government doing to encourage farmers?... Zero,” he says.

Two years ago, the government set out to overhaul the coffee sector but coffee industry looked askance at the recommendations of the task force with some activists going to court.

Harm industry

Mr Muchiri is unhappy with some of the recommendations fearing that they might harm the industry for good.

“The structure being proposed will be the end of coffee trade. What we have to get rid of is corruption in the coffee industry, protect our brand, support farmers with farm inputs and properly manage the cooperatives.”

While the task force proposals included an overhaul of the marketing, Mr Muchiri thinks that the Nairobi Coffee Exchange gives him a chance to get the best deal for this ‘black gold’ — a term that came to the fore in 1970s when 

a price coffee boom turned many local growers into millionaires.

It was that 70s moment that gave the country a chance to see the worth of the industry.

The impact on Kenya’s national economy was huge. In 1977, for instance, the balance of payments recorded a Sh2.2 billion surplus for the first time, while the foreign exchange reserves reached a record level of Sh2.7 billion.

The gross domestic product increased by 7.3 per cent in real terms, while the number of people in paid employment increased by 5.3 per cent.

This, however, happened at a time when the global prices of the cash crop were set by a cartel of coffee producing and consuming countries and, although farmers were hardly millionaires, they generally muddled through.

Mr Muchiri’s grandfather, who owned some 24 acres of coffee was a witness: “He loved to take care of his coffee and I learnt from him that we have the best. But he did not understand that he had the best.”

It was the emergence of Vietnam as a big producer in the 1980s that changed this matrix for Kenyan farmers together with the end of the Cold War.

These two saw the collapse of the International Coffee Organisation (ICO) quota system in 1989 as Ronald Reagan’s government pushed the James Baker-led free markets economy.

Hoard stocks

The departure of the US from ICO, which regulated exports, gave global cartels and roasters an excuse to hoard stocks and then dictate prices under the guise of a free market.

By this time, Kenya had not developed its own roasting and packaging industries and the market was thrown into a spin.

While coffee is still the world’s most traded commodity apart from oil, few local entrepreneurs have managed to get their packaging start-ups to enter Western markets.

Also, few industries have developed around the multi-billion-shilling crop and the country still exports semi-processed green beans abroad earning pittance to the poor farmers.

Muchiri has now taken a gamble and sunk Sh250 million into this coffee enterprise and wants to set pace for other young entrepreneurs with his Rockbern Coffee brand.

Favourable reviews

At the Amazon site, Muchiri’s Rockbern Coffee is getting favourable reviews and for a reason.

“We have banked on quality beans and good blending,” he says.

“To develop a unique character for coffee, the roaster needs the skill which contributes 60 per cent of the final taste. An unskilled person can ruin a good coffee.”

He also wants to feed the local market with his brand and seeks to turn tea-drinking Kenyans into coffee drinkers.

 

 

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