Economic analysis of coffee co-operative societies. A case study of Central Province in Kenya

Abstract

The coffee industry is an important sub-sector in agriculture. However, despite its importance, the industry has been facing a lot of problems especially in the marketing of coffee by the co-operatives. The co-operativ~ sub-sector of the coffee industry has been blamed for inefficiencies in internal coffee marketing. Neither have the various aspects of this inefficiency been identified nor ar~ factors underlying it clear. This study focused on analysing the factors that affect the efficiency of coffee marketing by the co-operative societies. The objectives of this study were: 1. To describe the cost structure of coffee cooperative societies in the area of study and establish the optimal level of operation. 2. To establish whether the costs recovered by the societies are economically justified. 3. To determine factors responsible for costs variation and whether there is scope for improving efficiency of t.hecoffee co-operative societies and the factories. To achieve the first objective, regression analysis was used while correlation analysis was used to assess whether the marketing costs were significantly different from the marketing margins. The study also evaluated whether the societies were efficient in handling of farmers' payment by analysing the ratio of clean coffee to cherry coffee. To evaluate whether there is scope for improving efficiency through improvement of technical efficiency, the study used -viiidescriptive analysis of accounting data. In this approach, the factories were categorized into four groups according to size. The groups were then analysed whether they differed in their ability to keep unit cost down or whether the differences in levels of various cost items were due to chance fluctuations. Two hypotheses based on the objectives were advanced. It was hypothesized that, the co-operative societies do not operate at minimum cost and that the deductions (marketing margins) made by the co-operative societies are not significantly different from the marketing costs. To achieve the above objectives, relevant data were collected and analysed using statistical Package for Social Sciences (SPSS). The data were collected from sampled societies in central province, Kenya Planters Co-operative union (KPCU) and Ministry of Co-operative Development (MOCD). The study found out that: 1. Most co-operative societies operate at levels lower than the optimum and consequently incur very high costs. The optimum level of cherry intake was found to be about 7.5 thousand tonnes at a cost of Kshs 751.73 per tonne of cherry processed. The societies have therefore not managed to reduce per unit marketing cost as they are meant to do. 2. The co-operative societies make higher deductions than can be justified by the estimated marketing costs. The mean marketing margin was Kshs 1.85 which was significantly higher than the mean -ixmarketing cost which was Kshs 1.21 per kilogram of cherry processed. 3. The co-operative societies are inefficient in the handling of the farmers' paYments as shown by the analysis of cherry: clean coffee ratio. The ratio as calculated in this study (6.74) was significantly less than that recorded by the societies (6.79). This showed that farmers were losing about 0.05 Kilograms of cherry per every tonne of clean coffee. 4. There is scope for improving the efficiency of cooperative societies through improvement of technical efficiency by expansion of volume of cherry handled. It is concluded that the overall performance of the cooperative societies is unsatisfactory and that there is need to make improvements in area of providing marketing services so that marketing margins are not in excess of marketing costs. Reduction of processing costs in societies with high cost due to low cherry volumes can be done by amalgamation of the small and uneconomical societies.