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Structure, conduct and performance of tea marketing in Nandi North CountY, Kenya.
Abstract:
Following market liberalization, the tea marketing has been complicated by unpredictable market channels. Limited decision making and ownership by smallholders on the processing, marketing and unequal distribution of profits at factory levels has been a disincentive to quality production. The purpose of this study was to describe the structure, conduct and performance of tea marketing in Nandi North County of Kenya. Descriptive and exploratory research design was used. Sampling procedure involved purposive sampling. A sample of 190 smallholder tea farmers in Nandi North district was used. Structure Conduct Performance [SCP] model was used to describe the nature of tea marketing in the study area. Results indicate that market concentration ratios [CR] are low. CR2 of 0.17 and CR4 of 0.27 indicate that the industry approaches the purely competitive model such that activities of each one do not significantly influence the market supply, demand and prices. Price spread analysis measuring performance indicates that the farmers receive more than 55 % of the Mombasa wholesale price and the processor's margin of 36.79 % and 41.15 % in Kenya Tea Development Agency [KTDAg] and non-KTDAg. Price conduct indicates that farmers receive prices that depend on Mombasa auction prices, quality of the factory's tea, seasonality, the prevailing exchange rate and World market prices. The structure of post-liberalization green leaf market reveals increased competition such that smallholder tea farmers have more opportunities and channels unlike in the pre-liberalization period. It is therefore recommended that measures that increase smallholder farmers' price stability, bargaining power in decision making and sharing out profits at factory levels be instituted.

Keywords: Market liberalization, tea marketing, price stability, profits

Article Type:
Report
Subject:
Decision-making (Analysis)
Tea industry (Marketing)
Authors:
Chepng'eno, W.
Sulo, Timothy
Ronoh, P.
Chelang'at, S.
Kotut, S.
Pub Date:
06/22/2012
Publication:
Name: European Journal of Management Publisher: International Academy of Business and Economics Audience: Academic Format: Magazine/Journal Subject: Business, international Copyright: COPYRIGHT 2012 International Academy of Business and Economics ISSN: 1555-4015
Issue:
Date: Summer, 2012 Source Volume: 12 Source Issue: 2
Topic:
Event Code: 240 Marketing procedures Computer Subject: Company marketing practices
Product:
Product Code: 9914202 Market Targeting & Approach
Geographic:
Geographic Scope: Kenya Geographic Code: 6KENY Kenya
Accession Number:
294195627
Full Text:
1. INTRODUCTION:

Tea, like many other crops in Kenya is produced on both small and large scale basis. Smallholder farmers in Kenya make a significant contribution to the industry producing 61% of the total national production and with 66% of tea acreage (Mwaura et al, 2005). There is only one Kenya Tea Development Authority agency (KTDAg, Chebut factory) which serves smallholder tea farmers in both Nandi North and Nandi South County. The liberalization of the smallholder tea sector led to the emergence of two marketing systems (Nyangito and Kimura, 1999a). The first system is the old KTDAg that gives factory directors a say in the provision of services to farmers. The second marketing system emerged as a result of liberalization of the smallholder tea sub-sector. Under this system, the farmers deliver their green leaf directly to non-KTDAg outlets or sell to middlemen for immediate payment. However, the structure and performance as well as the benefits of this new marketing system remain unclear (Nyangito, 2001).

Problem Statement: Government interventions in the1980's in KTDA (Nyangito, 1999) and more recently post-liberalization problems such as limited ownership and decision making by smallholders on the processing, marketing and distribution of profits at factory levels have been a challenge in the tea industry. The situation was further worsened by the decline in producer prices due to low world prices (Nyangito, 1999) against high inflation rates. This ultimately pushed down the real producer prices. It seems that structural changes in the green leaf marketing system have taken place after liberalization. However, little is known about the nature of tea marketing in the post liberalization era in Nandi North County of Kenya. The actions of farmers who are also shareholders of KTDAg at the same time seems complicate the market channels especially behavior and marketing structure. The purpose of this study was to describe the structure, conduct and performance of tea marketing system in the post liberalization.

Study Objective: The main objective of the study was to describe the structure, conduct and performance of green leaf marketing system in the post liberalization era in Chebut Factory Catchment area of Nandi North County.

2. METHODOLOGY

Research design and Sampling Procedure: Descriptive and exploratory research design was used. Sampling procedure involved a purposive selection of three divisions. Two locations were selected randomly using the lottery method. Systematic random sampling was used to select a total of 190 farmers.

Secondary Data and Sources: Secondary data used in the study was obtained from the database of Chebut KTDAg factory in Nandi North district and KTDAg Journals which hold historical information on smallholder tea growers. The information gathered included the number of farmers who sold their green leaf through KTDAg and the number of farmers who, despite having a contractual agreement with KTDAg to deliver green leaf to the factory, had stopped doing so. The total number of farmers who were contracted to Chebut KTDAg factory was also established.

Primary Data and Sources: Primary data was obtained by collecting information through administration of questionnaires on a sample of 190 smallholder tea farmers in Nandi North district. It sought information concerning the socio-economic characteristics such as the number of years in tea farming, the age, the education other enterprises, sources of income, price (in Kenyan shillings), marketing channels and on transport and other transaction costs were collected. The schedule also collected information on the farmers' perception of various marketing channels and the reasons why some smallholder farmers divert their green leaf to tea middlemen.

3. DATA ANALYSIS AND RESULTS

Data Analysis: Structure Conduct Performance SCP model was used to describe the nature of tea marketing in the study area. Among the key parameters analyzed to estimate some basic market characteristics at the farm level was the degree of market concentration. The concentration ratio formula was used to calculate degree of market concentration. Market performance was estimated by calculating the trader's margin under each market channel (Tomek and Robinson, 1990).

Results: Marketing Channels for Green Leaf in Nandi North County: The findings indicate that 66.3 % of the respondents deliver their green leaf to KTDAg outlet (Chebut tea factory) while EPK controls 11.6% of green leaf deliveries. Kapchorua controls 9.5% of the green leaf deliveries in the study area. Middlemen control 12.6% of the green leaf produced by farmers. Tea is a popular beverage among Kenyans with an annual per capita consumption of tea stands at 500g in Kenya (Jacinta, 2003). The local tea market absorbs only 5 % of the tea output in Nandi North district. Foreign market takes 95% of the made tea in the study area. The major outlet for made tea is the Mombasa Auction which absorbs most of the tea (86%). The tea auction in Mombasa is conducted under the auspices of the East African Tea Trade Association (EATTA).

The Concentration Ratio of the Four Largest Farmers (CR4): The calculation of concentration ratios indicate a CR2 of 0.17 which implies that the largest two farmers control 17% of the total green leaf output in the study area. The CR4 was found to be 0.27 which indicates that the four largest farmers control 27% of the total green leaf output in the study area while CR8 was 0.41 which means that the eight largest farmers' control 41% of the total green leaf output. The concentration ratio is low implying that the industry approaches the purely competitive model. It has many sellers and because of the contribution of green leaf by each farmer is so small such that his or her production and selling activities do not significantly influence the market supply, demand and prices.

Prices Conduct: The results indicate that farmers receive prices that depend on Mombasa auction prices, quality of the factory's tea, seasonality, the prevailing exchange rate and World market prices. Results also indicate that the middlemen pay the least at Ksh 10 per kilogram of green leaf delivered. Kapchorua paid an average of Kshs.18.50 per green leaf delivered. The second payment called bonus was Ksh 6. Per kilogram of green tea delivered.

Market Performance Analysis: Market performance is evaluated by the nature of prices at the market, supply and nature of costs and margins (Korir, 2005; Kosgei, 1998). Stable prices are preferred by both producers and consumers for planning purposes.

Price Spread: The term price spread refers to the price difference between the price paid by the consumer and the price received by the producer. Marketing margin or price spread is a measure of system performance. Marketing margins shown in table below measures the share of final selling price captured by various participants in the marketing chain and includes costs and additional income.

Under both KTDAg and non-KTDAg marketing systems, the farmers receive more than 55 % of the Mombasa wholesale price. The processor's margin of 36.79 % and 41.15 % in KTDAg and non-KTDAg reflect the kind of marketing functions and services that these processors perform. These services include processing the green leaf into made tea, storing the made tea before transporting to the Mombasa auction or to Ketepa.

4. CONCLUSION AND RECOMMENDATIONS

Results show that KTDAg still plays a major role in the smallholder tea marketing. In addition to formal outlets, farmers use other faster informal market outlets suggesting they are economically challenged and may prefer cash on delivery. The structure of post-liberalization tea marketing reveals that smallholder tea farmers now have more channels for their produce unlike in the pre-liberalization period when they delivered the green leaf only to KTDAg. The study therefore concludes that the structure of green leaf production is competitive at farm level. The liberalization of the tea sector has led to increased participation by private firms and individuals unlike in the past when KTDAg was the only licensed authority to handle smallholder tea. The private sector has responded to tea marketing liberalization by participating in the marketing of smallholder tea. It is therefore recommended that measures to increase smallholder farmers bargaining power in decision making and sharing out profits at factory levels be improved. It is also recommended that measures to counter farmers from selling their produces at lower prices from the middlemen and other agents be instituted.

REFERENCES:

Bain, J.S (1968): Industrial Organization. John Wiley and Sons, New York.

Jacinta, M. K. (2003): Diagnostic Study of the Tea Industry. Export Promotion Council.

Mwaura, F., Nyabundi K. and O.Muku, (2005). Situation Analysis of the Small Scale Tea Growers and their Contribution at the Local Auction Market in Kenya.Tea. Volume 26 (2) page 35-45.

Nyangito, H.O (1999): Agricultural Sector Performance in a Changing Policy Environment. Page 129-145 In P. Kimuyu, M.Wagacha and O. Abagi (ed). Kenya's Strategic Policies for 21s Century. IPAR, Nairobi, Kenya.

Nyangito, H. and J. Kimura, (1999a): Provision of Agricultural Services in a Liberalized Economy: The Case of Smallholder Tea Sub-Sector in Kenya. Institute of Policy Analysis and Research, Kenya.

Nyangito H. and J.Kimura. (1999b): Liberalization of the Smallholder Tea Sub-Sector: Progress, Impacts and Recommendations for Further Development. Policy Quarterly. Issue 2, May page 1-9.Tomek W.G and Robinson, K.L (1990): Agricultural Product Prices. Cornell University Press. Ithaca and London.

Korir, M.K (2005): Cross-Border Bean Marketing between the Northern Zones of Tanzania and Nairobi, Kenya . MPhil Thesis, Moi University.

Kosgei, D. (1998): The Marketing of Beans; An Assessment of the Structure and Conduct of Bean Marketing in Nandi district, Kenya. MPhil Thesis, Moi University.

W. Chepng'eno, Department of Agricultural Economics, Moi University, Eldoret, Kenya

Timothy Sulo, Department of Agricultural Economics, Moi University, Eldoret, Kenya

P. Ronoh, Department of Business Admin., Jomo Kenyatta University of Agriculture and Technology

S. Chelang'at, Department of Agricultural Economics. Moi University, Eldoret, Kenya

S. Kotut, Department of Economics. Moi University, Eldoret, Kenya

AUTHOR PROFILES:

Dr. Timothy Sulo is a Senior Lecturer in the Department of Agricultural Economics of Moi University. He earned his Ph.D. in 2005 in Moi University, Kenya/ University of Hohenheim, Germany {Joint Program}. He has twelve [12] Peer Reviewed International journal Publications, four [4] Book Publications and Seven [7] Conference Proceedings. He is currently the External Examiner of Egerton University, Kenya, Department of Agricultural Economics. He has recently successfully supervised four [4] Ph.D. [Doctorates] in Economics and Business.

Mr. Peter Kibet Ronoh is a PhD student at Jomo Kenyatta University of Agriculture and Technology, Kenya.

Ms. Winrose Chepng'eno is a PhD student and a lecturer at the department of Agricultural Economics of Moi University, Kenya. She has six [6] journal publications. She is currently the Undergraduate Examination Coordinator in the Department.
Table 1: Most Preferred Market Outlet for Smallholder Green Leaf
in Nandi North County.

Marketing Agent   Percentage   Cumulative Percentage

KTDAg                46.8              46.8
EPK                  32.9              79.7
Kapchorua            17.7              97.5
Middlemen             2.5             100.0
Total               100.0

Source: Authors Own Compilation, 2011.

Table 2: Gross Marketing Margins for Various Market Participant

Outlet                KTDAg                   Non-KTDAg
                      Kshs/ Kg     % Margin   Kshs/ Kg     % Margin
                      Green Leaf              Green Leaf

Farm gate price       19.91        63.21 %    17.95        58.85 %
Processor's Margin    11.68        36.79 %    12.50        41.15 %
Wholesale price at    31.59                   30.45
the Mombasa Auction

Source: Authors Own Compilation, 2011
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