Kenya Agribusiness Report Q3 2012

BMI View: Despite a largely disappointing grain harvest in 2011/12, Kenyan food security is expected to be relatively assured for the remainder of 2012, as a stable currency and a strong end to the harvest ensured sufficient supply. The country’s coffee sector is expected to remain a key driver of foreign reserves in the coming years, with this aided by government programmes aimed at increasing production and improving husbandry practices. For the sugar sector, we forecast continued output growth in the coming years as new investments come online. However, consumption growth is forecast to outpace production increases, leaving the country a net importer over the coming years. Although the country is expected to become a net grain exporter over that time, we highlight that poor weather can easily force the country to remain a net importer.

Key Views Corn production growth to 2015/16: 18.8% to 3.8mn tonnes. Growth will be a function of improved farming methods, domestic demand and the eventual introduction of genetically modified seeds. Sugar consumption growth to 2016: 28.6% to 994,200 tonnes. Higher incomes will drive consumption, and a government policy that eliminates sugar import tariffs could force domestic producers to be more efficient.

Coffee production growth to 2015/16: 46.2% to 950,000 tonnes. Growth will be driven by increased financial support from the government in the form of funds and debt relief. New coffee varieties planted also will help to boost yields. 2012 real GDP growth: 5.9% (up from 4.1% in 2011; predicted to average 5.4% from 2011 until 2016). Consumer price inflation: 12.3% year-on-year (y-o-y) in 2012 (down from 14% y-o-y in 2011).

Industry Outlook We estimate lower sugar production in Kenya in 2010/11 on the back of bad weather during growing conditions, which limited supply of cane to millers. We estimate that production fell 4.7% to 534,000 tonnes in 2010/11 but expect a recovery in output to 550,000 tonnes in 2011/12. We believe the ongoing dispute between farmers and millers over prices also restricted the amount of cane sold to millers, in turn affecting production. Indeed, Kenyan farmers have cited stagnating prices paid by millers for sugar cane in a context where global sugar prices are elevated by historical standards and where millers make extra profit selling their sugar.

We continue to forecast a slightly weaker corn crop in 2011/12, at 2.8mn tonnes, with the country’s wheat crop expected to come in at 210,000, slightly lower than 2010/11 level. The end of the harvest has been relatively favourable for corn growers, with steady rains in March and May, the end of the ‘short-rain’ harvest. More generally, rains have been average in most areas dating to mid-October, though there have been some concerns about lack of rain in marginal agricultural areas, particularly in the south east, which prevented crop production from expanding further. The result is that even with production decreasing year-on-year, domestic grain prices (particularly corn), have stabilised in recent weeks after rising significantly in mid-2011.

In our view, the government will most likely authorise imports to fill Kenya’s corn production deficit. We forecast the country’s corn production deficit to reach 530,000 tonnes in 2011/12, 4.3 times higher than in 2010/11. Additionally, the United States Department of Agriculture forecasts Kenyan corn imports of 400,000 tonnes in 2011/12 as the government has temporarily lifted the Eastern Africa Community’s 50% tariff rate on imported corn for human or animal consumption. We expect that these imports will be insufficient to help domestic prices to moderate in 2011/12. In fact, imports could be lower than needed owing to the restriction on genetically modified imports from traditional trade partner South Africa.

Furthermore, corn supply from neighbouring countries such as Uganda, Tanzania and Malawi could be subdued as the government of Tanzania maintains a corn export ban and transportation costs from Malawi are reportedly high.