20 November 2018

Kenya: Cut Flower Sector Wilting Under New Rules, Competition

Hopes by Kenya's flower growers to exploit the lucrative United States market and stop dependence on the European market will not bear much fruit despite the recent launch of direct flights between Nairobi and New York.

In spite of optimism and excitement after national carrier Kenya Airways (KQ) started direct flights to the US in October, the airline's business strategy of focusing on passengers as opposed to cargo has dashed the hopes of the flower industry of targeting the market that has remained elusive.

This is bad news for the industry which despite being the second leading foreign exchange earner after tea, is grappling with a myriad of challenges that are threatening the country's position as Africa's leading producer of cut flowers.

The sector is currently dealing with challenges ranging from a fertiliser importation crisis, increase in input taxes, delays in tax refunds, stringent phytosanitary requirements in the European Union (EU) market, new demands on fumigation by key market Australia to intensifying competition from emerging flower producers like Ethiopia, Rwanda, Uganda and Tanzania.

In the midst of these predicaments, the decision by KQ to dedicate the new route specifically to passengers, with only five tonnes allocated to cargo, means the flower industry cannot count on the national carrier to penetrate the US market.

Already most of the cargo space has been seized by Export Process Zones-based manufacturers of textiles and apparels that constitute Kenya's main export to the US under the Africa Growth and Opportunity Act.

"There is nothing for Kenya in the US market for now," said Clement Tulezi, the Kenya Flower Council chief executive.

He added that although KQ can decide to help the industry by introducing a dedicated cargo flight, there is the issue of the return flight flying back empty because Kenya's main imports from the US are bulk machinery, cereals and aircraft that are shipped here.

Currently, Kenya accounts for less than one per cent of the US flower market, earning less than $10 million annually, with Colombia dominating at 70 per cent followed by Ecuador at 20 per cent. These two countries also have the advantage of proximity.

"Although Kenya cannot continue depending on the EU for sustainability, we are protecting our key markets and seeking new ones in Asia," explained Nehemiah Chepkwony, Horticulture Crops Directorate interim head.

Flower markets

In 2017, Kenya exported 450,000 tonnes of cut flowers, with the EU providing 66 per cent of the market. Other key markets for Kenya are Japan, Australia and China while efforts are ongoing to increase presence in promising markets like Russia, Turkey, South Korea and India.

Kenya is particularly upbeat on increasing exports to China where volumes stand at 4,000 tonnes annually after President Uhuru Kenyatta signed a horticulture export deal with his Chinese counterpart President Xi Jinping when he attended the China International Import Expo recently.

Last year, the country earned a staggering $796 million from flower exports representing a 12 per cent growth from the previous year in which the sector earned $687.4 million.

In the first eight months of this year, the industry has maintained an impressive performance raking in $746.6 million, a 38 per cent increase from $539.8 million realised the same period in 2017 according to data by the Kenya National Bureau of Statistics.

Notably, 65 per cent of Kenya's flowers are sold at the world's largest flower auction in the Netherlands, meaning they lose identity by being branded by the buyers rather than the producers.

The country is trying to increase direct sales from the current 35 per cent to 50 per cent to enhance the visibility of the Kenyan flower brand.

Volumes

Although Kenya is basking in the continuous good performance of the cut flower industry, with land under flower cultivation increasing from to about 4,000 hectares in recent years down from 3,000 hectares, the industry is in a state of panic over mounting challenges.

"The long term survival of the industry is at stake because we have a feeling the government does not care about the industry but only cares about the taxes it generates," stated Mr Tulezi.

He added that while 60 per cent of sales are recorded during the Christmas season and Valentine Day in February, Kenya might fail to accumulate enough volumes for these high peak seasons due to a biting shortage of soluble fertiliser, a critical input in flower farming.

As part of the war on counterfeits, the Kenya Bureau of Standards (Kebs) recently introduced 100 per cent inspection on all soluble fertiliser shipments entering the country amidst protests by industry players that the accepted trend worldwide is based on pre-shipment inspection.

"Flower farming depends on specialised fertiliser and the decision by Kebs is affecting the industry badly. We are working on resolving it," admitted Mr Chepkwony.

Considering that Kebs lacks the internal capacity to inspect the volumes of shipments, the decision has ignited a major crisis with imports that had arrived at the port of Mombasa five months ago yet to be cleared and released.

The problem of inputs has been compounded by the move to introduce 16 per cent value added tax (VAT) on crop protection products like pesticides, a development the industry reckons will increase the cost of production and make Kenya's flowers expensive.

Although it previously costed $0.21 on average to produce one rose flower, with the new tax, it will cost $0.36. Also at play is the fact that before the tax, Kenya used to sell a kilogramme at $0.3 compared with Ethiopia that sells at $0.28 per kg.

VAT refunds

The issue of fertiliser and pesticides, however, are problems that have cropped up recently. For years, the industry has been at loggerheads with the Kenya Revenue Authority over VAT refunds, with the taxman owing some flower firms as much as $500,000 with others having not been refunded since 2013.

Yet even as it battles internal challenges, the flower industry is also under attack. To start with, the EU has continuously introduced new phytosanitary requirements that demand low concentrations of chemicals.

The requirements are forcing flower farms to seek alternatives methods of crop management, with expensive biopesticides and integrated pest management being the main options.

While overcoming these challenges is hard enough, the emergence of new cut flower producers, particularly Ethiopia, is causing jitters that Kenya's dominance is diminishing, albeit slowly.

"Ethiopia is coming up well thanks to government subsidies but we are still 30 per cent ahead in volumes," noted Tulezi, adding that it might take Ethiopia another 10 years to catch Kenya.

For Ethiopia, factors like availability of land, cheap labour and government incentives coupled with a vibrant logistics industry anchored by Ethiopian Airlines have provided a fertile ground for the flower industry to bloom.

Currently, the Ethiopian cut flower industry is raking in about $300 million annually and the government is targeting earnings in the region of $1 billion in the medium term.

Kenya

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