Contract Sugarcane Farming and Farmers Incomes - Essay Example

Table of Contents Table of Contents 1 Abstract 2 Introduction 3 Literature review 4 Profitability 5 Prosperity 5 Welfare 6 Findings 6 Discussion 7 Conclusion 8 Recommendation 8 References 9 Abstract Sugar cane farming in Kenya has been a cash crop for most farmers from as early as 1902 (Omolo 2005). And over years it has resulted in the betterment of rural households. Unfortunately, despite its huge potential, this farming is not widely spread. Parts of Kenya like Kilifi region which has similar climatic conditions to Nzoia hasn’t embraced this wonder crop (Suri et al. 2009). By the use of secondary data, this report takes a closer look into the numbers and reveals the true worth of the sugar industry. Introduction Sugar cane is a really valuable crop. Sugar is produced from it and is widely used to compliment other goods. In fact it is one of most often traded good in international trade, accounting for 25% of the outgoing traded goods (Omolo 2005). As a highly versatile agricultural product, the economic potential of sugar is vast. This report will look into why encouraging sugar cane farming at Kenya’s coast can be the key to eliminating poverty in the region. Ever since 1902 sugar cane has been planted for the sole purpose of selling and this has resulted in the improvement of the overall livelihoods of the sugarcane farmers (Omolo 2005). Top on the government agenda is the issue of doing away with poverty. Communities in the coastal region have greatly marginalized. Suri et al (2009) argues that between 2000 and 2007, 23% of rural residents from the coast had become worse off than they were before. Lack of development initiatives in the region are believed to have contributed to this. Development programs were mostly concentrated in one region of the economy, resulting in unequal development. Certain regions had better road networks than others. As a result of poor roads, most farmers in the rural Coast have been forced to produce on a small scale as they cannot easily reach the market (Suri et al. 2009). Suri et al (2009) did a research and found out that the main reasons for wide spread inequality in Kenya is the lack of support from the government. The study tried to address the issue of poverty by going directly into the roots. For a country to fully develop, there has to be equal income earning opportunities in all regions. Every county should be able to sustain itself. Economic development programs are crucial to the prosperity of Kenya. If the issue of unequal distribution of income is not addressed now, our country will never achieve vision 2030. Middle income status level can only be achieved when the welfare of the entire nation is also prioritized. Another reason that necessitates this report is the need by the Kenyan government to increase internal revenue. Kenya’s population hit the 40 million as of 2009. Population increase results in the demand for more welfare services from the government. Such services require money for their implementation. The current revenue the government collects is not enough. Hence the need to find ways of increasing internal revenue. Hopefully this report will be convincing enough to spur the growth of sugarcane farming at the Coast region. NPV analysis figures will be used to analyze the viability of the program. With the use of real figures that take into consideration the different cycles of the economy, the money making potential of the program will be the motivational force to the policy maker. This report shall use a very practical approach and showcase the numerical advantages of sugar cane farming. Economic progress is interpreted with figures, so the best way to drive it is also by the use of figures. Literature review Evidence from other research work support the fact that the best investment is the one that gives the most returns while benefitting the local population. A good investment will have positive spillover effects. This section will provide background information that will build on the suggestions advocated for by this report. Profitability, economic prosperity and social welfare will be the main themes of the support literature. Profitability . Mumias sugar company wanted to turn 20000 hectares of land into farm land for sugar cane planting in Tana and Lamu. According to the economic valuation findings of the Tana sugar project report, Mireri, Onjala and Oguge (2008) found out that the project was highly feasible Even when the discount rates were varied between the worst case scenario due to high inflation and best case scenario due to increased production, the projects NPV remained positive. In case of a high discount rate of 20%, the NPV still remained positive but reduced to around 928 million. A low discount rate of 15 % resulted in a slightly higher NPV of around 1.2 billion. A 20% discount rate represents a worst case scenario. 4000 hectares of sugar cane harvest will be from contracted farmers. These farmers combined income would be approximately 313 million. On average the total annual income for a population of around 40000 would be 1.3 billion shillings (Mireri Onjala & Oguge 2008). Other businesses like banks will come up to support the farmers. As a result of other businesses coming up, demand for workers rises, increasing employment levels translating to higher income. Per capita income will average 32500 shillings. This report seeks to build on the available evidence and to broaden the scope. It will focus on the entire coast region. Prosperity According to Waswa et al. (2012) sugarcane is a very valuable cash crop and most households in western and nyanza provinces have planted it. Farmers have been able to access credit facilities enabling them to take care of their basic needs. Sugar cane takes around 2 years to mature and this is why the farmers opt to borrow. The sugar cane earnings will be enough to repay the loans. Banks have confidence in the farmers ability to repay debts. A healthy economy is one in which the forces of demand and supply are at par with each other. When farmers take loans, they remain liquid and are able to meet their needs easily without any obstacles. Hence the farmers can still consume and at the same time produce; the farmers create the sugarcane supply while the sugar milling factories demand the sugarcane. Exchange of goods tends to have positive impacts on the economy (Mehar 2010). Here the market is in equilibrium and what is produced is consumed creating a self sustaining economy. This review demonstrates how opportunities can come about in sugarcane farming. It points out access to credit facilities as one such opportunity. Welfare Sugarcane planting takes a lot of work and it is very physical. Furthermore it has employed 35000 people in Kenya (Omolo 2005). Employment offers a chance for citizens to fulfill their needs and desires. It makes them better off and takes them to a much higher indifference curve. Satisfaction of wants is the main goal of the consumer. Consumption of goods maximizes their welfare by satisfying wants. Furthermore, a consumers consumption is limited by the amount of money he has. Work is the source of this money. This review strengthens this articles main point by denoting how sugarcane can improve the livelihood people. Methodology Most of the research was done using online research papers, journals and articles. Findings Using an initial capital investment of 2.377 billion shillings (Mireri Onjala & Oguge 2008). If the project was to kick off next year, the first cash inflow would occur at 2017. The first inflow is estimated at 1 billion shillings but it increases by 0.2 billion every year due to increase in demand and inflation rates. Graph 1: The relationship between discount rate and NPV value The NPV values are on the Y axis while the discount rates are on the X axis. As the discount rate increases, the NPV value reduces. The curve is negatively sloped to show this relationship. Discussion According to this findings, sugar cane production has shown that it really has got the potential to be profitable and change the lives of many. From our literature review, we learn that a project with a positive NPV is a profitable venture(Mireri Onjala & Oguge 2008). Our projects NPV remains positive even under extreme discount rates. Since the sugar industry is wide and highly valuable it has got limitless possibilities in terms of contribution to economic development(Suri et al. 2009).Sugar has got a wide variety of uses starting from energy to producing fertilizer (Mireri Onjala & Oguge 2008). No part of the sugar cane plant is thrown away, everything is used to produce a certain product. It tends to be economical and its uses are maximized to satisfy the many needs of the consumer. Each product that is produced fulfills a certain human or animal need. Climatic conditions necessary for cane to mature are widely available. Cane can be grown even the most arid of places and still survive. The majority of the poor live in arid areas. By encouraging the plantation of this crop, whose demand is always guaranteed, could go a long way in the fight against impoverishment. Conclusion Basically this article talks about sugar cane farming as the best and most profitable cash crop. Its demand will always be there. The economic benefits are phenomenal. It is also very highly economical. This crop creates a win win investment opportunity for both the government and her citizens. Recommendation The government should set up irrigation schemes that focus mainly on sugarcane farming. References Mehar ,A 2010, Common sense economics: what everyone should know about wealth and prosperity [online] Munich Personal RePEc Archive. Retrieved 24 September 2015 from SSRN: https://mpra.ub.uni-muenchen.de. Mireri, C, Onjala, J, Oguge, N 2008, The economic valuation of the proposed Tana integrated sugar project (TISP), Kenya [online]. Retrieved 24 September 2015 from SSRN: https://www.rspb.org.uk. Omolo, M 2005, What ails the sugar industry in Kenya? [online] Institute of Economic Affairs (5). Retrieved 24 September 2015 from SSRN: http://www.ieakenya.or.ke. Suri et al. 2009, Rural incomes, inequality and poverty dynamics in Kenya [online] Tegemeo Institute of Agricultural Policy & Development. Retrieved 24 September 2015 from SSRN: http://citeseerx.ist.psu.edu. Waswa et al. 2012, Contract sugarcane farming and farmers’ incomes in the lake Victoria basin, Kenya [online] Journal of Applied Biosciences 52:3685-3695. Retrieved 24 September 2015 from SSRN: http://www.ku.ac.ke. Read More