Coffee auction prices register sharp drop this season

The drop was because millers were not releasing to the market clean coffee as they have been denied license by respective authorities.

The government renewed efforts to deepen reforms has received resistance from key players in the sub-sector mainly the buyers and marketers. Key reforms that the government is fast tracking include licensing of coffee brokers to replace the former marketing agents at the Nairobi Coffee Exchange (NCE).

The former marketing companies said to be holding over 250,000 bags of clean coffee have contracts with farmers which are ending this month. The government has so far licensed 13 coffee brokers but volumes of clean beans being traded have dropped sharply eliciting a concern both locally and internationally.

Our writer Agatha Ngotho recently interviewed the NCE chairman Peter Gikonyo on the current situation at the auction and other pertinent issues the coffee sub-sector is grappling with. Below are excerpts.

Tell us briefly about Nairobi Coffee Exchange.

The Nairobi Coffee Exchange is a spot market auction that has existed for over 90 years as a price discovery mechanism that is transparent and is benchmarked worldwide. The Exchange brings together coffee buyers, and the coffee growers represented by the coffee brokers. Currently about 80 per cent of Kenyan coffee is traded through the auction, making it a particularly important marketplace for all Kenyan coffee traded across the world.

NCE prides itself on a robust automated coffee auction system which was put in place in 1998 with an upgrade in 2018. Further, in 2020 a web-based platform was acquired to enable trade participants to work remotely from their offices or homes in any part of the world.

The digital upgrade is one of the successes NCE celebrates today as it has brought a lot of ease in the way coffee is traded. To enhance transparency and encourage growers to follow trading, regional screens were installed in various coffee producing regions including Nyeri, Kirinyaga, Kisii, Bungoma, Machakos and Meru. Further we are in the process of deploying a mobile app where growers can follow their trading as they go on with their daily life.

What is the role of NCE?

Besides its key role in providing a trading platform where coffee is offered by the growers to the coffee buyers, we boast of providing a transparent, secure, and innovative marketing system that serves the industry’s needs.

Recently, the government introduced the NCE Direct Settlement System (DSS) to ease payment to farmers. Explain more on this?

The DSS is a banking facility provided by Commercial Banks, regulated by the Central Bank of Kenya, for clearing and settling coffee sales proceeds. Currently, the Cooperative Bank of Kenya is the appointed service provider, with the key users including coffee growers, buyers, brokers, warehousemen, and millers.

This will not only enhance transparency, efficiency and effectiveness of the trade but also improve the liquidity to growers as the coffee sales proceeds are settled directly to their US dollar account within the prompt date after the sale and no more money is held in the DSS system.

In the recent past there has been a decrease in the number of Kenya Coffee buyers. Why so?

Currently, the auction attracts an average of 25 buyers on each auction day. This low participation by buyers affects competition in bidding of coffee at the auction as this is where 80 per cent of the Kenyan coffee is traded.

So far Agriculture and Food Authority (AFA) has currently licensed 121 coffee buyers for the season 2023/2024 but only 58 have registered at the NCE to buy coffee from the auction. This is a major concern.

As at the end of the coffee year 2021/22, we had 52 buyers participating in the auction against 122 coffee buyers licensed by AFA Coffee Directorate for the same period.

We therefore as an exchange, encourage all the licensed buyers to participate in the auction as that is the reason they were licensed.  We are in the process of putting mechanisms to ensure their participation. After every auction there is a report that shows the coffee offered, sold and at what price.

The auction has witnessed low prices in the current fourth quarter of 2022/2023 season. What is the current price compared to that of last year and why has it dropped?

Following the change of marketing regime in the country, former marketing companies were supposed to apply for licenses as brokers from Capital Markets Authority (CMA) as at the end of June 30, 2023.  NCE is currently under the supervision of the CMA following the enactment of the Capital Markets (Coffee Exchange) Regulations 2020.

So far 13 companies have been licensed as coffee brokers but volumes of coffee being offered for sale is still low as the former marketing agents have contracts with farmers ending September 30, 2023.

In the previous regime most of the milling companies equally had marketing agents’ licenses but the current license regime has spread issuance of the permits to other players. For example, milling, warehouse licenses are supposed to be issued by the county governments.

Early this week, milling companies complained that the counties are yet to issue them with the permits thus complicating grinding of coffee beans. What is your take on this?

The information shared by growers attests to this slow flow of volumes to the trading floor as most of the coffee parchment is in the custody of their contracted millers. The millers have not been able to secure milling licenses issued by the county governments. We expect the situation to change once the contracts ends and farmers sign new agreements.

The auction volumes for August 2022 were at 4,380MT, compared to this August 2023 at 192MT representing a 95.62 percent drop of the volumes flowing to the trading floor. The average price during August 2022 is Sh39,228 (US$266.32) per 50kg bag, in August 2023, the average price is at a low of Sh27, 017 (US$183.41) per 50kg bag, also recording a 31.13 percent drop.

What are some of the coffee exports highlighted?

Among the nine top destinations whose total uptake of about 79.6 per cent, only Tunisia and Norway do not belong to any major economic bloc. Countries such as Belgium, Germany, Sweden, and Denmark belong to the EU which takes about 41.2 percent.

It is not surprising that none of the countries comprising South America common market is presently importing coffee from Kenya, the economic bloc includes among others Brazil and Colombia which are major world coffee producers.

Way forward

I would like to encourage all licensed buyers to participate at the auction to increase competition and potentially improve prices. Coffee growers need to improve the quality of their production to capture a larger share of the international market and thereby increase the much-needed foreign earnings from the sale of coffee.

I also want to encourage growers to embrace and enrol in the Direct Settlement System (DSS) to enhance seamless and transparent settlement of coffee sales proceeds. There is a need to develop a more robust digital trading platform alongside the auction system to allow continued trading of coffee not limited to auction days with emphasis on specialty coffee.

There is a need for all to embrace coffee reforms and encourage the players to play their respective roles in ensuring business continuity. A major shift towards the reforms has been achieved and any deviation would disrupt the path to full implementation.

Parting shot

Over time, the Exchange has developed an impeccable reputation as the one stop market for all the coffees grown around the country. We’ve developed goodwill with the growers, buyers, and warehousemen.