Kenya’s economy is bracing for a meagre performance from its soft commodities which contribute heavily to foreign exchange earnings.
Tea, coffee and horticulture, the country’s major foreign exchange earners have performed dismally this year largely because of erratic weather patterns and suppressed external demand which led to reduced export especially in horticulture.
According to the Kenya National Bureau of Statistics, tea, the country's biggest cash crop by volume, decreased by a marginal 0.9 per cent to 193,241 tonnes in the first five months of the year from 195,091 last year.
“I think probably the biggest challenge that they are facing right now is the commodity prices and sales in the international market. If you look at last year we had coffee prices perform quite badly but the tea prices were quite strong and we are looking at a reverse trend this year where the tea prices are quite low due to oversupply and the coffee prices are not doing quite well due to the adverse effects from Brazil and other coffee producers,” Moses Kiplagat, managing director of Sasini Tea told CNBC Africa.
Tea exports which earned Kenya about 1.3 billion Kenyan shillings in 2013 have been declining since February 2013. NSE-listed agricultural firms Williamson Tea, Kapchorua Tea and Limuru Tea have indicated that the drop in tea prices could hit their profits for full year earnings. Williamson Tea and Kapchorua Tea both posted a slide in annual profits in June.
According to Daniel Kuyoh, a research analyst at Kingdom Securities, the drop on commodity prices does not reflect well for the affected companies as the reduction goes beyond 50 per cent.
“These prices have been depressed as a result of oversupply. We feel that it is better to inform our shareholders that there is a red flag that profits may not be as good as was the case last year and more so we expect an even more depressed situation going forward,” Kuyoh said.
(READ MORE: Kenya horticulture exporter's position threatened)
Meanwhile, the East African country’s growth in production of horticulture slowed in the first quarter of the year. The country together with its peers from the East African Community is expected to sign an economic partnership agreement for fresh produce exports to the European Union market. This agreement will help Kenya avoid heavy taxation, which its exporters would have faced in the EU.
“One of the things that has emerged is the EU agreement with Kenya. [The country] has sort of lagged behind in this new agreement and there were indications in the media that it won’t be signed until the fourth quarter of this year. And when we see this trend emerging it’s definitely sending some shock within the horticultural market and even the European market. They are beginning to look for new avenues where they can bring in their products from.”