Traders feel the heat of global financial crisis

By Benson Kathuri

With the impact of the world financial crisis being heavily felt in global stock markets, exporters are now bracing for a slump in demand and have sought State intervention.

Now the Kenya Flower Council (KFC) is asking for Sh500 million to promote sales abroad.

KFC Chief Executive Jane Ngigi expresses cautious optimism that the performance will be sustained this year.

"There are no doubts that the financial crisis has led to reduced demand for goods and services and we cannot predict how this would affect horticulture," Ngigi told the FJ in an interview.

The crisis has caused a major change in consumer behavior around the world with foreign direct investment practices also changing almost on daily basis.

Tea and coffee exports to the US have stagnated with fears that it could get worse as the financial crisis that started in the world’s largest economy deepens.

"Our challenge is not only increasing the volume of our exports to the US, but also diversifying the range of exports with more value added components," said Matende Wabuyele, Export Promotion Council Chief Executive in an interview.

Despite the threats, the export sector remains disorganised with most traditional exports in coffee, tea and pyrethrum recording sharp declines.

Cost of inputs

Late last year, tea exporters raised the red flag saying the sub-sector, which is yet to recover from the impact of high costs of inputs and labour, is under threat.

According to senior managers at the Kenya Tea Development Agency, the decline in prices had been occasioned by the global credit crunch, weakening currencies in Kenya’s export markets and global inflation.

They warned that the impact of low prices could cause cash-flow crisis in the small-scale sector and lead to decrease in foreign exchange earnings and heighten inflation.

In Sri Lanka, tea auction prices began plunging in August 2008, precipitating an emergency stakeholders meeting convened by the Sri Lankan President to address the situation.

Sri Lanka's state-run tea promotion and regulatory body was reported to have bought large stocks of tea at auctions in Colombo in a bid to support prices.

It was authorised to buy up to 20 per cent stocks of tea and the Sri Lankan Government further agreed to help inject 5 to 7 billion rupees in emergency funding to protect their tea industry after the price collapse.

Sri Lanka Tea Board chairman Lalith Hettiarachchi said the move was agreed after prices plunged creating cash flow problems for factories and small farmers. Kenya’s tea industry, through the East African Tea Trade Association has petitioned the Government to convene a stakeholders forum to address the crisis in order to agree on urgent measures to stabilise the market.

This has not happened and analysts believe this is not likely to happen with attention now focused on the looming famine and the ongoing maize scandal.

Tea production

Tea Board of Kenya that regulates and monitors tea production and trade dismissed the fears saying the drop was temporary.

"Tea prices are gradually adjusting upwards without any deliberate interventions.

The unsold tea lots are now smaller, meaning most tea offered at the auction is being bought," said Sicily Kariuki, TBK Chief Executive Officer. "We are closely watching the situation all the same."

According to the Central Bank of Kenya the entire agricultural sector recorded mixed performance in the last 11 months of last year. During the period, tea production declined by 9.65 per cent to 307,902 tonnes in the Januaryto November, from 340,774.54 tonnes in January to November 2007.

The tea export prices averaged $2.81 per kilogramme over the first nine months of last year compared with $1.87 per kilogramme in the first nine months of 2007. In the horticultural sub-sector, output increased by 2.2 per cent in the first 11 months of last year from 175,306.26 tonnes in a similar period of 2007 to 179,089.84 tonnes.

"This reflected increases in production of cut flowers and vegetables," said the CBK.

However, coffee production declined by 26 per cent, from 50,972 tonnes in the first 11 months of 2007 to 38,705 tonnes in the first 11 months of last year.

The bank said this was due to high cost of production occasioned by increasing prices of fertilizer, chemicals, labour and farm implements.