Kenya: Bread Prices Rise As Bakers Rely on Imports

January 7, 2008
Zeddy Sambu
All Africa

Four years ago, a loaf of bread was retailing at Sh20, but it now costs an average Sh35, a 75 per cent increment. Local bakers say they depend largely on imported wheat to produce bread since the local farmers are not able to meet the industrial demand.

"The local wheat is also fine and is normally used for making home baking flour and the imported slightly thicker/harder wheat is used in the making of bakers flour. Both have to be blended so as to produce a mix that can be baked into loaves," bakers say.

Even if the territorial capacity were to be met, imports would still be inevitable, said the Bakers Association of Kenya (Bake).

So what has caused the drastic price increase of the only food many Kenyans could afford as standard but which is now a luxury, especially in the rural areas?

Local producer prices have shot up with the price of a 90-kg bag of wheat going for Sh3,300 from Sh1,800 - an 83.3 per cent increase. This is attributable to the shrinking acreage under till and an outbreak of stem rust disease, an infectious wheat disease.

There are about 20 large scale and 2,000 smallscale wheat farmers spread across Nakuru, Uasin Gishu ,Timau and Narok areas.

Due to the world market shortage, the price of imported wheat has advanced from $160 per tonne to $430 by the hard wheat growing countries like Russia, Canada, Australia, Argentina and the USA, another fluctuation of 168.75per cent .

Currently, wheat prices are at an all-time high in the international quarters compared to the past 10 years.

"Industries say with tough times ahead, people eat less brad, there are reduced sales/turnover, production trims, and imminent loss of jobs," said Ramji, the Bake secretary.

The Sh40 billion bread industry provides food regarded by many as staple . It employs over 20,000 direct people and supports 200,000 distributors and retailers.

Bakers say in more than 40 countries, Taiwan, Malaysia, Morocco and China have abolished excise duty on imported raw wheat and flour in the past to check price increase.

Still, from this month, bakeries have been directed to use thicker polythene material of 30 microns, from 20 microns already in use, a move that, players say, would affect prices further.

"This upgrade will cost an additional 200 per cent in price variation. The only alternative would be to revert to the wax paper packaging," said Sailen Ramji, the managing director of Mafuko Industries based in Meru town.

"That technology is now obsolete and those with older packaging machinery still lying in their courtyard would not be able to service them in case of a breakdown for lack of spares," he added.

Therefore, with no medium term respite in grain prices in sight coupled with an escalation of shipping freight costs due to surging fuel costs, the price of wheat that has by now surged to unprecedented levels, serves to electrify future trading .

The uncertainty around whether or not import duty on grain would be reduced to help check an escalation in prices, importers and millers are willing to pay for raw wheat and flour, has compounded fears over an imminent worldwide shortage.

When trading at the New York Mercantile Exchange closed, Freight-On-Board prices for US hard red winter wheat hit their highest for 30 years and the rise in shipping costs is making Kenyan consumers to resort to a hand-to-mouth buying.

With import duty yet to be waived or reviewed as requested by industry millers, importers say they are paying close attention to arranging purchases so as to achieve the lowest shipping requirement possible .

"It is vital that Government rescind duty on imported wheat grain so that wheat flour prices become more affordable to consumers," the Cereals Millers Association says in a statement to Business Daily.

Although the duty rates are seen to hurt traders and millers alike, only the Agriculture minister can degazette the legal notice on 35 per cent import duty on raw wheat, authorities say.

David Nalo, the Trade and Industry permanent secretary, says the solution is complex since Treasury is charged with fixing of duty rates and the consensus of the Agriculture ministry must be sought for intervention to be reached.

Mr Nalo confirmed receipt of protests by millers about the need for interventions. Until then, consumers should continue to dig deeper into their pockets.

"It is the consumers who are bearing the brunt. But we need a comprehensive review of the entire value chain in wheat production," he told Business Daily on phone.

Kenya's total wheat grain requirement for milling into flour stands at 900,000 tonnes per year, while Kenyan farmers produce some 300,000 tonnes per year; the shortage is taken care of by imports.

Wheat flour being sourced from an EAC country is liable for 60 per cent duty.

Egyptian millers where Kenya sources most of her requirements have, however, priced their flour to the price of local flour whose price reflects the high world wheat grain price and the fact that 35 per cent duty is levied on imports, meaning local wheat prices are then benchmarked at a minimal discount to import parity.

"We do not expect there to be any downward impact on local wheat grain and flour prices," BAKE says.

Apart from being faced with the import of duty-free flour from Egypt and Mauritius - under the Comesa protocol - industry players have poked holes in trade imbalance arrangement among EAC countries where Kenya faces a 35 per cent duty rate on wheat imports, Tanzania 10 per cent and Uganda at zero per cent, a disparity that affects imports/exports within the bloc.

"We are facing illegal exports of wheat flour from Tanzania and Ethiopia, which are coming into the country duty-free, are repackaged, and sold locally at prices lower than the Kenyan market rate simply due to the omission of duty," says the millers umbrella body.

Five years after establishing the EAC Customs Agreement, it was previously agreed that Kenya would need to pay duty on finished product exports into Tanzania in the order (10-8-6-4-2-0 per cent) and Uganda (5-4-3-2-1-0 per cent), every year, while both countries would export finished goods into Kenya duty-free, in a move seen to allow other members to match Kenya's manufacturing strength.

When the Agreement was signed, it stated that wheat grain imports into the EAC would be levied at zero per cent.

Soon after, a separate agreement was negotiated where each country would stay where it had been for two years (35-10-0 per cent), before this agreement was recently renewed for a further two-year period.

Mr Nalo says the planned review, sometimes this year, will seek to level trade practices within the EAC bloc, ending an era where Kenya still faces an import tariff on flour exports to Tanzania and Uganda and other non-tariff barriers.

Industry players say the consequence of this disparity in the duty structures between the countries is that increasingly larger quantities of flour and by-products are being imported into Kenya, particularly from Tanzania.

"It could also lead to loss of export markets of Rwanda, Burundi and Eastern Democratic Republic of Congo, which have been traditional and major destinations for wheat flour exports from Kenya," say millers.

Current global wheat shortage due to bad weather and reduced wheat acreage has pushed wheat prices the world over, to a 30-year high.

Tight supplies have been ravaged by poor weather conditions around the world. Droughts in Ukraine, Europe, Canada and Australia, which are four of the world's leading producers have drastically reduced their production. In the United States, flooding and drought have weakened harvests with some of its crop being downgraded on quality grounds.

The world's largest exporters in million tonnes are the United States (24.73 per cent), Canada's 19.66 per cent, European Union (13.5 per cent), Argentina (10.5 per cent) and Australia's nine per cent.

Russia, another of the world's largest exporters of grain, says it will reduce exports to the world market to control domestic food prices. Last week, Kazakhstan also said it plans to introduce licences for grain exports.

"In traditional emerging economies such as Brazil and India , population growth/economic well being and reduced yield there means that while sellers have less wheat to sell, buyers keep coming in with more orders", says the millers association spokesperson, Paloma Fernandes.

The surge in wheat prices has also fuelled the debate over the potential perils of the booming biofuels industry, which critics said divert critical food resources to fuel production.

New findings by the International Food Policy and Research Institute (IFPRI) show that cereal prices will increase by up to 20 per cent due to a multiplicity of factors but is likely to benefit only the commodity's net exporters.

Income growth, climate change, high energy prices, globalisation, and urbanisation will all transform food production, markets, and consumption, it says and calls for changes in food prices by eliminating trade barriers and programmes that set aside agriculture resources by developed countries .

IFPRI projects that by the year 2020, maize prices would increase by 26 per cent and oilseed prices would rise by 18 per cent as biofuel investment plans of many countries and the assumption that high-potential countries will expand their production of bio-energy.

With production of biofuels likely to double, maize prices would increase by 72 per cent and oilseeds by 44 per cent by the year 2020, it says.

"Rises in crop prices would lead to decreases in food availability and calorie consumption in all regions of the world, with Sub-Saharan Africa suffering the most as more land, water, and capital will be diverted to their production, and the world will face more trade-offs between food and fuel," says Joachim von Braun, lead author of the report and director general of IFPRI.

China and almost all African countries, which are net importers of raw materials for the world's staple foods will suffer from the high prices, but India, a net exporter would benefit.

It recommends a more open global trade in agriculture in order to benefit developing countries like Kenya.

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