Required Report - public distribution

**Date:** 4/6/2004

**GAIN Report Number:** KE4004

KE4004

**Kenya**

**Sugar**

**Kenya Sugar Update Report**

**2004**

**Approved by:**

![](media/image1.wmf)Fred Kessel

U.S Embassy

**Prepared by:**

Mary Onsongo

**Report Highlights:**

The Kenya sugar industry, outturn for MY 2003 was 448,000 tons, a 9 %
production decline from the previous year. The decline in performance is
attributed to low farmer morale, reduced prices, outdated machinery and
technology among other factors. A modest production decline (4%) is
forecast for 2004.

The industry is pre-occupied with controversies on modalities of COMESA
sugar quota import. The COMESA safeguards were extended for four years
(up to 2008) to cushion the local industry from competition by low cost
producer member states. In a move to pre-empt the recurrence of the
present unprecedented sugar crisis in Kenya, the GOK has promised to
review the flawed Sugar Act.

Includes PSD Changes: Yes

Includes Trade Matrix: No

Annual Report

Nairobi \[KE1\]

\[KE\]

Table of Contents

[**Executive Summary 3**](#executive-summary)

[Production 3](#production)

[Kenya PSD Table 3](#kenya-psd-table)

[Area Under Cane and area harvested
4](#area-under-cane-and-area-harvested)

[Cane yields 4](#cane-yields)

[Sugar Research Foundation 4](#sugar-research-foundation)

[Consumption and Trade 4](#consumption-and-trade)

[COMESA quota system 4](#comesa-quota-system)

[Export quota 4](#export-quota)

[Sugar Consumption 4](#sugar-consumption)

[Policy and Marketing 5](#policy-and-marketing)

[Sugar Industry Challenges 5](#sugar-industry-challenges)

# Executive Summary

The Kenya sugar industry recorded production for MY 2003 at 448,000
tons, a 9 % production decrease from the previous year. The decline in
performance is attributed to low farmer morale, reduced prices, outdated
machinery and technology among other factors. A slight production
decline (4%) is forecast for 2004. Presently the industry is
characterized with COMESA sugar import conflicts between the Kenya
Revenue Authority and Kenya Sugar Board. The COMESA safeguards were
extended for four years (end 2008). In a move to pre-empt the recurrence
of the present unprecedented sugar crisis in Kenya, the GOK has promised
to review the flawed Sugar Act and make workable recommendations.

# 

# Production

Kenya Sugar Board registered production for 2003 at 448,489 tons a 9 %
decrease from the previous year. A marginal decrease (430,000 tons) is
forecast for 2004. The decrease is attributed to low farmer morale,
reduced prices and reduced yields and area harvested.

## Kenya PSD Table

  --------------- --------------- ---------- ---------- ---------- ---------- ----------
  **PSD Table**                                                               

  **Country**     **Kenya**                                                   

  **Commodity**   **Centrifugal                                    (1000 MT)  
                  Sugar**                                                     

                  2002            Revised    2003       Estimate   2004       Forecast

                  USDA Official   Post       USDA       Post       USDA       Post
                  \[Old\]         Estimate   Official   Estimate   Official   Estimate
                                  \[New\]    \[Old\]    \[New\]    \[Old\]    \[New\]

  **Market Year                   01/2001               01/2002               01/2003
  Begin**                                                                     

  Beginning       60              60         99         99         118        146
  Stocks                                                                      

  Beet Sugar      0               0          0          0          0          0
  Production                                                                  

  Cane Sugar      494             494        350        448        0          430
  Production                                                                  

  TOTAL Sugar     494             494        350        448        0          430
  Production                                                                  

  Raw Imports     70              70         130        130        0          100

  Refined         80              80         70         90         0          90
  Imp.(Raw Val)                                                               

  TOTAL Imports   150             150        200        220        0          190

  TOTAL SUPPLY    704             704        649        767        118        766

  Raw Exports     15              15         11         11         0          11

  Refined         0               0          0          0          0          0
  Exp.(Raw Val)                                                               

  TOTAL EXPORTS   15              15         11         11         0          11

  Human Dom.      510             510        420        510        0          520
  Consumption                                                                 

  Other           80              80         100        100        0          100
  Disappearance                                                               

  Total           590             590        520        610        0          620
  Disappearance                                                               

  Ending Stocks   99              99         118        146        0          135

  TOTAL           704             704        649        767        0          766
  DISTRIBUTION                                                                
  --------------- --------------- ---------- ---------- ---------- ---------- ----------

# Area Under Cane and area harvested

A marginal increase in area under cane (2%) was experienced during 2003
and a further increase is expected during the year 2004. Presently area
under cane is recorded at about 122,600 hectares. During 2003 area
harvested and cane delivered declined by about 6.4 % and 6.6 %
respectively. Both are expected to have a marginal increase during the
year 2004. The Sugar Act requires that farmers be paid promptly and if
sustained this will boost farmers morale and consequently their
participation in sugar farming. The 2003 controversial cane pricing
formula yielded an average cane price Kshs 1,800 per ton.

# Cane yields 

The sugar industry recorded a marginal increase in yield for 2003.
Better cane yields are likely to be realized in late 2004 and 2005 as
the farmers improve on crop husbandry practices if prompt payment is
maintained.

# Sugar Research Foundation

The Sugar Research Foundation has developed six new varieties, ready for
commercialization (adoption on going). The new varieties are high in
sugar content, have improved yield prospects and can withstand
resistance to pests and are early maturing. The varieties are for
different agro ecological zones and yield 10-13 % more than the
conventional varieties. Research activities are operating below
expectations at present.

## 

# Consumption and Trade

## COMESA quota system 

Kenya received the first COMESA safeguard in 2002 for sugar, which was
extended in 2003 and 2004. On realizing that the three-year safeguard
had achieved little GOK negotiated for a final four-year extension
ending in 2008 in order to allow the sugar industry to recover and
restructure and attain self-sufficiency. The country will import the
difference between production and consumption, which is estimated at
200,000 tons comprising of 110,000 tons of plantation white sugar and
90,000 tons of refined sugar.

# Export quota

Kenya is negotiating for an export quota to EU (temporary at the
moment). Mumias Sugar Company is delivering the EU temporary quota
requirements from Kenya (11,300 tons).

# Sugar Consumption

Demand is difficult to measure and is estimated at 600,000 tons by Kenya
Sugar Board, a figure that has received a lot of criticism by industry
analysts. FAS estimates sugar consumption at about 510,000 tons of sugar
and other disappearance mostly industrial, at 100,000 tons.

Imports that are mainly from COMESA member states are difficult to
capture as the sugar comes in containers and is not declared by the
traders. Import irregularities are still a common occurrence at the port
of Mombasa. Efforts to curb them are being instituted but will take time
before the practice is completely erased.

## Policy and Marketing 

During 2003 the sugar industry was on the blink of collapse with the
sector characterized with reduced performance due to high production
costs, old machinery, low investment, and lack of credit and general
mismanagement of factories. On this strength a four-year COMESA
safeguard period was negotiated to cushion local industries from
competition by low cost producer member states and work has began
tentatively on reducing the cost of sugar production. Kenya imports the
sugar deficit estimated at 200,000 tons (110,000 industrial sugar and
90,000 table sugar). Efforts by the GOK to resuscitate the sub sector
have rocked the industry between the Kenya Sugar Board (KSB), Kenya
Revenue Authority (KRA), Ministry of Trade and sugar traders. The main
reason for the disagreement is the modalities of regulating the 90,000
tons COMESA sugar imports. Ministry of Agriculture and KSB wish to
monitor and control sugar imports, an issue the Ministry of Trade argues
risks breaching the COMESA protocol and the Treasury insists the KSB and
the Ministry of Agriculture have no business with sugar imports
regulations.

The sugar industry is characterized with directives that are nearly
always partially implemented. GOK is making efforts to review the flawed
Sugar Act. In line with the Sugar Act GOK has released Kshs 800 million
loan from the sugar development fund to pay farmers for arrears due from
the mills. Arrangements to pay the balance estimated at Kshs 900 million
are underway. Arrears due to farmers a common feature in the past seems
to be coming to an end. The major challenge is maintenance of prompt
payment by the milling companies.

The industry has also witnessed a wave of technical management changes
with F.C. Schaffer and Associates of USA (Nzoia Sugar Company) and
Booker Tate of UK (Mumias Sugar Company) relieved of technical
management. Government recruited local technical managers have been put
in place at both mills.

Controversy over the proposed cane price reduction from Kshs 2,015 to
Kshs 1,800 per ton precipitated a crisis in the industry in 2003 with
some farmers abandoning sugar cane farming and going on strike and
refusing to deliver sugar cane at their respective factories. It is
hoped that with the new price structures the sugar mills that are
predominantly government owned will make operational profit.

# Sugar Industry Challenges 

The industry is faced with a major challenge of reducing the cost of
sugar production if they have to compete with the other COMESA member
states, after the expiry of the safe guards in 2008. The factories are
considering the following options as cost cutting measures;

-   Co-generation of power and consequent contribution to the national
    grid

-   Adopting the new released sugar varieties that are early maturing,
    rich in sugar and high yielding.

-   Improving or boosting technology i.e., diffuser systems, modern
    boilers, powerhouse etc.

-   Branding sugar to claim ownership and market segmentation.

-   Fortification with vitamin A and other minerals.

Most of the six functioning factories have branded their sugar except
Muhoroni (under receivership) and West Kenya. Mumias, the industry
flagship, has embarked on market segmentation and product positioning.