Kenya’s sugar sub-sector: A good case for multifunctionality?

Multifuncionality: Recognizing the special role of agriculture

§ Multifunctionality seeks to acknowledge the “social role” of agriculture. Hence, focus on non-trade concerns of agriculture.

§ Multifunctionality admits that beyond ensuring food security, agriculture plays important role in supporting rural development, maintenance of agricultural landscapes, cultural heritage, preservation of agri-biological diversity and good plant, animal and public health.

§ Government intervention is viewed as important to support multifunctionality even where this contradicts trade rules.

§ The agricultural sector is largely underdeveloped in many d’g countries for domestic and export market. Still, agriculture accounts for large share of GDP, employs large share of labour force, major source of forex and subsistence and income for large rural populations.

“ Significant progress in promoting economic growth, reducing poverty and enhancing food security cannot be achieved in most of these countries without developing more fully the potential capacity of the agricultural sector and its contribution to overall economic development” (FAO, 1999).

§ Key sub-sectors need a multifunctional approach in recognition of their far-reaching implications on peoples’ livelihood and employment.

§ Multifunctionality should be geared towards increasing domestic capacity, improving rural employment and development.

Key sub-sector characteristics

§ Kenya’s sugar sub-sector is dominated by small-scale producers.

§ Sub-sector has been marked by mismanagement resulting in a drastic decline in production levels. In 1999 for instance, Mumias had a total production of 253,000 tonnes compared to a total production of 191,000 produced by Chemelil, South Nyanza (Sony), Nzoia and Muhoroni. Mumias is considered a more efficient producer due to its management style.

§ Kenya has excellent cane growing weather conditions but a lack of adequate incentives has meant that only two-thirds of consumption needs can be met by local outgrowers.

§ The sugar sub-sector provides direct and regular employment for 35,000 workers and thousands more employed as casual workers on farms.

§ The sub-sector supports an estimated 2.6 million people representing 7-8 % of the population.

§ As at beginning of 2000, 88% of total area of 108,793 hectares belonged to small-scale growers. Sub-sector strategic in promoting rural development and fighting poverty.

Key issues in thinking about multifunctionality on sugar sub-sector

§ Local outgrowers need protection against unregulated sugar imports that glut market and stifle local production. Potential interventions include classification of sugar as a designated commodity, under-declaration and duty evasion by sugar importers. Allocation of import quotas an important check against dumping and protection of revenue base for local farmers.

§ Incentives should be targeted at enhanced efficiency by reducing production costs and development of better varieties to enhance competitiveness against low cost producers like Brazil and Australia.

§ Wide variances exist on production costs. Mumias is the most efficient producer using 9.82 tonnes of cane to make 1 tonne compared to 16.65 tonnes for Miwani. In 1999, KSA estimated that the cost of developing a hectare of plant cane in Nzoia nucleus estate and outgrowers’ farms was Kshs 158,174 against a return of Kshs 138,400 to the farmer paid over 2-3 years.

§ But first, farmer has to pay: 18% VAT, 7% Sugar Development Levy, 2% presumptive income tax, 1 % cess to local authorities and additional levies to outgrower companies. In total, a total tax burden in excess of 28%.

§ Incentives should support outgrowers to sell without burdening consumers. Currently, taxation accounts for an average 35% of the retail prices.

§ Prices of sugar should be determined by the (international) market to ensure better returns to farmers as opposed to the current structure where the price is negotiated between Kenya Sugar Cane Growers Association, Kenya Sugar Manufacturers in consultation with Kenya Sugar Authority.

§ There’s need to consider measures which can boost efficiency in sub-sector e.g. irrigation and land reform in favour of consolidation to reduce costs and enhance efficiency.

§ Need to consider how best to address dumping problem with view to cushioning local producers. Current world production of 129.1 million tonnes in excess of annual consumption of 124.6 million tonnes creating avenue for dumping.

How can multifunctionality be operationalized?

§ Develop a “Development Box” under which developing countries can increase domestic production and protect livelihoods of small farmers.

§ DB to provide flexibility of import controls, tariff barriers and domestic support for key agricultural products until export levels are achieved.