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Findings on the Implication of Excise Duty on Sorghum Value-Chain

Kenya’s agriculture sector continues to face challenges in production in marginal areas. This is mainly due to frequent and prolonged drought hence the need for drought resistant crops like sorghum to address the issue of food security, household income, poverty alleviation, and climate change adaptation. Kenya’s Vision 2030 also identifies agriculture as one of the key sectors to deliver sustainable economic growth and improved livelihoods for the poor in the rural areas. Productivity increases in agriculture can reduce poverty by increasing farmers’ income, reducing and stabilizing food prices and thereby enhancing increments in consumption.

Sorghum is a staple food crop for many low-income households in Kenya and a raw material in the food, feed and brewing sectors of this country. When sorghum is viewed in terms of its suitability for production in drought-prone, semi-arid areas of Kenya, its importance increases. The growth of these regions will best be served by promoting the production and use of crops suited to these agro-ecological conditions - this has been the driving force behind promoting sorghum production by various stakeholders in these regions. In 2012, Eastern, Nyanza and Western regions accounted for 45, 39 and 6 percent of the Kenya’s sorghum production respectively. Collectively, these three regions produce about 91 percent of the country’s sorghum (MoA-ERA, 2011, 2012 & 2013).

In 2004 the government granted a remission of 30 % on excise duty on beer made from sorghum, and increased it to 100 % in 2006. This allowed beer made from locally produced sorghum to be sold at Ksh 16. per 300 ml per glass (equivalent of $0.20), approximately the same price as most illicit brews. This was meant to promote the use of locally produced raw materials (sorghum) while encouraging consumers of illicit brew to switch to hygienically prepared beer. This tax break boosted sales of legal beer made from sorghum, and allowed government to collect some of the tax lost from sale of illicit brews. In September 2013, a new tax regime came into force through the Customs and Excise Act that introduced excise duty on beer made from sorghum, millet or cassava at 50% of the rate charged on other beverages on top of the 16% VAT that the beer attracts. This brand of beer from sorghum was initially introduced to woo drinkers of illicit brew to a more hygienically prepared brew.

In our recent analysis of the implication of the excise duty on the sorghum value chain, we use the case study of smallholder sorghum producers to demonstrate the anticipated welfare losses to farmers as a result of its implementation and the implication on the fight against poverty, food security and job creation. The Government’s key argument in introducing this tax was difficulty to administratively differentiate between various beer products and those made from sorghum hence posing a threat to revenue collection. However, this argument did not take into account how the small scale sorghum producers will be affected if the demand for sorghum, a raw material in beer production is curtailed by the new tax regime on the sorghum beer.
The introduction of the tax and subsequent withdrawal of a major buyer in the sorghum value chain has led to income losses estimated at Ksh 3.4 billion to various actors. The country risks adverse long run effects on poverty, food insecurity, nutrition and unemployment as well as increase in number of children dropping from school due to this tax.

The incentive to produce sorghum by farmers in marginal areas where food insecurity and poverty is rampant was enhanced by market access offered by East African Breweries Limited and the hope for better returns. However, the excise tax increased cost of producing a litre of sorghum beer by Ksh 35. This additional cost was passed on to consumers of the beer subsequently leading to low demand. Sales for sorghum beer fell by 75% in 2013/2014 as reported by EABL. The brewer subsequently reduced demand for sorghum. Our analysis estimates the farmers’ forgone income from sale of sorghum to EABL in 2013/2014 at about Ksh. 180 million. We anticipate decline in production of white sorghum due to the shrinking of the market. Sorghum production declined by 17 percent in 2013 (FAO estimates) and the question we pose is: Could this be attributed to market uncertainty faced by farmers due to the excise tax on sorghum beer? The intermediaries’ forgone revenue from bulking and sale of sorghum to EABL is estimated at Ksh 78 million. Jobs have been lost by several other actors in the value chain. EABL has reported losses in revenue stream due to low demand of sorghum. Who could be gaining from this tax regime? Perhaps feed manufacturers if they take advantage and buy sorghum cheaply from farmers- but again this needs to be investigated.

Implications for Policy
Efforts by the government and other stakeholders to promote sorghum production were based not only on the desire for equity or concern about the welfare of those producing insufficient food, but also its contribution to national economic growth. Therefore, government policies and investment strategies should be designed to exploit the competitive advantages of poor people living in marginal areas in the production of sorghum. They should also ensure agricultural growth with favorable marketing incentives in the agro-processing sector. In response to the Custom and Excise Act 2013 that introduced a 50% excise tax on sorghum beer, the government should consider the following actions:


Firstly, reviewing downward the rate at which the excise duty has been set before total collapse of the sorghum value chain so as to:
a. Keep farmers in business as they continue to meet their food security needs and be able to keep their children in school.
b. Help in reducing the number of people consuming illicit brews hence avoiding unnecessary deaths.
c. Stimulate demand for sorghum beers hence help the government realize the projected Excise tax of Ksh 6.2 billion or more.

Secondly, explore options for up-scaling use of sorghum in feed and food manufacturing to cushion farmers from market uncertainty and over reliance on EABL as a major buyer since agricultural marketing and agro-processing is critical to agricultural growth.

Finally, review the rationale for imposing excise duty on value added products manufactured using locally produced agricultural raw materials.

Author: Joseph Opiyo, Senior Research Assistant at Tegemeo Institute of Agricultural Policy and Development – Egerton University

Quick Links

Tegemeo at the Inaugural East Africa Evidence to Action Conference, 24th May 2017

 group photo iced

Tegemeo participated at the inaugrual East Africa Evidence to Action (ICED) Conference held on 24th-25th May 2017. 

Various speakers and panelists provided in-depth insight as well as practical tools that will enhance evidence based and data informed Policy and Practice in Africa.

Many topics were covered during this inaugural conference and in line with Tegemeo's mandate of disseminating its research findings to various stakeholders, we participated in various sessions. The Institute Director Dr. Mary Mathenge led a panel of other experts from the Institute comprising of:  

  1. Dr. Mercy Kamau, MLE Director, Tegemeo Institute
  2. Dr. Lilian Kirimi, Research Director, Tegemeo Institute
  3. Dr. Timothy Njagi, M&E Specialist, Tegemeo Institute
  4. Dr. Miltone Ayieko, Outreach, Communication & Partnerships Coordinator, Tegemeo Institute

The panel of experts discussed keys to translating Evidence to Policy and Practice: Lessons and Experiences from Agricultural Policy Research

 

Besides the Tegemeo team moderating in various sessions and exhibiting part of its research products, Dr. Timothy Njagi & Dr. Mary Mathenge presented at a break out session themed Adoption of Improved Technology. Their presentation was on lessons drawn from a study on Adoption of Technology Bundles among Smallholder Maize Farmers in Kenya Evaluating Socioeconomic Impacts of Mid-altitude Maize Hybrid Varieties in Kenya. Dr. Mercy Kamau and Dr. Fred Bagamba presented at yet another break out session themed: Adoption of Improved Technology. Their presentation was onImproving food security through the introduction of new seed varieties: How effective are demonstration plots and field days in influencing farmers adoption behavior towards new maize and bean varieties?

The conference was held at Park Inn Radisson Blu, Nairobi.

Visit our twitter and flickr pages to follow on part of the proceedings

 

 

Tegemeo-ELLA Workshop on Land Tenure and Sustainable Pastoralist Systems, 16th March 2017

Date: 16th March, 2017

VenueOlolulung’a Sub County Headquarters, Narok County

Pastoralism is an extensive form of livestock production that constitutes the main production system found in rangelands, providing livelihoods to an estimated of 500 million people globally. Similar to other parts of the world, the country’s public policy has not always pursued policies that are sustain pastoralism. This has been due to misconceptions about pastoralism, competition from other land uses, demographic changes and urbanisation. As such, pastoral communities in Kenya, similar to other parts of the world, are now facing immense pressure on their land.

Against this backdrop, Tegemeo Institute conducted a study that tracked how land tenure in pastoralist communities had changed. In addition, we were able to compare this evolution with what is happening to pastoral communities in other parts of the world with a view of learning from these experience and drawing lessons that will help pastoral communities sustain their productive systems. We have drawn lessons through interaction with experts from Sub Saharan Africa and Latin America. The findings from this work are now ready to be disseminated as we continue to engage in the debate for sustaining pastoralism. It is in the light of this that the Institute is organizing a workshop where key findings from this study will be presented and discussed. The workshop will brought together government bureaucrats, pastoral communities and other stakeholders working with pastoral communities.

 

Workshop Proceedings

See more out put from the Ella Project 

Tegemeo Hosts Press Conference on the Nations Food Situation and Rising Food Prices, Thursday 25th May 2017

 press conf may 2017

Tegemeo Institute hosted a Press Conference on Thursday 25th May 2017 discussing the food situation and rising commodity prices in the country. The focus was mainly given to maize, sugar and milk and was informed by a recent rapid assessment survey conducted by the Institute.


The Institute's Outreach Communication and Partnerships Coordinator Dr. Miltone Ayieko and other Senior Researchers gave emerging evidence and recommendations from the study that are key to informing and guiding policy related to the agricultural sector.


Journalists from key media houses covered the event.

 

Downloads from the event

See the press release

See coverage of the event

See video coverage of the event 

Tegemeo at the Inaugural Food Security and Water NMG Leadership Forum, 3rd April 2017

Tegemeo Institute participated in the inaugural Nation Media Group (NMG) Leadership Forum as part of the panelists discussing matters related to development. The forum was launched as a platform bringing together professionals, stakeholders, leaders and Kenyans to discuss issues of national importance.

Tegemeo Institute’s Director, Dr. Mary Mathenge represented the Institute, at the forum which discussed issues of food security and water access to Kenyans. Dr. Mathenge noted that there is need for a serious review of the nation’s agricultural policies and their implementation, drawing from even, the nation’s budgetary allocation to the agriculture sector of 3%. The agriculture Cabinet Secretary Willy Bett concurred that the Ag Sector has been underfunded for a long time noting that the private sector can assist to bridge this gap. On matters of food security, the Institute had in late 2016, given indication of an impending drought come year 2017 following a study conducted on the competitiveness of key food staples in Kenya: role of production costs and pricing. Issues of food availability, accessibility, and affordability were identified as key drivers to a food secure nation and at this fora, it was noted that the government’s response to emerging issues in the Ag sector though right often come in late hence the effects of drought and high food prices being experienced.

The NMG Leadership Forum platform seeks to encourage dialogue on key issues affecting the country such as economy, agriculture, health, governance and financial markets.

Effect of Coronavirus on Food Security

 How the Country can Attain Food Security during the Coronavirus Pandemic

Kenya faces one of the most challenging years with regards to food security. Although the country has faced food insecurity incidences in the past, the situation this year has been complicated by the Coronavirus pandemic. The country was already facing several threats to food security. First, the desert locust invasion of biblical proportion that spread quite rapidly between December 2019 and February 2020, was affecting crop and livestock production. Second, above-average rainfall experienced from October 2019 to January 2020 increased the likelihood of losses.

The policy choice for the country is to attain self-sufficiency. However, the country is a net importer of the major staples consumed. Over the past decade, the key food security challenges were mostly about inadequacy. The most severe food security shock was between 2008 and 2009. During that period, the country was recovering from the effects of the post-election violence, when the global food price shock occurred in 2008. This was further complicated by unfavourable weather in 2009. In recent years, shocks were also experienced in 2016 and 2017.

The current food security situation

The country usually attains good performance in years with adequate rainfall as the majority of the producers are smallholders who rely largely on rainfed agriculture. The 2019/2020 season was favourable. Most parts of the country received above-average rainfall during the long- and short rains seasons. A good harvest was forecasted. However, above-normal rainfall was recorded through the harvest period. In the long rains season, it led to the destruction of cropland. The ministry estimates that 10,000 hectares of cropland were destroyed. The post-harvest losses, especially for cereal grains, is expected to be higher, this year, than usual due to inadequate drying of grain. In the past five years, it is estimated that the country loses an average of four million bags of maize post-harvest. In context, this is almost the entire short rains season harvest in a normal year. In addition, vast swarms of desert locust started arriving in the country and affecting the northern frontier counties from December 2019. The desert locust outbreak is complex to predict, and its mobility and feeding behaviour further complicate efforts to control it. It is estimated that swarms spread fast and can cover between 100 and 150 kilometres per day. An average swarm can comprise between 40 and 80 million locusts per square kilometre. Such a swarm can consume green vegetation (crops, pasture, fodder) in the amount that is equivalent to food enough for 35,000 people in one-day. By the end of February 2020, 17 counties had been infested, mostly the ASAL counties. Without the desert locust invasion, livestock farmers in the ASAL counties were likely to improve meat and milk productivity due to abundance of pasture. By March 2020, the FAO categorised the threat in the country as dangerous, due to continued breeding and new swarms formation that represents an unprecedented threat to food security and livelihoods at the beginning of the long rains season.

How has the coronavirus pandemic affected food security?

March 2020 also saw the country record its first case of Coronavirus. By mid-March, measures for self-isolation were announced, which included the closure of schools and encouraging people to work from home. More strict measures commenced towards the end of March, including the closure of produce markets in urban areas and dawn to dusk curfews. The last two were highly disruptive for the food systems. A key challenge now is how we continue to access essential foodstuffs in light of the measures to curb the spread of the disease. Majority of foodstuff, especially the highly perishable ones like fruits and vegetables are transported to urban towns at night when the temperatures are cooler. The closure of major markets in many urban and peri-urban areas, while a reasonable measure to avoid crowding, has disrupted food supply systems especially for fresh produce in urban areas. Also, the initial exclusion of food transporters in the essential services category meant delays were experienced in getting food to destined markets. The ministry of agriculture has already announced that transporters of foodstuff are now included in the essential services category to improve food supply in urban areas.

The disruption has mainly been on the informal food supply chains. These supply chains primarily serve low-income and informal housing estates. Fruits, vegetables and other foodstuff arrive in the designated markets which act as wholesale markets. The small retailers then get their access through these large markets and distribute to small kiosks in the estates. Although innovations such as the model used by Twiga foods have been introduced to try and improve efficiency in these chains, the traditional model which involves many actors remains dominant.

The measures put in place to contain the virus have a huge effect on the supply chains. For example, the reduced economic activity in the hospitality industry has a huge negative effect on food demand. Significant decreases in demand would usually lead to a fall in prices offered to producers. On the other hand, if supply is disrupted and consumers are unable to enjoy place and time utility, prices would rise in an ideal scenario to reflect the shortage. However, these are not ideal or usual times. An expectation is that in addition to the overall reduction in demand, we will observe shifts in demand. For example, where workers ate lunch in a restaurant near their office in the usual case, they will now consume the same from home if they are working from home. Another shift that can be expected is the increase in consumption of dry foods such as cereals and pulses which can be stored over a longer duration. Ideally, the market is expected to adjust itself, but this happens after a period of learning and so it is not instantaneous. Also, market panic will set in when demand and supply are not predictable. Already, there are numerous instances of panic-stricken shoppers buying everything they can afford trying to ensure that they have adequate stocks. To some extent, this can lead to an increase in prices for commodities that now seem ‘scarce’.

What past lessons can lead to sustaining food security

The number of persons infected in the country is expected to continue rising and peak in April or May 2020 depending on the effectiveness of measures taken to curb the spread of the disease. Already, the government has issued travel restrictions to citizens in hotspot areas. All the hotspots are in urban areas. Ensuring the movement of foodstuff and access in markets is not restricted is critical to minimise the adverse effects this can have especially for poor households in urban areas.

A key challenge for policymakers is how to bring order in the informal system. Whereas it’s easy to develop solutions for formal markets such as the institution of quotas, it is very difficult to undertake this in the informal system. For example, in 2017, the government announced a price ceiling for a 2 kg packet of maize flour, however, in the informal estates, consumers paid up to twice the ceiling price due to repacking into smaller quantities.

In the current situation, the government must put all effort into ensuring that there are no artificial demand and supply conditions. This can be done by developing tailored solutions to different market segments. For example, the middle- and higher-income dwellers access fresh produce from supermarkets and grocery shops. Innovations such as online shopping and home deliveries are already taking traction as people try to stay at home. This should be encouraged. Conversely, such solutions would not work for the low-income and informal housing estates, who largely access their foodstuff from the informal market system. This market segment was significantly interrupted in the first few days of the curfew.

The business as usual scenario especially for the informal markets is not practical in the current pandemic. However, if produce markets remain closed, then there is still suboptimal functioning of supply systems. A further measure should be to ensure that markets remain open all days, although at reduced capacities. There is no doubt that overcrowding must be avoided. However, measures must be put in place to ensure that all people can access food. County governments and the ministry of health should work out measures that would facilitate some functionality of produce markets. This could include having different traders on different days, restricting the numbers of people at the market at any given time and ensuring that the safe distancing guidelines are followed. Although this would increase enforcement costs, the benefits in better access and less panic are much higher.

The other key question is on the adequacy of stocks available in the country. Currently, the planting for the long rains season is underway. The ministry has sustained measures already put in place to control desert locusts which now are a threat to the new crop that farmers are establishing. There is also need to ensure that farmers have access to inputs they need for optimal production. The ministry has also announced plans to import about 4 million bags of maize. Earlier planning for any imports is highly commendable, especially taking cognisance that the pandemic has also disrupted global food supply systems. The ministry should step up monitoring of stocks, prices and distribution systems to ensure that the government can step in where the market mechanisms fail.

At the global level, some countries in Eastern Europe have already enforced export bans on essential staples such as wheat. The bans are being put in place with an objective of ensuring food availability in the exporting countries. Learning from the 2008 food crisis, exports ban is counterproductive. A similar measure in 2008 caused panic in food markets resulting in spikes in food prices across the world. Countries such as Kenya will be at a disadvantage if such measures are repeated.

Additionally, there is need to track both producer and consumer prices for food. Food security, especially in the urban areas in more about access and affordability. An economic downturn is expected in the post-pandemic period. Tracking prices ensures that the government is on top of things pertaining to the support that is required for vulnerable populations, both producers and consumers alike. The government must ensure that adequate safety nets will be in place to guarantee food security for households that will be devasted economically. At the same time, the government needs to continue providing support to producers, to the extent that is realistically possible, in order to improve supply and link them to markets for their produce, particularly through e-commerce channels, whose importance is growing.

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