Africa’s tea and coffee growers have set their sights on the world’s morning cuppas as they seek to ramp up output and venture into new markets. But in the face of stiff competition, do the continent’s producers have what it takes? Eleanor Wragg reports.
Coffee and tea are big business for Africa. As crucial foreign exchange generators and a vital source of employment in rural areas, the tea and coffee sectors have been the subject of several recent schemes by governments across the continent as they seek to bolster growth.
Cameroon’s ‘New Generation’ programme seeks to attract younger people into coffee cultivation and renew the trees on the plantations to make them more productive; Uganda’s national coffee strategy aims to improve access to extension services, agricultural inputs, marketing services and other technologies in coffee farming, while the Rwandan National Agricultural Export Board (NAEB) last year launched a national tea brand designed to boost the reputation of its teas on the global market.
But the continent still lags behind its competitors in production. In the 1970s, Africa produced 28% of the world’s coffee. Nowadays, this figure has fallen to around 12%, with the total output of all of Africa’s coffee-producing countries only slightly more than half that of Vietnam, the world’s second-biggest producer. In tea, although Kenya is the world’s third-largest producer and biggest exporter, it only holds an 8% share of global production, dwarfed by India and China, and earns less from its tea than Sri Lanka, despite selling a higher volume.
But the outlook is positive. As Kenya’s tea sector recovers from a devastating drought in 2017, total output is expected to hit 452 million kg this year, up from 439 million kg last year, as farmers improve yields. Unlike India and China, most of the country’s tea goes to export, with volumes seen at 423 million kg this year, up from 415 million kg a year ago. What’s more, Kenya now expects production of tealeaves to rise about 20% by the end of the decade as farmers harvest from new bushes, according to the country’s industry regulator. Meanwhile, the African Fine Coffees Association recently asserted that the continent’s coffee output could “almost double” in the next five years thanks to improved productivity and new plantings.
“Governments in coffee-growing countries are taking coffee as a strategic crop and have taken a deliberate effort to support its production. The outlook for the coming years is massive,” says Carl Kachale Chirwa, head of trade finance, Sub-Saharan Africa at Citi. “Africa’s coffee producers are being prepared for a mindset change on coffee production around how to grow coffee as a serious business on a commercial scale and compete favourably.” On the tea front, he highlights that as exports recover from the drop in production caused by drought conditions, financial institutions will play a key role in catalysing trade by ensuring that payment risk is eliminated in new markets.
But boosting production volumes may not be a simple task, especially in coffee. “There are a couple of challenges,” says Wouter Kool, director of trade and commodity finance for Rabobank in Kenya. “First of all, coffee in Africa is still very much produced by smallholders. This is different to Brazil and in Vietnam. In Africa, in order to increase production you have to have more farmers producing, and other crops are competing with coffee.”
While he sees scope for banks to help farmers increase yields by sharing knowledge, or to give security in the form of offtake contracts, the challenge remains that the sector is fragmented into small farms and small amounts. “As a result, for a bank, it is difficult to have a really commercially viable operation on the farming side.” However, he also sees this as an opportunity: “The potential still remains to create a good value chain, this is what makes Africa interesting.”
Getting into new markets is a priority for Africa’s tea producers, as younger people in traditional export destinations eschew the drink for the more fashionable coffee. One way to do this is by rethinking the way tea is sold. Currently, much of East Africa’s tea is sold through Mombasa to a few large buyers, mainly from Pakistan, Egypt and the UK, but some are looking to bypass the Kenyan regional tea auction to boost export earnings through a more efficient direct-sale arrangement. The Uganda Export Promotion Board, for example, has already begun to identify potential buyers, among them Sudan, South Sudan, the Democratic Republic of Congo and Turkey, and received a delegation of Iranian buyers earlier this year on a fact-finding mission.
However, Chirwa cautions that the finance is not yet in place to make direct Ugandan tea sales feasible. “There are some companies trying to sell Ugandan tea directly rather than offering fixed forward contracts. So, to a large extent, there is currently no financial infrastructure to support increased tea exports, although it can be created.” Some of the world’s most significant tea markets are subject to international sanctions, which again restricts trade, he adds.
While the pre-shipment and post-shipment value chains are largely similar for both commodities, financing coffee trade tends to be somewhat trickier than tea, says Chirwa.
“The main difference is that with tea, trading is through the auction, while coffee is usually traded on a bilateral basis with the major coffee buyers on fixed forwards or coffee futures. For historical reasons, the pre-season value chain for tea is more structured, organised and easier to track and finance than the coffee value chain.”
Even where the finance is in place, poor infrastructure holds back trade. With an average of 40% of Africa’s crops rotting before they can make it to market – mostly as a result of inadequate storage and hold-ups at borders – enormous investment in logistics needs to take place in order to support the tea and coffee sector. Kenya, Uganda, Rwanda, Tanzania and Burundi have now begun collaborating to expedite movement of coffee through the introduction of a single customs territory replacing multiple weighbridges, security officers and customs checks along the Northern Corridor, which gives the region’s landlocked countries access to the sea.
“On the structural side, a difference between Africa and Brazil, for example, is the size of the farms. While Brazil also has some small farms, the small farms in Africa are even smaller,” says Rabobank’s Kool. The Ethiopian Commodity Exchange, set up in 2008, is one example of best practice that may provide a solution to this fragmentation. It linked 2.4 million smallholder farmers to markets through agricultural co-operatives, and created a huge network of designated coffee warehouses, where the product is graded for either export or sale on the domestic market, smoothing the way for finance to be done on the back of warehouse receipts.
Quality over quantity
Africa has already made some inroads in gaining global market share in tea: India’s Economic Times last year reported that the South Asian country’s tea exporters were losing market share in neighbouring Pakistan to Kenya’s cheaper exports, while the Sri Lankan Sunday Times bemoaned the loss of its country’s share in the British tea market to the East African nation.
However, Edward George, head of group research at Ecobank, points out that on the coffee front, any meaningful increase in Africa’s global market share may not be feasible. “Africa has lost a huge part of its market share, but that is because coffee consumption and production have changed totally since the 1970s when it played a leading role. If you go back 40 years, Vietnam did not produce any coffee, but it’s now the single largest producer of Robusta in the world. The truth is that the market has changed, the way people consume coffee has changed, and if Africa wants to play in the coffee market, it is not in volume.”
For him, Africa’s opportunity in coffee lies in specialisation and quality.“Kenya and Tanzania are producing all these speciality coffees, grown organically in a particular place, and therefore the coffee has a real additional value. Of course, it is a very small production; it might be that one company is producing 1,000 bags a year, but these countries have a good chunk of the global speciality market, and that is where the future is for Africa when you talk about coffee,” he says.
This is backed up by activity by trading houses. In response to the growing demand from international specialty coffee customers for single-estate, certified and traceable volumes, Olam International last year sought out Rainforest Alliance and UTZ certification for two of its coffee plantations in Tanzania and Zambia. “We have been able to enhance the coffee production of both countries, putting them firmly on the coffee connoisseur map,” said Varun Mahajan, Olam’s vice-president and commercial head of coffee plantations in East Africa, in a statement.
“Our clients who are the traders that are active in coffee really want to be in Africa. They have set up shop in countries such as Uganda, Kenya, Tanzania, Burundi, Rwanda and Ethiopia, because of the quality of the coffee. Although the volume contribution is small, traders want to have in their portfolio of products the high-end product from Africa,” says Rabobank’s Kool.
It is no different on the tea front. In Kenya, a new variety, purple tea, is fetching prices for farmers of as much as US$1 per kg, compared to US$0.14 for ordinary tea, according to a World Bank report. Kenyan authorities estimate that speciality teas such as this will account for up to 5%, or approximately US$60mn, of all the country’s tea exports in the next three to five years, going some way toward addressing Kenya’s comparatively low tea export receipts.
Improving farmer access to finance
However, farmers face difficulties in accessing the finance they need to export their products. “The financial infrastructure for coffee trade is largely in place for traders and processors but not for the farm gate,” says Citi’s Chirwa. “Processors and exporters are able to hedge their transactions with coffee futures and fixed forward contacts which are recognised and protected by the International Coffee Association. The challenge for coffee traders are the securities for the financing as coffee trade requires huge capital, and most traders do not have sufficient physical assets collateral for the loan requirements.” He explains that the solution currently is to finance under collateral management arrangements, with coffee taken as a security for the financing either as a pledge or through an SPV by the bankers.
Furthermore, a sizeable amount of coffee trade in Africa is informal and therefore unable to be financed. In Kenya, for example, due in part to delays in receiving payment for their deliveries, farmers smuggle coffee to neighbouring Uganda for instant payment. To address this, the Kenyan government is weighing the introduction of something akin to the Ethiopian coffee industry cash model, where farmers receive their money immediately after delivering their beans.
The African Continental Free Trade Area (AfCFTA), agreed earlier this year, could provide another solution. “Once this free trade area comes into being, many, many informal flows will become legal. As soon as it is legal that means that you can finance it. That means there is a huge incentive for informal traders to formalise, because the authorities aren’t going to be after them in that sense,” says Ecobank’s George. “I think that is hugely positive. It’s the opportunity to bring a huge amount of the SMEs into the formal sector, because all the lending and borrowing they are doing at the moment is informal. Formalisation will boost volumes and that means boosting visibility, and once people are clear on what the flows are, that means investors and banks can come in.”
Creating domestic markets
The open trade pact could also present a boon to intra-regional trade, as Citi’s Chirwa points out. “The AfCFTA will to a large extent benefit trade in coffee and tea, especially to countries that have appetite for these crops like Sudan and Egypt – which is the second-largest buyer of Ugandan coffee after the EU.”
Although coffee now outstrips tea as the world’s most popular hot drink, Africa’s former British colonies have held on to their customary cuppas, as have countries like Somalia, for which tea-drinking is an ingrained part of daily life. A notable exception is Ethiopia, coffee powerhouse and the birthplace of Arabica coffee, which consumes half of all the coffee it produces. Conscious of the need to capitalise on growing incomes and their rising middle-class market, officials in Uganda and Rwanda are working to give their local populations a taste for coffee. In Rwanda, a government-sponsored campaign to encourage coffee consumption has seen adverts played on local radio inviting consumers to tastings, while in Uganda, the Museveni administration has distributed posters touting the health benefits of the beverage.
“There is a real rise now in African consumption of coffee,” says George. Whereas just a few years ago, a visitor to an establishment in the continent would be hard-pushed to get more than a sachet of Nescafé – even in the continent’s largest coffee-producing destinations – today coffee chains are springing up from Kenya to Nigeria. “They are not only international brands like Starbucks; I’m seeing local homegrown ones as well,” adds George. “This is very positive for African coffee. If we are seeing local consumption rising, that is further support for the industry.”
He also highlights that a growing domestic market for the commodity gives more power to producers. “They will no longer have to take any price that is offered to them by exporters if they can sell locally. It changes the game.”
As a result, while it may not be feasible for Africa to snatch market share in coffee and tea from other nations, trade liberalisation, greater value-addition and a focus on playing to its strengths in quality and specialisation will continue to create myriad opportunities for its exporters for many years to come.