Agriculture basks in the sunlight: Kenya's agriculture sector has enjoyed one of its best periods with surpluses recorded in almost every segment. This has meant healthy profits for agro-based industries. Derek Otieno reports from Nairobi.

Kenya's economic backbone, the country's agricultural sector, has made substantial improvements in the last two years. Growth in demand from Kenya's traditional markets, the stabilisation of soft commodity prices and favourable weather conditions in the second half of 2004--have all contributed to gains in the coffee, sugar, tea and horticulture sectors.

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Reforms within the moribund dairy sub-sector have also paid dividends and indicators reveal that Kenya's agricultural sector has grown faster than was ever previously forecast.

Agriculture Minister Kipruto arap Kirwa attributes these gains to the policies put in place by the government and his ministry in the last two years.

"We are on the right track. We hope that there will be great improvements in the coming years with policies to support farmers in many areas, including the marketing of their produce" Kirwa told African Business. The government is also developing policies to assist farmers to export their produce.

According to the Agriculture Ministry, Kenya's export volumes increased by 8% in 2003 (as opposed to 4% in 2002), with surplus volumes across the industry. This improved performance was due to reduced operating costs and administrative expenses.

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The food sector performed better than in previous years as it has benefited from a steady supply of local raw materials and steady consumer prices. The animal health and nutrition sector also improved despite raw material shortages towards the end of the year.

Picked at random, five companies operating within Kenya's agricultural sector have posted encouraging results illustrating how the agricultural sector is boosting its productivity and profitability.

In the tobacco industry, British giant BAT recorded a large improvement in turnover that was mainly driven by a 9% growth in the company's local sales of Benson & Hedges, Embassy, Sportsman and Safari cigarette brands. Productivity enhancement initiatives complemented improved sales with BAT's Nairobi factory becoming firmly established as the company's regional manufacturing centre. Meanwhile, another foreign player involved with the agricultural sub-sector, Unilever, achieved a significant improvement in 2004 relative to the previous year.

Unilever's profits were attributed to a marked improvement in crop production and better tea prices linked to more favourable exchange rates. Ongoing productivity improvements and gains in the value of the company's tea estates and fuel wood plantations further brightened the picture.

However, the company has cautioned that the prospects for the coming year's crops are dependent on good rainfall patterns. Furthermore, the decline in the price of tea due to global over-supply could impact negatively on performance.

Local currency appreciation and any increase in input costs would also put additional pressure on the company's profitability.

Consumer foods leader, Unga Group Ltd realised a turnaround in performance--posting profits for the second half of 2004 after five consecutive years of losses.

Unga Group's turnover was up 18.72% to Ksh3.74bn ($49.5m at the current exchange rate of 1Ksh/US13.25c used throughout this analysis) and operating profits rose to Ksh76m from a Ksh54m loss in 2003. Pre-tax profits were also up at Ksh45.3m from a Ksh11m loss.

Another local company, Rea Vipingo, also reported an impressive performance for its year ending September 30 2004, with attributable profits appreciating by 4,200% to Ksh129m. This huge rise in attributable profits was mainly due to new accountancy practices. Comparative figures for year 2003 were restated to reflect the adoption of these new accountancy rules, showing a rise in turnover of 21.5% and pre-tax profits of Ksh1.1bn, against a loss of Ksh364m in 2003. Net profit stood at Ksh771m against a loss of Ksh350m in 2003.

Sasini, the agricultural arm of Sameer Group, also reported much improved results for its year ending September 30 2004 when compared with the previous three financial years. Turnover went up by 21.2% to Ksh1.04bn.

The main drivers of Sasani's growth in turnover were the higher volumes realised in both the tea and coffee sectors as a result of favourable weather conditions and the better prices realised by both commodities.

Sasini, which also adopted the same accountancy rules as Rea Vipengo, reported profits before tax of Ksh1.1m. Improved profitability was attributed to better tea and coffee prices during the year combined with more favourable exchange rates.

High costs of production, especially of inputs, remain the key risk to the business in addition to price volatility as a result of overproduction.