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Manufacturers lure farmers in pricing war

By Patrick Alushula | Updated Tue, March 14th 2017 at 08:21 GMT +3

Manufacturing firms are battling to strike a balance between selling products at affordable prices and buying raw materials at low prices.

The growing number of firms manufacturing similar products has introduced cut-throat competition that calls for careful pricing and packaging to attract customers.

However, the presence of many firms has given suppliers of raw materials higher bargaining power, and many are determined to settle for nothing less than the best price in the market.

And as the cost of living continues to spiral and a rising population puts pressure on land, farmers are demanding more from their holdings.

Asmin Oparanya, a 46-year-old sugarcane farmer turned rice farmer, captures this attitude that is spreading rapidly.

Three years ago, she walked into her farm in Mumias, Kakamega County, and did something she never imagined she would do.

“I was tired, and it was long overdue,” Ms Oparanya said to explain why she uprooted her entire sugarcane plantation and got into rice farming.

Raw materials

She represents the many farmers whose value in what they do only counts if it can put food on their tables, and educate and clothe their families. If what they are growing is not supporting their lives, they simply uproot it or scale down.

But companies are not willing to just sit back and let this happen. They have come up with strategies to address the situation as in the absence of raw materials, the fortunes of many businesses would wane.

Nestlé East Africa, a nutrition, health and wellness company, cannot do without coffee. Yet the crop that was once a darling for many farmers in the Mount Kenya region has lost its shine, forcing many to uproot it. Others have scaled down on the acreage and diversified into higher-paying crops.

This has seen coffee plantations today occupy 109,000 hectares from an average of 150,000 hectares in the 1980s and 1990s.

Nestlé has been paying attention to the data. Thus, in 2011, the firm launched the Nescafé Plan, with Coffee Management Services Ltd as the implementing partner, to work with more than 42,000 farmers. The idea is to ensure they use best farming practices to secure returns.

Under the plan, the firm said it pays a premium for the coffee it buys. It also supplies farmers with millions of high-yield and disease-tolerant coffee plantlets to ensure productivity does not drop.

“We do our practicable best to help farmers address challenges in the sector to make coffee farming attractive and encourage them to consider coffee farming as a business,” said Brinda Chiniah, the corporate communication and public affairs manager for Nestlé Equatorial African Region.

In 2015, the company added a scholarship programme for orphaned and vulnerable students from families that deliver coffee in eight regions in Central and Eastern Kenya. The firm pumps in at least Sh7 million to encourage vulnerable families to keep growing coffee.

In the sugar industry, on the other hand, some millers are struggling to hold on to farmers.

In Western Kenya, the competition is fierce between Mumias, Butali, Nzoia, Sony, Muhoroni and Chemelil sugar companies.

Mumias, the largest and oldest miller in Kenya, has lost its grip on being a monopoly as farmers vote with their stomachs. They only supply cane to millers that offer a good price.

Last month, when announcing a profit warning for 2016-17 financial year earnings, the miller said a cane shortage had led to the factory being under-utilised, leading to high production costs.

In the six months to June 2015, Mumias crushed 581,541 tonnes of sugarcane, which reduced 45 per cent in the half-year ended December 2016 to 319,746 tonnes.

The loss-making miller has been faced with the challenge of farmers opting to supply its competitors or simply uprooting sugarcane, like Ms Oparanya, in favour of other crops, like maize and rice.

Weather conditions

According to Mumias Board Chairman Kennedy Mulwa, the miller plans to engage with farmers more to boost loyalty, as well as own more land.

“Mumias Sugar Company has planned for its future through an accelerated cane development plan, with the core focus being on increasing land under the company’s control,” said Mr Mulwa.

In the dairy sector, the country’s largest milk processor, Brookside, has seen the pressure on land and weather conditions threaten the supply of milk.

To wade through this, the firm has launched farmer-centred programmes. To satisfy its demand for 1.5 million litres a day, Brookside has extended contracts to 160,000 farmers from an initial 5,000. These farmers are spread across more than 300 co-operative societies in 27 counties.

According to John Gethi, Brookside’s director of milk procurement, the secret to lasting relationships with farmers has been regular payment for supplies and training.

“We have prioritised regular payments to farmers because we believe dairy farming has a big role to play in turning the wheels of the economy in rural areas,” said Mr Gethi, whose firm paid dairy farmers Sh10 billion last year.

The Ruiru-based processor also has a national pricing regime where producers throughout the country are paid the same price for each kilo of raw milk delivered.

The firm also runs 50 raw milk cooling plants to prevent losses from spoilt milk, and organises training courses at the village level to equip farmers with best practices and lure those not currently supplying the firm.

In addition, Brookside has demonstration farms where farmers can learn about dairy farming management to remain profitable.

Land pressure

For East African Breweries Ltd (EABL), the demand for Senator Keg has seen it set out to woo sorghum farmers.

In the Nyanza region, the firm launched a drive to encourage farmers to produce more sorghum, even as land pressure and the temptation to grow staple foods like maize builds.

Last year, the brewer said it was seeking to raise its sorghum uptake three-fold to 30,000 tonnes a year to satisfy growing consumption.

According to Lawrence Maina, the general manager at East African Maltings, an EABL subsidiary, the brewer wants to get this supply from at least 12,000 smallholder farmers who can dedicate an acre of their land to sorghum farming.

EABL is supplying seeds for free and purchases sorghum at Sh33 per kilogramme, with an additional Sh1 to cater for transport of the crop for farmers in Western Kenya.

For cigarette maker British American Tobacco (BAT), despite being the largest company in the sector, it faces the threat of farmers opting not to grow the tobacco. To avoid this, it maintains a close relationship with contracted farmers though support programmes and enhanced payments.

Last year, it raised the price per kilogramme by Sh8 to an average of Sh175 for the tobacco received by May. This pushed its total payout in 2016 to Sh1.31 billion, up from Sh1.24 billion in 2015.

Through these robust programmes, manufacturers hope to boost farmers’ commitment to continue supplying raw materials.

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