Climate Change Effects on Kenya’s Tea Industry

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Table of Contents

Introduction
Main body
Macroeconomic impacts
Conclusion
Reference List

Introduction

The tea sector is categorized as one of the key economic sectors globally (International Labor Organization1994). This is evident in the increased rate of adoption of tea as one of the major cash crops (International Labor Organization 1994). As a result, the sector influences other significant macroeconomic factors such as the rate of economic growth. However, the significance of the tea industry is relatively high in the developing countries compared to the developing economies (International Labor Organization, 1994).

Over the last few decades, there has been significant growth in tea production. The average annual growth rate in 2003 was 1.81%. This was also occasioned with an increase in the rate of consumption with a margin of 2.05% (Michuki 2003). India is the leading tea producer. For example in 1998, India produced 87,000 tones of tea. On the other hand, China which is the 2^nd largest tea producer had an output of 665000 tonnes while Kenya was ranked 3^rd with an annual production of 294200 tonnes and Sri Lanka 280100 tonnes during the same year (Wijeratne 2006).

In 1999, there was a significant global reduction in the volume of tea production with a margin of 3 million tons to 3.7 million tons. The main reason for the reduction is a change in weather conditions (Wijeratne 2006). Most of the countries which were affected include Bangladesh, Indonesia, and Kenya. However, tea production in China and Sri Lanka were not affected.

Agriculture forms the backbone of the Kenyan economy with regard to the real Gross Domestic Product (GDP) (Atieno 1994). As a result of changes in weather conditions, tea production in Kenya has undergone a significant reduction in tea production thus affecting the country’s economic growth as a result of a reduction in its contribution to the country’s Gross Domestic Product (GDP).

Over the past few decades, there has been a decline in the performance of the sector in relation to its contribution to the country’s GDP. For example, during the period ranging from 1964 to 1974, its contribution to the GDP averaged 36.6% (Mariara 2007).

However, in the following years, there were fluctuations in its contribution. For example, its contribution to the GDP for the periods ranging from 1974-1979, 1980-1989, 1990-1995, 996-2000 and 2001-2009 were 33.2 %, 29.8%, 26.5%, 24.5% and 19.7% respectively( Mariara 2007). This illustrates a significant reduction in the sector’s performance. Despite its poor performance, the sector is one of the key drivers of the country’s economic growth. Over the years, the tea sector has been dominant in the country’s economy.

Kenyan tea has become competitive in the international market making it to be one of the country’s main exports. According to an economic survey conducted in 2003, the country is ranked as the 4^th largest producer of tea on a global scale (Michuki 2003). According to two journalists Julius N’Ethagatha and Kerstin Linne (2008), tea accounted for a quarter of the country’s total earnings from exports in 2008. The performance of a countries agricultural sector is dependent on a number of factors such as the country’s endowment with suitable soil and other climatic conditions such as temperature, humidity, and the amount of rainfall (Mariara 2007).

Over the past few decades from 1950-2010, there has been a significant climatic change across the globe (Pinkse, & Kolk, 2009). This has affected Kenya’s agricultural productivity especially with regard to the production of tea (Chopra & Peter 2005). The crop which mainly performs well at an altitude of 2000 meters above sea level is posed with a threat of losing out to other crops (Pinkse Kolk 2009). This paper will analyze the microeconomic and macroeconomic effects of climate change in Kenya’s tea sector.

Main body

The current climatic changes are making tea production to be unpredictable (N’Ethagatha & Linne 2008). According to two professional scholars Andrew Hoffman and John Woody (2008), it is vital for business organizations to consider climate change as a market issue and not only as an environmental issue. This arises from the fact that climatic changes have diverse effects with regard to economic, social, and environmental issues (Hoofman & Woody, 2008).

In order to attain this, it is vital for individual firms to incorporate the concept of sustainability in its diverse contexts (Cogan 2006). One of these contexts relates to environmental sustainability (Dunphy, Griffiths, & Benn 2005). As a result of climate change, firms operating within the Kenyan tea sector are posed with a threat of attaining their goals as going concern entities.

According to Jane Mariara, an economic researcher with The World Bank Research Group which is a subsidiary of the World Bank Economic Review, environmental changes resulting from the high rate of climate change has become a common phenomenon in recent years (Mariara 2007). The effects of climate change on both individuals and organizations are so enormous to be ignored. This means that these two parties have a role to play to ensure that the effects are mitigated. Both the large and small scale tea farmers have been affected by climate change.

Most of the tea plantations are located in the Rift Valley province (Attwood 2010). An example of such a firm is Unilever which is a multinational company. The firm operates within the consumer goods industry with its products being distributed in 170 countries (Reuters 2010). In its operation, the firm deals with wide categories of consumer goods. In Kenya, Lipton owns a large tea plantation in Kericho (Unilever 2009).

The firm‘s tea plantations in Kericho covers 20,000 acres of land (Attwood 2010). In order to appeal to a wide range of its customers, the firm’s management team has incorporated the concept of product innovation. As a result, Unilever has a wide range of Lipton tea products such as green tea, yellow tea, white tea, and black tea. In an effort to increase its profitability potential, the firm has ventured into the production of ready-to-drink tea varieties which is a type of tea packaged in form of juice. In its quest to achieve effective tea production, the firm has outsourced the services of Rainforest Alliance which is an environmental Non-Governmental Organization in 2007 (Unilever 2009). The key objective of this alliance is to ensure that the company produces high-quality tea from its plantations.

As a result of climate change, there is a high probability that Lipton will not be able to meet its production capacity. One of the main reasons for the reduction in the resulting change in weather patterns. According to Michael Wijeratne an environmentalist at the University of Amsterdam which is a major university in the Netherlands, the weather has a significant impact on tea yield (Wijeratne 2006). Growth tea is highly dependent on even the distribution of weather conditions. The current climatic changes have adversely affected the weather patterns in Kenya. For example, the country has experienced drought conditions a number of times since 2000 (N’Ethagatha & Linne 2008).

For example, in 2008, the country was hit by a prolonged drought that started in April. During the normal climatic condition, April is considered to be the wettest month of the year in Kenya (N’Ethagatha & Linne 2008). The climatic change resulted in the company experiencing irreparable losses considering the fact that irrigation is not used in tea plantations. There are predictions that all the country’s regions will experience an increment in temperature level averaging between 1.5⁰ C and 3⁰ C (N’Ethagatha & Linne 2008).

In other cases, some parts of the country especially in Rift Valley where Unilever has its tea plantations have experienced heavy downpours. High rainfall intensity has an adverse effect on the production of tea. For example, high rainfall results in soil erosion thus washing away chemicals and fertilizers which are necessary for the effective growth of tea (N’Ethagatha & Linne 2008). This means that climate change will negatively affect the quality of tea that Unilever Company produces. The resultant effect is that the company’s competitiveness in the international market will be reduced.

According to a report published in 2007 by the Technical Centre for Agricultural and Rural Cooperation ACP-EU which is an independent agency on the effect of climate change on the tea industry in Kenya, there will be an expansion of some arid areas as a result of an increase in temperature levels (ACP 2010). According to the report, there is a high probability that the land suitable for tea production will encroach. If the temperature levels increase by a margin of 2⁰C, then areas that currently have potential conditions for tea cultivation will become unsuitable. There is a high probability of these areas being utilized in the production of other crops (N’Ethagatha & Linne 2008).

This will limit Unilever’s capacity to expand its tea production via the acquisition of other new plantations. The resultant effect will be a reduction in its profitability potential. In order to cope with this, the firm may be forced to increase its production by buying tea from other small scale farmers (International Labor Organization 1994). This may increase the cost of operation. Despite incorporating such a decision, the firm may not be able to eliminate the deficit in its production since the small scale farmers are also faced with the same climatic condition.

In an effort to deal with the effects of climate change, various environmental regulations are being instituted by various governments such as China, India, the United Kingdom, United States of America amongst others (Sietz & Nyangena 2009). Some of these regulations relate to carbon and other greenhouse gases that are emitted into the atmosphere (Siden 2008). Carbon emission is one of the major causes of global warming which is a key cause of climate change (Margolick & Russel, 2001).

In their operations, tea factories emit a substantial amount of carbon. This arises from the fact that Kenya is mainly dependent on fossil fuels for its energy needs (Pateman 2004). Some of the environmental regulations being developed by the government related to energy utilization (Faulkner 2009). In order to reduce global warming and hence climate change, firms are required to be carbon neutral. According to Andrew Hoffman and John Woody (2008), the attainment of carbon neutrality is one of the ways through which a firm can achieve environmental sustainability. In order to attain this, tea factories such as Unilever Company will be required to incorporate the concept of carbon offsetting.

This entails ensuring that the amount of carbon and other greenhouse gases emitted is equivalent to the amount removed from the environment (Taiyab 2006). In order to attain this, the firm will be required to undertake carbon footprinting. Carbon footprinting is a process which enables a firm to determine the amount of carbon it emits into the atmosphere from all its operation (Hoffman &Woody 2008). If the firm does not have the necessary technology to undertake carbon footprinting, it will be required to outsource this service to other intermediaries. According to Nadaa Taiyab (2006), an environmentalist scholar, the cost of investing in carbon footprinting is relatively high.

According to Julius N’Ethagatha and Kerstin Linne (2008), the tea industry is an energy-intensive industry. The energy requirement of tea companies presents a great environmental risk and hence climate change ( Pateman 2004). This arises from the fact that wood energy is one of the key sources of energy for tea companies (Faulkner 2009). In addition, tea companies use fossil fuels which are a major source of carbon.

With regard to the new environmental regulations, Unilever Company will be required to invest in cleaner technologies so as to minimize its negative impact on the environment. In the process of incorporating new technologies, the firm will be required to make significant changes to its operation. A substantial amount of investment will be required to attain this. Environmental regulations will also require the firm to undertake tree planting project in an effort to attain carbon neutrality via offsetting (Collins 2009).

This arises from the fact that tea companies such as Unilever are amongst the major agents of deforestation. Prior to the environmental summit aimed at combating climate change which was held in Copenhagen in 2009, the Kenyan government announced that it would increase its commitment towards restoring tree cover (Collins 2009).

Macroeconomic impacts

The tea industry in Kenya is labor-intensive (N’Ethagatha & Linne 2008). This is evident in the fact that tea picking in Kenya is done manually. As a result, the industry is not only beneficial to customers who consume its products but also to individuals who are employed to work on the plantations. It is estimated that approximately 1 million individuals are employed within the tea industry in Kenya (Bowden 2007).

Most of them are employed by multinational companies that own tea estates such as Unilever Company, Sasini Tea, and Brooke Bond Kenya. In 2010, Unilever Company has employed 18,000 workers who come from different parts of the country (ACP 2010). Over the years, the firm has managed to attract skilled workers as a result of its steady wages. By working in the estate, the employees are able to meet their personal needs and also take care of their families. As a part of corporate social responsibility, the company supports its employees by offering services such as schooling and healthcare facilities (Attwood 2008). The company accounts for approximately 11% of the entire Kenyan tea market.

Due to the effects of climate change, there is a high probability of these laborers losing their job. One of the main reasons is as a result of a reduction in the company’s level of profitability. For example, due to a reduction in the volume of tea leave production from its estate as a result of climate change, the firm’s management team will be forced to minimize the cost of its operation (Kiplinger’s Personal Finance 2003).

One of the ways in which this will be undertaken includes laying-off some of its employees. Such an action has got a ripple macro-economic effect. According to Henry Perritt (2006), by laying off some of its employees, the laid off employees may sue the company for compensation. As a result, the firm may incur a heavy cost in form of employee compensation. Considering the reduction in the level of profitability, the firm may experience financial constraints.

In their operation, firms in different sectors of the economy are required to contribute towards the attainment of the Millennium Development Goals. Some of these goals include reduction of poverty, diseases, provision of primary education, reducing children mortality, and ensuring environmental sustainability (United Nations Development Programme 2010). One of the ways in which they can achieve this is through their contribution to the economy via various business activities. Laying-off workers have the effect of increasing a country’s rate of unemployment. This will further aggravate the country’s poverty level.

According to Steven Hackett who is a renowned scholar, poverty occurs as a result of a lack of sufficient economic resources such as money to cater to basic needs (Hackett 2001). Unemployment is one of the major causes of the increase in antisocial behaviors within society. For example, in order to survive in the current economic environment in Kenya, these individuals may result in illegal businesses and other antisocial practices such as prostitution (Bowden 2007).

According to journalists; George Fogolia, William Sateren, Peter Renzullo, and Lawrence Langat, the poor living conditions in some of the Kenyan tea estates is blamed for the upsurge in risky sexual behaviors within the society which may aggravate the risk of contracting HIV and AIDS(Fogolia et al 2007). HIV and AIDS have the effect of reducing an individual’s productivity. Poverty reduction and combating HIV and AIDS are amongst the Millennium Development Goals (MDGs) which Kenya is committed to achieving by 2015 (Fogolia et al 2007). However, the effect of climate change on the decision implemented by firms within the agricultural sector poses a threat to the attainment of the poverty reduction goal.

As a result of job loss, it will not be possible for the laid-off individuals to invest in other sectors. This will greatly hamper the country’s rate of economic growth. In addition, the loss of a job has a negative effect on an individual’s purchasing power due to a reduction in his or her disposable income. One of the most effective signs of identifying a reduction in consumer’s purchasing power is an increment in the rate of unemployment (Kiplinger’s Personal Finance 2003).

According to Peter Rosner, a professor at the University of Vienna, having a constant income is one of the ways through which individuals can be able to finance their consumption (Rosner 2003). Christian Weller, an economic scholar further asserts that there is a strong direct correlation between consumption and income as illustrated by the function C=f(Y) where C= consumption and Y is the income (Weller 2002).

Therefore, when an individual has a high income, his or her rate of consumption is relatively high and vice versa. The Life-Cycle Hypothesis of consumption stipulates that an increase in unemployment has a negative effect on an individual’s consumption. This arises from the fact that the individuals do not have future expected income. It is the consumer’s lower-income level over a given period of time that makes him or she reduce the rate of consumption (Rosner 2003).

The laborer’s loss of income will translate into a reduction in an individual’s rate of consumption for goods and services. John Maunder (2005) who is a scholar asserts that personal consumption is one of the major contributors to a country’s economic growth. The laid-off individuals will shift their consumption to necessities. This means that their contribution to economic growth via consumption will be adversely affected.

Conclusion

In summation, the attainment of sustainable development is paramount in a firm’s effort to attain profit maximization objectives. One of the ways through which firms can achieve this is by operating in a socially responsible manner. Firms’ efforts to achieve this are currently threatened by various environmental issues. According to Maunder (2005), climate change is one of the major environmental issues that firms in various economic sectors have to deal with in the 21^st century.

Maunder (2005) who is a meteorological scholar defines climate change as a significant change with regard to the mean meteorological values such as the expected amount of rainfall and temperature within a given period of time. The average period of measuring climatic conditions is usually a decade. Firms within the agricultural sector are the hardest hit. This arises from the fact that their survival depends on favorable climatic conditions.

The tea industry in Kenya is amongst the sectors threatened by climatic change (Stewart & Mathiason 2009). This has resulted in a shift with regard to climate change being considered as a mere environmental issue but a market issue (Stewart & Mathiason 2009). As one of the ten firms in Kenya, Lipton Tea Company (Unilever) is under a threat as a result of climate change. Stewart and Mathiason (2009) are of the opinion that climate change will culminate in a reduction in the company’s production capacity. This arises from the change in weather patterns. For example, an increase in the amount of rainfall may result in soil erosion culminating in a decline in the level of production (Stewart & Mathiason 2009)..

In addition, there is a high probability of the tea produced being of low quality as a result of nutrients being washed away (Stewart & Mathiason, 2009). The effect is that the company’s competitiveness in the international market will be reduced. This will adversely affect its profitability. This is due to the fact that there will be a reduction in demand for the company’s tea products.

In order to deal with the effects of climate change, the government has instituted environmental regulation. Some of these regulations relate to the amount of carbon emitted from firms. Firms are currently being required to be carbon neutral (Kollmuss, Lazarus, Lee, Lefranc & Polycarp 2010). In their operation, tea companies are energy-intensive. They are also one of the agents of environmental degradation via deforestation.

This is due to the fact that they depend on wood as the main source of energy. Fossil fuels are also a key source of energy for these firms. As a result, the amount of carbon they emit is not equivalent to the amount they remove from the atmosphere. To achieve carbon neutrality, firms in the tea industry will be required to reduce undertake major changes in their operation. Some of these changes will require a significant amount of investment. For example, the firms will be required to incorporate cleaner technologies to minimize their carbon emissions (Ernst 2000).

Other carbon offsetting technologies that the firm will be required to undertake entails investing in renewable energy and tree planting projects (Wirtnberg, Russel & Lipsy 2009). To deal with a reduction in profit, reduction in profitability capacity, and increase in the cost of operation, the firm may lay off some of its employees (Institute of Management & Administration 2005). The result is an increment in the level of unemployment in the country.

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