KENYA DROUGHT CUTS COFFEE, TEA OUTPUT AND MAY SLOW GROWTH

Bloomberg

By Sarah McGregor - Feb 3, 2011 5:02 PM GMT+03

A drought may slow economic growth in Kenya for the first time in three years as farmers in the world’s biggest black-tea exporting nation scale back production and millions face food shortages.

Production of tea, the East African nation’s biggest foreign-exchange earner, may decline as much as 12 percent in 2011, according to the Kenya Tea Board. Forecasts for output of the country’s coffee, sold to Vevey, Switzerland-based Nestle SA, the world’s biggest food company, and Starbucks Corp., the largest coffee chain, were cut as much as 27 percent last month. Kenya’s coffee is considered to be the continent’s best quality by merchants and its tea is the most expensive in Africa.

Lower crop production “would have a chain effect on the economy,” Peter Mutuku, senior corporate currency trader at Nairobi-based Bank of Africa, said by phone on Feb. 1. “It would have a direct effect on a huge employment sector. Foreign- exchange reserves would also be affected, bringing pressure to bear on the shilling.”

Kenya relies on agriculture for a quarter of its gross domestic product and half its exports. The economy, the region’s biggest, expanded an estimated 5.2 percent last year. Lower growth than that would mark the first time the pace has slowed since 2008, when the country was engulfed by ethnic violence following a disputed election.

If the three-month rains due in March fail, “the worst- case scenario is it could knock 2 percent off of GDP in 2011,” said Wolfgang Fengler, the World Bank’s chief economist in Kenya. The current bank forecast is for GDP to expand by at least 5.3 percent in 2011 and as much as 6 percent if there are no “shocks,” he said.

The Kenyan shilling has declined 7.2 percent against the dollar over the past 12 months, trading at 81.08 per unit of the U.S. currency at 5 p.m. in Nairobi today.

Long Rains

The La Nina phenomenon, in which the surface of the Pacific Ocean cools and reduces moisture in the atmosphere, may curb rainfall through 2011, weather forecasters in Kenya say, following drier-than-usual rains in October through December.

The weather system is the same one that unleashed the worst flooding and storms in more than 50 years in Queensland, Australia, and killed 741 people in Brazil, according to Helen Bushell, regional program manager for Oxfam GB in Nairobi. At the same time, floods in South Africahave killed at least 123 and displaced 6,000 more, while in neighboring Mozambique, six people have died and 12,000 forced to flee their homes.

Risk of Hunger

Two-thirds of Kenya received rainfall equivalent to about 70 percent or less of the long-term average in that period, Chanzu Bernard, an assistant director for forecasting at the Kenya Meteorological Department, said by phone. It was the least since 2008, when the country was plunged deeper into a drought that put 10 million Kenyans at risk of hunger and starvation.

“Another dry spell will dampen growth momentum,” Yvonne Mhango, an economist with Renaissance Capital Ltd., said in a research note on Jan. 26. She expects growth to slow to 4.9 percent this year from 5.3 percent in 2010.

Other countries in the region are also experiencing dry weather. Neighboring Somalia, in the throes of a two-decade civil war, has been affected. Somali Prime Minister Mohamed Abdullahi Mohamed warned of “catastrophic” consequences from drought unless the international community provides aid for its agriculture industry. As many as 2.5 million people in Somalia, home to 10 million, may die, Mohamed said Jan. 14.

Island Boreholes

Mauritius, off the east coast of Africa, is considering digging boreholes to alleviate water shortages, the government said in a statement on Jan. 19. More than half of Uganda’s 31 million people face food shortages because of drought, the country’s parliament said in October.

The four affected countries account for about 6 percent of the sub-Saharan African economy, according to World Bank data.

“There’s no getting away from the fact that if there is bad rain, that none of the East African nations would be able to weather it regardless of how other industries look,” Razia Khan, head of Africa regional research at London-based Standard Chartered Plc, said by phone.

Average prices for African tea may rise to $3.50 a kilogram by midyear, Aly-Khan Satchu, a Nairobi, Kenya-based independent financial analyst, said in an interview on Jan. 27. Prices averaged $2.69 a kilogram at a sale on Feb. 1, according to Tea Brokers East Africa Ltd.

“I’ve got a super conviction that the whole basket of the breakfast commodities, which includes tea, coffee, sugar and cocoa, is all in a parabolic price move,” Satchu said. “While tea has been lagging the price move, it is now going to play a degree of catch-up.”

Tea Stocks

Rising prices may also bode well for Kenyan tea companies, including Sasini Ltd., whose shares have risen 63 percent in the past year, and George Williamson Ltd., up 54 percent. The combined market value of the two companies is about $55 million.

Shares of Eaagads Ltd., a Kenyan coffee producer, have almost tripled over the past year to 58 shillings, while Kakuzi Ltd., a tea and fruit producer, has more than doubled to 77 shillings in the period. The two stocks are the top performers in the Nairobi Stock Exchange’s All Share Index since Jan. 1, 2010, according to Bloomberg data.

Kenya ships tea to as many as 38 destinations. The U.K., Egypt and Pakistan are among the top five importers, according to the Tea Board of Kenya.

The average price of African tea rose to $3.05 a kilogram in mid-January, approaching a record high of $3.11 in December 2009. The leaves are traded at an auction in the Kenyan port city ofMombasa, the world’s largest such sale.

‘Sustained Demand’

“We are seeing sustained demand for quality tea,” Nick Munyi, managing director of Finlays Mombasa, a unit of John Swire & Sons Ltd., said in an e-mailed response to questions. Finlays Mombasa grows, processes and trades tea in Kenya. “If there is drier-than-expected weather the tea markets are likely to be stronger due to shortage of supply,” Munyi said.

Kenya cut its coffee production forecast for the 2010-2011 season through September to 40,000 metric tons from a previous estimate of as much as 55,000 tons, the Kenya Coffee Board said on Jan. 17. The country grew 45,000 tons last season.

Over the past three months, basic food items including corn, beans, rice and cooking oil valued at 1 billion shillings ($12.3 million) have been distributed and water boreholes drilled in drought-affected areas, said Andrew Mondoh, permanent secretary in the Special Programs Ministry.

Kenya has a better chance of coping with this dry spell because domestic prices for corn, a staple food, have fallen about 50 percent from $400 a metric ton in July 2009 during the height of the last drought, said Fengler of the World Bank.

“The problem is that we haven’t moved into a situation of a significant recovery” in rainfall since 2009, said Bushell. “Economies were picking up, and now that threatens to be significantly undermined,” she said. “If the next rains do fail we may have significant humanitarian crisis in the region.”

To contact the reporter on this story: Sarah McGregor in Nairobi atsmcgregor5@bloomberg.net.

To contact the editor responsible for this story: Antony Sguazzin in Johannesburg atasguazzin@bloomberg.net.