Summary
The Kenyan cut flower sector has identified three major challenges currently faced: EU plant health regulations, freight costs and domestic Kenyan taxation. Of these, EU plant health regulations is seen as the most serious challenge since this relates to the accessibility of the all-important EU market. While there is no alternative to meeting EU requirements for access to the EU market, there is now scope for divergence in UK plant health regulations from inherited EU requirements. This could offer market alternatives for ACP cut flower exporters unable to verifiably meet EU requirements. This would appear to add urgency to expanding direct exports to the UK market, particularly since this would side-step the increased costs faced along triangular supply chains. However, Covid-19 linked airfreight disruptions greatly complicate such routing adjustments, with these new trading realities needing to be built into post-Covid air freight recovery plans.
While Kenya’s cut flower sector has been growing strongly in recent years (now employing ‘200,000 people directly and had over 1 million people’ indirectly) three major current challenges have been identified, namely: EU plant health regulations, freight costs and domestic Kenyan taxation (1).
- The Plant Health Control Challenge
Of these three main challenge the most fundamental is the EU’s plant health regulations, with the Kenyan cut flower sector being impacted by ever stricter EU plant health controls. The most recent area of concern is in regard to pest infestations of False Coddling Moth (FCM), which has been classified as a ‘quarantine pest’ by the. As a ‘quarantine pest’ products particularly vulnerable to FCM infestation are subject to special control requirements. Only products from pest free zones, which verifiably follow specific treatment regimes to prevent infestation of false coddling moth and other major plant pests of concern (e.g., fruit fly) are allowed entry to the EU market (see companion epamonitoring.net article ‘The Potential Differential Effects of Stricter EU False Coddling Moth Controls on African Exports’, 19 March 2018).
These control requirements require action from producers, exporters, and the National Plant Protection Organisation (NPPO) in producing countries. The NPPO is responsible for ensuring containment and prevention protocols and fully implemented and authenticating compliance by producers. For exporters, physical plant heath controls and treatments, also need to be conducted (2), while import inspections are also carried out upon entry to the EU, with the frequency of such inspections being determined by pest risk assessment. All of these phytosanitary requirements add to costs at the level of producers, regulatory authorities, and exporters, with import inspection costs adding to the financial burden. On top of this, infested consignments face destruction with consequent revenue losses.
This affects Kenyan exports of not only cut roses but also exports of capsicum (chilli peppers), while from an import perspective it can impact on some 68 other major plant crops (3). There are concerns in the Kenyan cut flower sector that the EU rate of inspections for FCM could increase still further beyond the 10% level of inspections the EU currently applies (already up from 5% before 2019) (4).
Any such increase in inspection levels, it is believed would carry implications for the competitive position of Kenyan cut rose exporters. This needs to be seen in a context where Ecuador and Colombia are emerging as important competitors to Kenya cut rose exporters, (despite only supplying 1/5 of the volume of Kenyan exports in 2019), with Dutch investment expanding in the Ecuadorian cut rose production and export.
In response to EU controls, and in an attempt to get inspection requirements down, the Kenyan cut flower industry is currently ‘tightening the protocols and guidelines and asking growers and exporters to implement to the letter’ (1).
- The Freight Challenge
While freight costs have always been an important cost element in Kenya’s cut flowers export trade, recent Covid-19 related increases in air freight charges, resulting from the collapse of air freight services on passenger flights, has seen freight charges accounting for around 20% of costs (1). While better cooperation and coordination with freight forwarders is seen as offering some solutions in this area (1), with passenger to cargo conversions also assisting in easing pressures, EU to Africa routes has been particularly severely impacted by the Covid-19 pandemic and are likely to be amongst the last routes to recover (5).
Against this background, the Kenyan Flower Council (KFC) has been exploring the option of sea freighting certain varieties to Europe, with pilot operations already having been undertaken. While handling processes to facilitate speedy embarkation and disembarkation have been revised, with a travelling time of 28 days there are clear limits to scope for moving over to sea freight services.
- Local Tax Policy
The Kenyan governments’ tax policy in response to the financial demands generated by the Covid-19 pandemic is seen as adding to the burden of the Kenyan cut flower sector. This is impacting on the costs of inputs such as chemicals, fertilisers, tractors, machinery, and services. Changes in the direct horticultural levy from a flat rate to an ad valorem rate has further increased the tax burden of the high value cut flower sector. KFC believes these tax increases will constrain the expansion of the Kenyan cut flower sector and result in Kenya losing investors to other countries, where rose production for export is being expanded.
In India for example, there has recently been considerable private sector investment in protected farming of roses for export, with this being accompanied by substantial public sector investment in the development of the cold store chain to facilitate exports (6). This needs to be seen in a context where the flight time to the EU from the main rose growing area in India is less than 90 minutes more than the flight time from East Africa.
To date Kenya’s tariff advantages and India’s high air freight costs have served to limit competition. However, it is unclear how the evolution of air freight services in the ongoing Covid-19 crisis will impact on the relative cost advantage Kenya has enjoyed to date. Given the size of the Indian market relative to Eastern African markets, the introduction of dedicated air freight services along EU-Indian routes is likely to be more rapid then along EU-Eastern African routes. Similarly, given the size of the Indian market, the recovery of passenger services is likely to be more rapid than along EU-Eastern African routes.
| Comment and Analysis Since there is little alternative to rigorous pest infestation prevention measures and strict inspections prior to export, if access to the EU market is to be maintained, a critical issue faced is who bears the financial burden of the additional costs generated by stricter EU plant health import regulations. This is an important issue which will need to be addressed in the context of the equity considerations which are increasingly coming to the fore in discussions around the sustainability of agricultural production and trade. The issue of who bears the burden of additional costs, is also relevant in the context of the pending introduction of full UK border controls on goods crossing from the EU in 2022. This needs to be seen in the context of the major role the Dutch flower auctions play in delivering cut flowers to the UK market (see companion epamonitoring.net articles ‘No-Deal’ Brexit Challenges in Cut Flower Sector Highlight Problems for ACP Triangular Supply Chains’, 1 March 2019 and ‘Cut Flowers Sector Concerns Over Proposed UK Border Controls Highlighted’, 23 September 2020). While the Brexit process will give to additional costs for cut flowers traded along the currently dominant triangular supply chains, some advantages could arise. Thus, we find the UK governments ‘Pest specific plant health response plan: Outbreaks of Thaumatotibia leucotreta’ published in 2020 maintains ‘T. leucotreta is not considered to be able to establish outdoors in the UK’ (7). Although roses when grown indoors in the UK are considered to be at risk, the UK has a lower risk assessment for FCM than the EU. In this context, scope would appear to exist for a divergence in UK and EU FCM controls. This could then provide an alternative market for products facing restrictions on entry to the EU market. This would appear to suggest a need to develop more direct exports to the UK rather than working through specialist traders in EU27 member states (most notably in the Netherlands where, for example, the Dutch flower auctions dominate the EU trade in cut flowers). However, with the low rate of vaccine distribution in Africa and concerns over new varieties of the Covid virus seeing the introduction of ‘red list’ travel restrictions it is likely to be many years before passenger flight-based freight services are restored to anything near pre-Covid levels (see companion epamonitoring.net article ‘East African Air Freighted Horticulture and Floriculture Exports to UK facing Devastation Given UK ‘Red List’ Travel Restrictions’, 13 April 2021). This is likely to hold back any major adjustments to the routing of deliveries of Kenyan cut flowers to final markets. This being noted the high value to weight ratio of cut flowers, leaves them less vulnerable to problems of accessing scarce air freight shipping capacity then many horticulture products. As such this is likely to see the freight challenge focused on the cost dimension rather than any absolute shortage of freight capacity. Absolute capacity constraints had been the major focus of concern at the beginning of the Covid-19 pandemic. In this context, ensuring other logistical cost increases are kept to a minimum becomes a matter of considerable concern. This suggest a need to get to grips with the policy issues which are serving to increase costs in the distribution of cut flowers to the UK in the post Brexit context. To date, policy decisions by the Dutch customs service to facilitate the breaking down of cargoes for onward distribution, without losing originating status, alongside the highly organised nature of the Dutch cut flowers sector (with its dedicated transport fleet), has minimised the negative impact of the Brexit process on the cut flower sector. However, this needs to be seen in a context where UK border controls on goods crossing from the EU will only be introduced in 2022, and so the full effects of the creation of an EU/UK customs and regulatory border have yet to be felt. This suggests a need to learn from the current experience of the movements of ACP goods from the UK to EU markets, so appropriate steps can be taken before 2022 to set in place trade facilitation arrangements which minimise new cost increases. It should be borne in mind that Kenya’s competitors in the cut roses market have a lower dependence on triangular trade in serving the UK market and hence are less vulnerable to Brexit related disruptions. In addition, in the case of Latin American cut rose suppliers FCM concerns are far less pronounced than for Kenyan and other African cut rose exporters, suggesting overall phytosanitary inspection costs are likely to be lower. |
Sources:
(1) floradaily.com, ‘The three major challenges for Kenya’s flower industry in 2021’, 9 Jun 2021
https://www.floraldaily.com/article/9327353/the-three-major-challenges-for-kenya-s-flower-industry-in-2021/
(2) cbi.eu, ‘Changes in European phytosanitary regulations for fresh fruit and vegetables’, 08 July 2020
https://www.cbi.eu/news/changes-european-phytosanitary-regulations-fresh-fruit-and-vegetables
(3) Ministerie van Mandbouw, Natuur en VoedselKwaliteit, ‘Factsheet False Codling Moth (FCM)’
https://www.agroberichtenbuitenland.nl/landeninformatie/kenia/achtergrond/studies–factsheets/factsheet-false-codling-moth
(4) Ministerie van Mandbouw, Natuur‘en VoedselKwaliteit, ‘Rose farmers in Kenya watch out! The False Codling Moth could stop the export of roses to the EU’, 24 April 23021
https://www.agroberichtenbuitenland.nl/actueel/nieuws/2021/04/24/rose-farmers-in-kenya-watch-out-the-false-codling-moth-could-stop-the-export-of-roses-to-the-eu
(5) The Loadstar, ‘As air freight rates start to fall, how long can passenger-freighters stay in the air?’, 16 March 2021
https://theloadstar.com/as-air-freight-rates-start-to-fall-how-long-can-passenger-freighters-stay-in-the-air/
(6) Journal of Pharmacognosy and Phytochemistry, ‘An economics analysis for export of fresh cut rose flowers from India’, 2019
https://www.phytojournal.com/archives/2019/vol8issue2S/PartH/Sp-8-2-67-178.pdf
(7) DEFRA, ‘Pest specific plant health response plan: Outbreaks of Thaumatotibia leucotreta’, 2020
https://planthealthportal.defra.gov.uk/assets/uploads/Thaumatotibia-leucotreta-contingency-plan-v7.pdf