Producer Institutional Arrangements in Kenya’s Coffee Sector and their Effect on Economic Benefits to Farmers

Abstract

Coffee is the world’s most traded tropical commodity and its production is dominated by small-scale farmers globally. A major determinant of the economic benefits derived by coffee farmers is the efficacy of the organizations they form to facilitate the production and marketing of coffee. These Producer Institutional Arrangements in the coffee sector in Kenya are dominated by cooperatives with almost all its coffee farmers belonging to cooperatives. This is due to a legal requirement that mandates farmers with less than five acres to cooperative membership. Numerous studies have therefore focused on coffee cooperatives while alternative forms of production arrangements have remained largely unexamined, including the more than 3000 small Coffee Estates. With numerous reports indicating that Kenya’s coffee sector is operating sub-optimally, Producer Institutional Arrangements provide a critical area that warrants empirical analysis. The general objective of this study was an analysis of the relationship between Producer Institutional Arrangements in the coffee sector in Kenya and their effect on Economic Benefits to farmers. The three arrangements that were studied were coffee cooperatives that had received certification, coffee cooperatives that had not received certification and Coffee Estates. The first specific objective was to characterize the three Producer Institutional Arrangements. The second specific objective was to examine the relationship between the institutional framework of the producer arrangement and economic benefits. Asset-based farmer agency was examined as a moderating variable in the relationship between the institutional framework and economic benefits. Three theories were utilized in this study: New Institutional Economics theory, Transaction Cost Economic theory and the Capability Approach. The sampling frame consisted of the coffee farmers in Nyeri County engaged in production in the period of 2012/13-2014/2015. Questionnaires and key informant interviews were used to collect data and information. There were 260 respondents out of the targeted sample of 384, which represented a response rate of 68 per cent. The study established that there were significant relationships between the producer institutional frameworks and economic benefits to farmers in all the producer arrangements. It was also determined that farmer agency, influenced the relationship between the institutional framework and economic benefits the most in the Certified Coffee Cooperatives, followed by Coffee Estates and lastly in the Non-certified Coffee Cooperatives. It was therefore concluded that farmer agency was most effective in Certified Coffee Cooperatives. While there were benefits to certification, challenges to acquiring and maintaining certification also existed. The findings of this study are consistent with the theories used and demonstrate that institutions are a key factor in development as asserted by the New Institution Economic theory. It is also demonstrated that transaction costs are a significant aspect of the economic benefits that accrue to farmers. The Capability Approach is instrumental in interpreting the moderating influence of asset-based agency and how this differs between the Producer Institutional Arrangements. The study advances research methodology particularly in the use of comparing institutional arrangements. Recommendations included the facilitation of certification in the non-certified cooperatives and estates, and the implementation of transparency and accountability measures in the coffee chain activities and transactions.