Is Africa’s Flower Industry Losing Its Bloom?

The African floriculture industry, one of the most lucrative export sectors has had to survive a long and hard economic winter since the global financial crisis hit. This star performer, which has spread from its original base in Kenya to virtually all countries in East and Southern Africa, is now facing the most serious threat to its continued survival. While its traditional market has been shrinking, competition among the producers is intensifying. Encouragingly, however, the industry is showing remarkable resilience. Although the frost is far from having lifted, with new investment and innovations, and reinvigorated competition, there are opportunities for the continent’s flower growers to sow new seeds for success in 2012.

Alhough the potentially lucrative nature of the floriculture industry has long been beyond dispute, its vulnerability to circumstance is notorious. Based around the sale of a non-staple, perishable agricultural good, bad weather, delays in transportation or dissipating demand for luxury items in market destinations can quickly throw the industry into turmoil. Unfortunately, Africa’s flower sector has recently illustrated with acute accuracy what it can mean to be exposed to such susceptibilities. Since the credit crunch hit, the sector has unmistakably suffered and diagnoses of the industry’s health have been largely pessimistic ever since.

The negative impact that the global crash has had on the sector can be clearly catalogued. The profitability of the sector for established exporters nose-dived following the financial downturn in the autumn of 2008 as purchasing power and, thus, consumer demand for African flowers in Europe, Africa’s biggest export market, quickly dissipated.

The effect on export earnings was so severe in Kenya, dropping by as much as 15% in 2010, that, although profits improved in 2011, it will take some time for the country to recover. Moreover, in Tanzania, within a year of the credit crunch, prices had tumbled by between 30% and 50% and growth continues to be lacklustre into 2012.

Even the rising star of the floriculture sector, Ethiopia, did not escape the crisis unscathed – over the course of 2008 and 2009, flower farmers earned less than half of the $280m that the government had projected. “As with any other flower-producing country, the Ethiopian flower sector had problems with the unstable market conditions,” admits Tilaye Bekele of the Ethiopian Horticulture Producer Exporters Association.

Moreover, the underlying problems that floriculture has faced in recent years show no sign of abating in 2012. The sobering projections of Ian Ross of Flora Export, the South African partner of The Dutch Flower Company, are typical of those currently held within the industry: “2012 will continue to be a very difficult year for producers, exporters and importers. Those operating on debt will find it difficult to remain competitive while the larger companies will strive to maintain their market share and survive,” he explains.

Indeed, the cyclical convergence of factors, which choked profit levels in 2011, including the continuation of the global recession, the escalation of the Euro Crisis, the weakening of both African and European currencies, climbing production costs, and disastrous weather, is still lingering. The present state of the European economy is causing particular consternation on the continent.

“If you look at what is happening in the Eurozone, and you see what Spain is going through, as is Greece, as is Portugal – they have to be bailed out – what impact is that going to have on the spending ability of the Europeans?” asks Jane Ngige, Chief Executive Officer of the Kenyan Flower Council.

Input cost rise

Rising production costs, which are eating into already pinched profit margins, have taken their toll over the last year and look set to remain at high levels throughout 2012.

The projections of DM Kagwe, Chairman of Profarm, a medium-sized agricultural firm based in Nairobi, are typical. “We expect sales of farm inputs to be lower due to high input costs,” he said. A major cause of such high input costs has been high oil prices. They remained at over $100 per barrel for most of 2011, which had a direct impact on the cost of crucial inputs such as fertilisers and freight aircraft.

Crucially, oil prices show no sign of depreciating in 2012. The primary causes of high oil prices, namely strong growth in Asia and political unrest in oil-producing Middle Eastern countries, are unlikely to be resolved in the near future.

Other spiralling costs, including electricity, continue to cause issues in flower-producing countries. “The high cost of energy and power outages for prolonged periods of time has been a big issue, especially in Tanzania,” says John Kihia, technical manager at Floralife, a Europe-based company that imports flowers from the continent.

Moreover, transport and infrastructure-related production costs have hit South Africa particularly hard: “It is especially a problem in Southern Africa where our labour and electricity is relatively expensive when compared to regions such as Kenya,” says Ian Ross of Flora Export. “The price of electricity has increased drastically and, together with the high cost of coal, winter productions in particular have become uneconomical. The high cost of transport from regions such as Mpumalanga and Natal to the exporting hubs such as Gauteng has also put a burden on the producer’s shoulders and, with the prospect of toll roads being erected, this is going to put further strain onto the cost of production,” he added.

High input costs have been compounded by currency issues. The weakening of the euro throughout 2011 and into the start of 2012 has meant higher input prices in relation to the value of exports as most of the industry’s input costs are dollar-based.

With the Euro Crisis showing no sign of receding, this trend is likely to continue. Weakening currencies in African countries themselves have also exacerbated production costs. In East Africa, the Kenyan, Ugandan and Tanzanian shillings have all experienced falls in value over the last year and rampant inflation has severely curtailed the value of the Ethiopian birr.

Southern African countries have experienced similar problems. The volatility of the South African rand has put a lot of financial strain on exporters to ensure a quick turnaround time between shipping flowers and receiving payments for them. Currency issues also have had repercussions for Zimbabwe’s flower industry as the country has adopted the US dollar to replace its own following perhaps history’s most extreme inflation.

Finally, concerns about the potential impact of climate change on floriculture in Africa have been rising. “Where Europe appears to be getting colder at different times of the year compared to 10 years ago, the same is occurring with the flower seasons,” explains Ian Ross. “Inconsistent rainfalls and extreme climatic conditions are also affecting our ability to plan our seasons with comfort. We see many changes in the weather: in the past we used to have relative heat or rainfall over a period, we now experience extreme heat and or rainfall.”

In East Africa, some operating in the floriculture industry report that the drought that has ravaged the region since last summer has had some impact on overheads. “Although the drought didn’t affect the quality of flowers, the cost of production increased due to the adoption of measures to use less water,” admits Ngige of the Kenya Flower Council. The fact that the drought continues to affect significant swathes of Kenya and Ethiopia makes it likely that unfavourable weather will continue to create problems in 2012.

Rivalry intensifies

However, despite the quandaries which floriculture in Africa will struggle to extricate itself from, rumbles of interest and excitement about growing competition in the industry are  becoming more audible. An emerging theme is the intensification of competition between the continent’s leading flower exporter, Kenya, and other African countries. DK Kagwe of Profarm admits that Kenya is facing some serious competition. “Kenyan farmers need to be more innovative in producing quality flowers at lower prices than neighbouring countries to maintain the market currently held and grow flowers that have more appeal to consumers,” he said.

Ethiopia in particular has received much attention as a potential rival to Kenya. Ethiopia’s ascendancy to its current position as one of the largest exporter of flowers in Africa has been dramatic. Income from flowers mushroomed from the very modest sum of $300,000 in 2001 to $104m in 2006. The country has recorded earnings of $74.5m through flower exports in the last five months, a 21.9% increase on last year. The government has also attracted international attention for its deliberate moves to develop the industry further. It has spent several months preparing millions of hectares of land to tempt foreign investors into developing large-scale commercial flower farms. Which companies will snap them up will be watched with keen interest this year.

Interestingly, much of the recent investment interest in Ethiopia is from India – over the last year, floriculture has constituted roughly 40% of India’s investments in Ethiopia. Bangalore-based Karuturi Global, the world’s largest exporter of stemmed roses, has experienced impressive sales growth in Ethiopia over the last two years and has projected earnings of $11bn over the next five years.

Both Karuruti Global and the Indian agricultural company Neha International Limited have ramped up investment in the sector and are seeking to expand their activities, buying up new land for flower cultivation and investing in new technology. Karuturi has also become one of the largest flower exporters in Kenya.

Other countries that have been flagged as potential rivals to Kenya alongside Ethiopia are Uganda and Tanzania. Environmentalists, when considering a long-term view of the sector’s future, predict that the less harsh weather conditions in these East African countries, compared with Kenya, along with their abundance of land which is ideal for cultivation, makes them more attractive locations for flower production. Such a view gained official credibility when it featured in a recent World Bank environmental review.

Interest in new, emerging producers is also growing. In particular, Rwanda, a relatively new arrival within the East African floriculture club, is being increasingly identified as a country with notable potential. The Rwandan government is taking very deliberate steps to diversify its commercial agriculture portfolio from coffee and tea to other products, and export revenue from horticulture is expected to rise to $335m by 2017 as a result. Epimaque Nsanzabaganwa, the head of horticulture at the country’s National Agriculture Export Board, also revealed that the board intends to ramp up flower production by installing greenhouses and preparing new cultivation fields.

The Rwandan government plans to establish a floriculture demonstration centre in the Eastern Province in coming months in order to lure more investors. These efforts have not gone unnoticed and the tiny landlocked country is attracting steady investment from countries such Holland and Germany.

Kenya prepares for a fight

Nonetheless, it is clear that Kenya has no intention of forfeiting its crown as the continent’s most important flower exporter without a fight. Its horticulture sub-sector recorded a notable improvement in profits last year, supported by a 52.5% increase in production from 2010 to 2011. Ngige, of the country’s Flower Council, is upbeat: “The potential growth in the floriculture industry is promising despite the challenge from the externalities. The industry here in Kenya is looking to improve productivity to counter low returns on investments.”

Moreover, keen to differentiate its flowers as superior to those produced in the rest of Africa, the country announced the launch of a carbon credit scheme within the flower industry last month. It hopes the scheme will help the country carve out a reputation as the source of the most environmentally friendly flowers on the continent, giving its competitive advantage a new boost. Applied to the floriculture industry, the main environmental project would entail the cultivation of a “flower industry forest” by counting all of the new trees planted by flower farms and converting the numbers into a single carbon sink.

The flower industry has also been commissioning further research to identify other innovative ways of producing flowers using environmentally friendly methods. For example, Stephen Mutimba, Managing Director of Camco, an energy consultancy firm, which has been commissioned to investigate this area for the floriculture industry, has presented proposals for resource pooling and subsidising smaller farms to install solar panels.

There are also clear indications of Kenyan producers employing new strategies to produce higher quality or more attractive roses than their African counterparts: “There is a move towards starting farms in the higher altitude areas in Kenya, which may be as a result of the need to produce bigger headed roses that can compete with the highland roses from Ethiopia,” observes John Kihia of Floralife.

Moreover, although there is no doubt that Kenya faces stiff competition within the sector in coming years, experts cite a number of formidable obstacles which potential contenders will have to overcome before they have any chance of matching Kenya in terms of output. Kihia says: “Although Kenya cannot afford to be complacent, it is still quite far ahead in terms of know-how, availability of skilled labour and associated infrastructure compared to the other flower-producing countries in Africa.”

Ethiopia is a strong case in point. Lack of access to capital for small-scale farmers is a serious challenge. Ethiopia’s strategy of giving out loans to small-scale farmers in order to encourage them to cultivate new land, scale up production and adopt new technology has proved problematic, with many farmers sinking into unserviceable debt. The country also faces the daunting prospect of having to commit high levels of capital to invest in new technology and improving sector knowledge in order increase crop yields and quality. In addition, it will have to address the severe lack of diversity in its flower portfolio – currently around 80% of Ethiopia’s flowers are varieties of roses.

Industry experts also contend that until governments in countries outside Kenya commit more seriously to investing in their floriculture sectors, they will struggle to match Kenya. The lack of government commitment to flower cultivation in South Africa is a key example. “As long as we have uncertainty about the long-term prospects within South Africa, we will not be able to compete with the likes of the Kenyans. The end result is that as long as there is little or no investment from the government, the long term prospects for such projects have shown to be short lived,” said Ian Ross.
Tanzania is also a powerful testament to this fact; the failure of the government to invest in airport infrastructure has made foreign companies doubtful about the country’s potential to seriously compete in the near future – Karuturi recently refrained from opening new flower farms in the country for this very reason.

Despite the rivalry between Kenya and other African countries and intensifying debate about which countries will emerge stronger, it is evident that they also have common goals.

Shared objectives include prising open new markets in developing countries in the Middle East and Asia, an especially crucial goal given the current volatility of demand in European countries, and negotiating to lift burdensome import legislation and regulations in their target markets, particularly the EU.

African countries will struggle to achieve these goals unless they work in unison. Although some observers feel that mutual competition will preclude serious attempts at cooperation, others believe that narratives of African countries pitted against each other for a slice of the flower market are somewhat distorted and that countries are finding their own niches rather than working to push others out of the market: “Many flower-producing countries have established their own markets. For example, the roses produced in Ethiopia have a marketplace different to that of the Kenyans, while countries such as South Africa are now relying on these countries to supply them with flowers rather than compete with them,” suggests Ian Ross.

Whatever interpretation of the dynamics is accepted, it is clear that serious investment, healthy competition and strategic cooperation will be crucial if African floriculture is to blossom in 2012 and beyond.