KWALE COUNTY INVESTMENT FORUM 2014 INVESTING IN VALUE CHAINS IN AGRI-INDUSTRIES : The Case of Fruit Value Chains in Kwale County By: ENG. DAVID K. OPIYO

KWALE COUNTY INVESTMENT FORUM 2014 INVESTING IN VALUE CHAINS IN AGRI-INDUSTRIES:

The Case of Fruit Value Chains in Kwale County

By: ENG. DAVID K. OPIYOKENYA INDUSTRIAL ESTATES LTD

OUTLINE

1. Introduction

2. Resource availability

3. Viable value addition products

4. Business profiles

5. Economic and social benefits

6. Required business development services

7. Conclusion

INTRODUCTION

Agriculture and Business Environment Agro-ecological zones :

-Medium agricultural potential : 15% of land

-Marginal lands: 18%

-Range land (arid and semi arid: 67%

Annual precipitation:

-900mm – 1500 mm per annum along the coast;

-500mm to 600 mm per annum in the hinter land.

Climate:

-Hot and dry from January to April/May;

-June to August is the coolest period of the year;

-Short rains from October to December;

-Long rains from March/April to July

Business Environment

-High level of poverty - 74.9% (National poverty level-50%);

-Lack of sustainable income from manufacturing, trade and other commercial ventures in the region;

-No facilities for post-harvest preservation ;

-Very little local value addition to agricultural commodities and fish products;

-Main business is in hospitality and tourism sector.

Infrastructure:

-Roads, electricity and water have lately been improved;

-County is well linked to other parts of the country through highways;

-Linked to the export market through the port of Mombasa and Moi International airport;

-The county lies along the Indian Ocean;

-Neighbours Tanzania and Zanzibar.

Resource Availability - Fruits

Mangoes-Most widespread fruits along the coastal region;

-Kwale is one of the largest producers after Tana River ;

-Main growing areas are Matuga and Msambweni Sub counties;

-Acreage under mango tree is 4135 hectares mostly holdings farms in and around homesteads;

-Approximately 500,000 trees which yield an average of 179 kgs per year per tree;

-43,196 tonnes sold in the year 2011; 52,574 and 91,390 in 2012 and 2013 respectively.

Main species (cultivars):

Ngowe, which is the dominant variety estimated at 50%;

Boribo/Kipunda/Kimji or indigenous variety that is being gradually replaced due to low yields and biennial harvesting;

Apple – popular for its sweetness and amount of flesh; about 20%.

New varieties: Haden, Tommy Atkins, Van Dyke, Sensation and Kent - yield between 1,000 and 1,200 fruits per tree

Mango Market

50%: Kongowea Market in Mombasa;

20%: exported to Tanzania;

10%: Hotel Industry along the South Coast;

10%: Processors, mainly Milly Processors in Mtwapa, Kilifi County (famous for Picana brand);

Balance is sold locally by hawkers or consumed at farm level;

Mango fruits fetch a price of Kshs.20 per Kg, i.e. Kshs.5-7 per fruit;

Figure goes down drastically during peak harvest periods - as low as 50 cents due its rapid ripening and perishability.

Main Challenges Poor market development and weak supply chains leading to exploitation of the

farmer;

Pest and disease invasion: fruit fly, weevil, powdery mildew, etc;

Unreliable rainfall hence the need for irrigation;

Low uptake of modern farming practices; farmers’ unable to buy inputs/implements;

Poor post-harvest handling;

Lack of storage facilities for ripe fruits;

Minimal value addition.

Citrus

Kwale is the largest producer in the coastal region, followed by Taita Taveta;

Citrus family includes oranges, lemon, tangerine, grapefruit and lime;

Main growing areas are Matuga, Msambweni, Shimba hills and Mwaluphamba;

Acreage: 2870 hectares - mostly small holding farms in and around homesteads;

High potential within the current growing area and beyond.

Approximately 800,000 trees which yield an average of 52 kgs per year per tree;

20,157 tonnes sold in 2011; reduced to 8,398 in 2012; increased to 41,400 in 2013;

Market 60%: Kongowea and other markets in Mombasa;


10%: Grocery stores; balance - hawkers or consumed at farm level;

Price Kshs. 20-25 per Kg/ Kshs.3-5 per fruit; as low as Kshs. 1 during peak season;

Stiff completion from Tanzania - sweeter, juicier variety in Tanga Region.

Challenges to production Pests / diseases, poor husbandry practices, old trees that need replacement;

Destruction of the crop by wild animals, especially in Shimba Hill area;

Lack of technological packages of training and extension services;

Poor infrastructure -high transportation costs for off-farm delivery to markets;

Exploitation by middlemen due to unorganized market structures;

Poor post-harvest handling, lack of storage facilities for ripe fruits;

Minimal value addition.

Passion

Farming of passion fruit is among the fastest growing agricultural activities in Kwale County (KARI report)

Growing areas : Msambweni, Shimba Hills, Mwaluphamba and LungaLunga (lower parts);

1million trees in Kwale County which yield an average of 14 kgs per year/tree;

Acreage is 887.8 hectares mostly small scales farmers;

Can harvest throughout the year using irrigation and modern farming methods; simple to cultivate, inter cropped as a creeper, can thrive even on hedges;

KARI has introduced Varieties like Brazil and CF4 – better tolerance to diseases and bugs compared to the local yellow passion fruit;is training farmers in orchard management and fruit harvesting; rapid increase in fruit supply - has doubled in 4 years;

20 collection centers supported by MESPT have changed the supply mode.

Market Mostly sold to ALL FRUIT EPZ Limited, Changamwe, Mombasa County. Requires

10,000 MT pa but farmers can only supply 400 tonnes.

12 MT sold between Dec. 2011 and Feb 2012; increased to 44MT in June – Sept 2012 and 85MT in Dec 2012 – Jan 2013. Prices: KShS.6 to Kshs.14/Kg;

70%: Kongowea and other grocery markets in Mombasa and Kwale Counties,

20%: Hotel Industry along the South Coast; balance - processors or consumed at farm;

Challenges to production: Similar to other fruits

Pineapple

The most important variety "Smooth Cayenne" is grown commercially in Kenya for both canning and the fresh market.

Not widely grown in Kwale County; found in Msambweni and Matuga Sub- counties but have a very high potential ;

Only 30.7 hectares most of which are small scale holding in and around homesteads;

Approx. 300,000 trees - average of 2.95 kgs per year per tree;

694 MT sold in 2011, increased to 729 and 902 in 2012 and 2013 respectively;

Planting to harvesting takes 1 – 2 years; ratoon crop 9 months – 18 months;

For canning and puree production, sugar/acid ratio 13 to 16° Brix is suitable - attainable when the fruits mature when there is plenty of sunshine.

Market

80%: Kongowea Market in Mombasa ;

20%: Hawkers or consumed at farm level.

Price: Kshs.20 per Kg, i.e. Kshs. 20 per fruit.

Challenges to production : Unreliable rainfall hence the need for irrigation + similar to other fruits.

Paw paws Popular fruit in Kwale County; main growing areas are

Msambweni, Shimba Hills, Matuga and Lunga Lunga (lower parts);

450,000 trees in the County - average yield of 39 Kgs per year/tree;

Acreage: 722 ha mostly small scale farmers;

Harvested throughout the year; high potential for more cultivation.

Market 60%: Kongowea, other grocery markets in Mombasa and

Kwale;


Balance is consumed at farm level.

Price: Kshs.10/Kg, i.e. Kshs. 10 per fruit.

Challenges to production Pests and diseases; poor crop husbandry practices;

High transportation costs due to poor infrastructure;

Lack of inputs and knowhow; very limited value addition.

Others Include: bananas, jack fruits, guavas, tomatoes and

water melons;

Currently grown on a very small scale, mainly as subsistence crops; combined annual yield 2,000MT - Kshs. 30,000,000;

High potential for commercial production, especially guavas, tomatoes and water melons - in high demand due to their medicinal value and nutrients;

Establishment of processing factories – like a tomato paste plant - would instantly catalyze the crop production.

Fruits Growing Regions

Approx. No. of Trees

Yield (Tonnes) Per Year Price (Ksh/Kg)

Income(Ksh.M)

Potential Yield (T)2012 2013 2014

CITRUS (oranges, lemons and tangerine)

MsambweniMatugaShimba HillsMwaluphamba

797,222 8,398 41,400 51.93 20 828 100,000

MANGO MatugaMsambweniKinango (very rarely)

510,493 52,574 91,390 179 15 1,370.85 300,000

PASSION MsambweniShimba hillsMwaluphambaLungalunga(lower part of Lunga Lunga-along the beach)

986,444 5,740 14,108 14.3 20 282.16 50,000

PINEAPPLE MatugaMsambweni

307,000 729 908 2.95 20 18.16 5,000

PAWPAWS MsambweniLungalungaShimba hillsMatuga

451,250 8,326 17,597 38.99 10 175.97 50,000

OTHERS 2000 30,000 20,000

Summary

CITRUS MANGO PASSION PINEAPPLE PAWPAWS OTHERS0

50,000

100,000

150,000

200,000

250,000

300,000

350,000

MAIN FRUITS IN KWALE

current production (MT) potential production (MT)

FRUITS

PR

OD

UC

TIO

N

Viable Value Addition Products

Fruit Juice Liquid that is naturally contained in the fruit; Mechanically extracted and flavored but retains its natural quality; Most popular juices are made from mangos, citrus, paw paws,

pineapple, tomatoes, guavas, apples, pitches and strawberries; Orange juice is most recommended for Kwale with option to produce

mango, passion, tomatoes and guava juices as alternative products during low citrus season.

Reason: presently no large scale processors of orange juice in the Coast Region. Mango, passion factories available.

Fruit Puree

Made by boiling peeled fruit and adding sugar and starch to produce a sweet a jelly;

Can be consumed directly or incorporated in making juice, jam and squash;

Is locally popular, mainly as a sweetener in oriental and Arabic dishes;

Pineapple or mango puree added to cake makes it soft, sweet and yummy;

Also a great baby food. Can also be topped on desserts, cookies or to the bowl of cereals.

Huge export demand in the Middle-East and Europe.

Fruit Jam/Tomato Paste

Thick mixture of fruits, pectin and sugar; boiled gently but quickly until the fruit is soft and has an organic shape;

Most fruits can produce jam but pineapple, mango, strawberry and plum jams are the most common and popular brands;

Marmalade is a variety of jam made from citrus fruit, adding peels to bring a bitter-sweet flavor.

Tomato paste

Thick paste made by cooking tomatoes for several hours to reduce moisture, straining them to remove the seeds and skin, and cooking them again to reduce them to a thick, rich concentrate;

Used as a flavor /gravy on dry fried food like potato chips, chicken, rice, bananas grilled beef and fish.

Other Products Raw Material Benefits

Animal Feeds Fruit fibre and other wastes

Linkage to livestock farming

Biogas Fruit fibre and other wastes

Green energy

Non-nutrient compounds

Citrus peels Medicinal value

Dietary fiber or NSP (non-soluble polysaccharides) like hemi-cellulose, pectin, tannins and gums

Help prevent constipation by reducing gastro-intestinal time

Increase the bulk to food.

Juice

producers in

the Coast

Region

Location Annual Output (MT ‘000) Market

Pulp

(mango,

passion,

citrus)

Mango

juice

Citru

s

Juice

Passion

Juice

Others Total

(MT ‘

000)

All fruits EPZ Changa

mwe

EPZ

30,000 0 0 0 30,000 Export,

Local

Refiner

s

Milly

processors

Mtwapa,

Kilifi

7,000 4,000 2,000 1,000 1,000 15,000 Export,

local

Malindi

Farmers Co-

op.

Malindi 3,000 0 0 0 0 3,000 Local

refiners

Coast

Development

Authority

Hola 0 1,500 0 0 500

(tomato)

2,000 Local

ICDC project

(proposed)

Kilifi 5,000 0 0 0 2,000 7,000 Export,

local

Over 20

Cottage

Industries

All over

the

region

0 200 300 200 300 1,000 Local

Total - 45,000 5,700 2,300 1,200 3,800 58,000 -

Current Juice Production

45,000

5,700

2,300

1,200

3,800

Pulp (mango, passion, citrus)Mango juiceCitrus JuicePassion JuiceOthers

Type of Consumer Number Weekly Demand

(M ltrs)

Est. Annual

Demand (M ltrs)

Large Supermarkets ( e.g.

Nakumatt, Uchumi, Naivas,

Budget, Tuskeys)

40 0.4 20.8

Medium size supermarkets

and grocery stores

78 0.12 6.3

Retail shops 3,000 0.18 9.4

Tourist Hotels 43 0.02 1.04

Other Hotels & Restaurants 300 0.05 2.6

Other institutions

(Hospitals, Colleges,

Schools )

150 0.02 1.04

Export to Tanzania 10

Total - 51.18

25% being citrus juice 12.8

Juice Demand Structure

Proportion of Demand by Consumer

Supermarkets Export to Tanzania Retail shops Grocery stores Restaurants Tourist Hotels Other institutions 0

5

10

15

20

25

20.8

109.4

6.3

2.6

1.04 1.04

Annual Demand (Million ltrs)

TYPE OF CONSUMER

AM

OU

NT

Market for other products Demand for fruit jam, puree and tomato paste is closely related to that of juices;

Prominent exporters can take 20,000 MT of puree and jam/marmalade pa for the Middle-East and European market;

Market Challenges and Constraints Seasonality of the crops might impede continuous production; facility required for

preservation of the raw materials during off season.

Food production industry - protracted licensing and regulation processing, especially regarding environmental and public health concerns.

Marketing Strategy Direct marketing of bottled juice and tomato paste to supermarkets, retailers, hotels,

institutions, etc;

Ex-factory sale of juices, tomato paste and compost manure;

Sub-contracted supply of concentrate to large juice processing factories;

Targeting the export market for the bulk of puree;

Ensuring that products are standardized, branded and well packaged to meet international standards;

Use of website, media and word of mouth to advertise the products.

Pricing Strategies Consider terms of sale - credit sales, wholesale vs. retail, distance to market and type of

packaging.

Adopt penetration pricing as an entry strategy - slightly lower than the average industry prices.

SUPPLY CHAIN

Raw Material Supply Chain Key success factor for fruit projects - over-ripe, rotten fruits are discarded as

waste at considerable loss to the business; delays in supply cause factory down time.

Recommended supply chain:

-farmers deliver to collection centers; picked by factory;

-Co-ops manage the collection centers and pay the farmers;

-Co-ops are contracted suppliers to the factories.

Other inputs - sugar, starch and packaging material - procured in sufficient quantities to last for approximately one month.

Transportation of Raw Materials Most efficient and currently popular - vehicle leasing. Frees the company from

maintenance, service and insurance costs.

It is thus recommended to lease transport but have one (1) 7 - ton lorry as fall-back.

Product Supply Chain Distributors, wholesalers and retailers;

Exporter to the export market (for puree);

Factory gate sales for manure and other by-products.

Business Profiles:

1. Juice ProductionReception of goods

Sorting

Washing Peeling Splitting and removal of core

Blending

Pulping

Filtering

Pasteurizing

Cooling

Packaging into

bottles

Labeling and

packing into cartons

Dispatch

Proposed Factory site

Local leaders and the business community prefer plant to be located along the Mombasa – Lunga Lunga Highway, i.e., between Msambweni and Matuga

- easy access to market;

-good transport infrastructure.

County Integrated Development Plan (CIDP) recommends Kikoneni/Dzombo in Lunga Lunga Constituency.

Other factor to consider is closeness to the source of raw materials - Shimba Hills produces the largest quantity of citrus fruit.

At least 3 acres of land is required; necessary infrastructure must be in place.

Organizational StructureBoard of Directors

Managing Director

Chief Finance Officer

Human Resource Manager Production Manager

Food Technologist

ChemistProd.

Supervisor

Technicians Lab Staff OperatorsClerks/ Storekeepers

Adm. Asst.

Drivers Security

Accountant

Estimated Investment (5,000 tons pa)

Item Costs

Land and building 25,000,000

Plant & equipment 70,000,000

Other assets 6,000,000

Working capital 5,000,000

Start-up costs 2,000,000

Total 108,000,000

Financing Plan

County government: land, construction of factory shed, provision of infrastructure;

Farmers co-operatives: establish fruit collection centers; in future plans to carry out semi-processing (pulping) in those centers;

Co-operatives to raise funds from members for initial costs and working capital;

private investors: plant, working capital and other fixed assets

Shareholder Percentage shareholding

Items financed Amount (Kshs)

Kwale County /Cooperatives

30% Land & building 25,000,000Start-up costs 2,000,000Working Capital 5,000,000Total 32,000,000

Private Investors 70% Plant & Equipment 70,000,000

Other assets 6,000,000Total 76,000,000

Grand total 108,000,000

Projected Income Statement

Indicator Rate Comparison to marketIRR (10 years) 9% Treasury bonds: 5-6%ROI 3rd year 18% Fixed deposit: 7 - 8%Return on Equity 3rd year

22% Unit trust rate: 8 -10%

BEP 3rd year 32% Industry average: 30 – 50% of capacity

Net profit after tax 3rd year

Kshs. 24,062,960 Shows good profitability

Year 1 Year 2 Year 3 Year 4 Year 50

5000000

10000000

15000000

20000000

25000000

30000000

35000000

40000000

2. Fruit Puree

Particulars 1st Year 2nd

Year

3rd Year 4th Year 5th year

Capacity

Utilization 40% 50% 60%

70%80%

Raw Material Input

(tons) 10,000

12,500

15,000 17,500 20,000

Puree production

(tons)2,000 2,500 3,000 3,500 4,000

By-products

(manure) (tons) 4,000 5,000 6,000 7,000 8,000

Summary of InvestmentItem Costs






Total 110,900,000

Proposed Business Model

Ownership Structure Private investors to take full ownership of the project – Kshs. 110.9M;

Farmers to form cooperatives for supply of raw materials;

County Government to extend necessary support to the business: infrastructure, ease of licensing, business development services to farmers in order to increase crop yield.

Proposed Factory SiteMsambweni is the most suitable and convenient location:

-Easy access to market;

-Good transport infrastructure, especially to collect pineapples and mangoes beyond the boundaries of Kwale County.

-Availability of land (at least 3 acres) and necessary infrastructure will be an important consideration.

Main Markets Export markets in the Middle East and Europe;

Supermarkets and hotels in Kenya and neighboring countries;

Ex-factory sale of compost manure to farmers;

Projected Income StatementIndicator Rate Comparison to marketIRR (10 years) 9% Treasury bonds: 5-6%ROI 3rd year 20% Fixed deposit: 7 - 8%Return on Equity 3rd year





Year 1 Year 2 Year 3 Year 4 Year 5 -

10,000,000.00

20,000,000.00

30,000,000.00

40,000,000.00

50,000,000.00

60,000,000.00

Series1

3. Fruit Jam/Tomato Paste

Particulars 1st Year 2nd Year 3rd Year 4th Year 5th year

Capacity

Utilization 40% 50% 60%

70%80%

Raw Material

Input (tons) 4,000 5,000 6,000 7,000 8,000

Jam production

(tons)800 1,000 1,200 1,400 1,600

By-products

(manure) (tons) 1,500 1,900 2,300 2,600 3,000

Production Program

Process flow chart CLEANING

MIXING OF PECTIN & SUGAR

DISPATCH

COOLING &PACKAGING

DE-SEEDING

CRUSHING

COOKING

PULPING

Summary of InvestmentItem Costs (KES)






Total 66,000,000

Proposed Ownership Structure

Farmers form a cooperative society which will own and manage the project;

Raise 20% of investment through shares; balance financed through a medium-term loan, preferably from the Co-op. Bank of Kenya;

County government could also inject funds to support farmers. Optional;

County Government will also extend necessary support to the business.

Proposed Factory Site Most suitable and convenient location is Ukunda town:

Easy access to the beach hotels in Diani which are the main local consumers;

Good transport infrastructure ensures easy linkage to Mombasa and the up- country market;

Direct link to Northern Tanzania where there is a good market for the product.

Projected Income Statement

Indicator Rate Comparison to marketIRR (10 years) 14% Treasury bonds: 5-6%ROI 3rd year 31% Fixed deposit: 7 - 8%Return on Equity 3rd year





ECONOMIC AND SOCIAL BENEFITS

Economic Indicatorsa. Wealth creation:

Increased income from fruit farming since there will be a ready market

Dividends from shares in the investments;

Income from direct and indirect employment;

BDS providers will be engaged;

Linkage to transporters, wholesalers and retailers;

Providers of technical services e.g. maintenance, plumbers etc.

b. Tax revenue:

National and County government will benefit from tax revenues, licenses and other levies.

c. Value addition: potential to add value by over 50% to raw fruits.

d. Employment creation: approximately 100 direct jobs and over 1,000 indirect employment

e. Export potential: high potential for export to the international markets and East African region especially Tanzania.

Social Benefits Improved standard of living for local farmers

Strengthening the cooperative movement in the region

Reduced insecurity due to gainful employment of idle youth

Employment opportunities for women

Activity Jul-

Sep

‘14

Oct-

Dec

‘14

Jan-Mar

‘15

Apr-Jun

‘15

Jul-Sep

‘15

Oct-Dec

‘15

Feasibility Study

Raising Equity

Growing of fruits

Construction

Procuring &

Installing plants

Training

Trial/Commissioning

of projects

IMPLEMENTATION PLAN

REQUIRED BUSINESS DEVELOPMENT SERVICES

BDS Activity Target beneficiary Expected benefits

Enhanced

agricultural

extension services

including provision

of essential farm

inputs

Local farmers and

cooperative societies

Better yield

Right fruit varieties for the proposed

products

Improved land utilization

Improved living standard

Entrepreneurship

and management

training

Cooperatives and small

scale enterprises

Better business management

Inculcation of entrepreneurial culture

among locals

Job creation

Governance and

leadership skills

Cooperative management

and SMEs

Better managed cooperatives and

businesses

Strong cooperative movement

Technical skills

training

Youth and women Enhanced human resource capacity;

Improved product quality;

Job creation

Marketing and

accessing public

procurement

Cooperatives, SMEs, Youth

and Women

Improved market access

CONCLUSION Proposed business models are financially viable and

also economically/socially beneficial to the local community and the country as a whole towards the attainment of Vision 2030;

It is possible to implement all the proposed projects within a period 12 to 18 months as outlined in the implementation plan above;

The investors will have the latitude to vary plant capacities, technology and product range including integrating all the products in one factory.

Potential investors are therefore invited to:

Consider the business proposals contained in this report;

Identify suitable investment opportunities therefrom.

THE END

THANK YOU.

Documents

KWALE COUNTY INVESTMENT FORUM 2014 INVESTING IN VALUE CHAINS IN AGRI-INDUSTRIES : The Case of Fruit Value Chains in Kwale County By: ENG. DAVID K. OPIYO