Kenya Potato ISP

1. Kenya Potato ISP Stakeholder Meeting DATE: 19 July 2018

2. Agenda • Exec Summary • Potato Market Overview • Intervention Deep Dives and Business Cases • Recommendation and Roadmap

3. Executive Summary (1/2) • Potato contributes 30-40B KSh p.a. at retail, but production has not grown since 2010 • Globally, potato has proved a staple crop driving both food security and GDP growth. Countries like Egypt, South Africa & India use it both locally and for export • In Kenya, potato can drive critical national outcomes: • Food Security and Cost of Food: Kenya aiming for food security by 2022; targeting increasing potato volumes to 2.5Mt p.a. • GDP: Doubling yields with ~40% of farmers would result in a 0.3%increase in GDP • Smallholder profitability: Per acre, farmers could increase profit by 70-140K KSh p.a. • However, potato facing challenges across the value chain: • Seed: Certified seed can increase yield from ~8t/ha to 16-20t/ha for smallholders, but currently ~5% of the demand satisfied (2017) • Production: Average yield of ~8t/ha significantly lower than other African and global benchmarks (20-40t/ha), reducing smallholder profitability and industry competitiveness • Aggregation: Structural inefficiencies increase retail cost of potato by ~20%, reducing farmer margins and retail demand. Buying patterns result in post-harvest loss of 20-30% • Processing: Ineffective contracts and lack of access to quality potato restricting formal processing into chips and crisps to 5% of total potato volume • Retail: Seasonal price volatility with shortage prices 1.5-2xhigher than in glut period Business Solutions to Poverty

4. Executive Summary (2/2) • Highest priority interventions should focus on seed and farmer groups, while encouraging business opportunities in processing, irrigation and mechanization. Interventions can be considered in 3 phases • Within the next year (quick wins): strengthen existing farmer groups and leverage dairy co-operatives, prove viability of C3 multiplication, implement 50kg bagging, reduce duplication of extension programs and improve packages for smallholders • Within the next 3 years: scale out irrigation and mechanization, famer group seed multiplication and aggregation, public-private partnerships unlock land for large-scale seed and ware production, regional chips processing • Beyond the next 3 years: grow retail consumption, large scale investment in processing, research in cuttings and true seed Business Solutions to Poverty

5. Potato industry facing challenges across the value chain Aggregation & Distribution Seed & Inputs Production Processing Retail • Quality seed biggest driver of yield, but only 1-2% farmers use it • Only5%of required quality seed being produced • Distribution & storage difficult because of potato bulk • Limited disease free land • Varieties not tailored to market demands • Some seed producers not aligned with KEPHIS on current regulations • High cost and time to certify seed • Avg yields of 8t/ha lower than benchmarks of 20-40t/ha • Limited irrigation prevents off-season growing to reduce price volatility • Farmers tend to sell immediately (when prices low)  storage business case unclear • No market for quality or variety. Shangi grown because it sprouts quickly and sells well (but spoils & increases post-harvest loss) • Soil testing or blended fertilizer rarely used and use of DAP increases soil acidity • Lack of farmer groups and fragmentation of brokers leads to inefficient distribution – low prices for farmers, high retail prices • Distribution expensive: potatoes bulky, poor road quality • CESS fees charged by bag not weight, driving waste & obscuring pricing transparency • Processors complain about inconsistent supply and quality  high end retailers (e.g. KFC) choose to import • Contract farming not working – smallholders side sell, processors pay late or only buy large potatoes (leaving farmers with 50% leftovers) • Ideal processing varieties not grown due to lack of market linkages • Chips processing inefficient, encouraging high degree of informal processing • Seasonality in potato production leads to price volatility • Inefficient distribution results in large variation of prices across the country • Market prioritises fresh potato, disincentivising longer-lasting varieties or storage  preference for Shangi because of quick boil time and trust Business Solutions to Poverty

6. Interventions to address these problems can focus on a number of different areas (1/2) Business Solutions to Poverty

7. Interventions to address these problems can focus on a number of different areas (2/2) Business Solutions to Poverty

8. Agenda • Exec Summary • Potato Market Overview • Intervention Deep Dives and Business Cases • Recommendation and Roadmap

9. Potato is the second most important Kenyan food crop Kenya’s Crop Production – Potato 2nd most important History of Potato in Kenya • Potato introduced to Kenya in late 19th century, and has seen strong growth since the 1970s • Now a major cash crop in 15 counties, and becoming increasingly popular in Rift Valley and Western Kenya • Research and release of varieties traditionally done by KALRO and CIP, but with new international varieties also being introduced now • Potato now the second most important food crop after maize – ~800,000 farmers currently growing potato, ~90% on less than an acre Source: “The Big Four” Agenda Paper (2017)

10. Potato is grown as a major crop in 15 out of 47 counties by ~800K farmers • Nyandarua • 170K farmers, annual production ~270kT • 1 seed producer: Suera • Elgeyo-Marakwet • ~130K farmers, annual production ~290kT • Bungoma • ~6K farmers, annual production ~120kT • Meru • ~110K farmers, annual production ~160kT • 1 seed producer: Kisima • Kiambu • ~120K farmers, annual production ~60kT • Nakuru • ~20K farmers, annual production ~160kT • 3 seed producers: ADC, AgriCo, Charvi Major potato growing counties Source: TNS Analysis, Value Chain for Seed & Ware Potatoes (2013), Modernization Options for the Potato Value Chain (2016), county reports (2016)

11. After steady growth, productivity has stalled Since 2010, yields have fallen into a 6-9t/ha range Production steady since 2010, but driven by more land for potato production Yields and production grew steadily until 2010 Without intervention, forecasts suggest little change by 2023 Note: FAO data has been adjusted due to inexplicable jumps in yields (from 8 to 20t/ha and back some years) Source: TNS Analysis, FAOSTATT, Expert Interviews

12. As a result, Kenya struggles to compete with regional potato producers – particularly Egypt and South Africa Kenya’s yields comparatively low Insights • Kenya yields lower than regional comparatives – particularly biggest producers in Egypt and South Africa • Main points of differentiation are: • Lack of quality seed available • Farm size – most farmers smallholders growing potato on <0.5 acres per season. This often prevents investment in technologies such as irrigation and mechanization • Unclear market (largely informal, missing infrastructure) and price volatility reduce smallholder incentive to invest and achieve profits Source: TNS Analysis, Investment Opportunities for Potato in East Africa (2016), FAOSTATT

13. Quality seed is the greatest driver of productivity, but not widely available Seed Demand Seed Supply Note: 2018 demand based on assumption that producers replace seed every 3-4 seasons Source: TNS Analysis, Seed Producer Interviews

14. Moreover, farmers and market prefer Shangi – which is less available than other varieties Shangi most popular with market, but not being grown for seed as much Kenyan Seed Choices • Smallholders and market prefer Shangi since it was introduced in ~2012: • Short dormancy reduces need for storage and lets some farmers to get 3 seasons p.a. • Established market position means brokers only buy or pay more for Shangi • For consumers, Shangi is sweeter, and boils faster than most other varieties (~5 minutes) • However, Shangi comes with challenges: • Short dormancy prevents storage, reducing value for food security & increasing waste • Not a good variety for processing, hampering growth of chips and crisps industries • Dominance of 1 variety heightens diseaserisk & reduces options for smallholders • Seed multipliers have stayed away from Shangi for these reasons (esp. high waste) • As a result, Shangi yields are low from re-use, while new varieties aren’t adopted Source: TNS Analysis, Seed Producer Interviews, Expert Interviews, Post-harvest losses in potato value chains in Kenya (2014)

15. Introduction of Potato Cyst Nematode (PCN) has has further lowered yields, particularly in areas without crop rotation • Potato cyst nematode introduced to Kenya some time in the last decade • PCN intensified by using same land for potato each season, and spread through soil on potatoes in informal seed system • Testing of soil samples shows it has now spread throughout Kenya’s potato growing counties • Now particularly prevalent in counties with high seed re-use, small land sizes and multiple seasons per year – particularly central Kenya • Causes up to 80% reduction in yields. Potentially the main cause of falling yields (particularly in central Kenya) • PCN difficult to manage: • Can stay dormant in soil for up to 20 years • Spreads rapidly once in soil and potatoes grown on it • Spray treatments very expensive • Crop rotation most effective long-term management (best practice in Europe), but complex in Kenya due to small land sizes and lack of testing • Newer technologies to manage (trap crops, banana paper) in testing, but not yet fully developed or rolled out (covered later in presentation)

16. Marketing difficulties in a largely informal market reduce smallholder profitability and willingness to invest… In informal market, brokers take majority of the profit available Most consumption done informally where brokers control prices Brokers tend to maintain these margins regardless of retail price – squeezing smallholders Brokers tend to maintain these margins regardless of retail price – squeezing smallholders Source: TNS Analysis, Broker & Wholesaler Interviews, Post-harvest losses in potato value chains in Kenya (2014)

17. … particularly since seasonal volatility leads many to sell during lower price periods Prices can increase by ~50%, and often vary significantly across counties Nakuru market tends to have highest spikes & dips Eldoret potato significantly cheaper in 2016 & early 2017, but no longer Other markets tend to fluctuate with 50-100% difference between peak & low Source: TNS Analysis, NAFIS Wholesale Prices (2016-2018)

18. However, as seen throughout Africa, potato can be a critical agricultural product Egypt South Africa • Egypt one of world’s largest potato exporters – exporting frozen chips, as well as table potato to Europe, Middle East and Africa • Have successful import oriented seed system – allows local producers to tailor production to export market requirements • Tripled value of potato industry over last 15 years, driven by greater focus on seed and processing • Encouraged adoption among large scale farms with irrigation and mechanization • Strong central regulatory and trade organisations enforcing quality standards – particularly when it comes to market access Rwanda Malawi • Potato identified as one of six priority crops • Attracted $120M in foreign investment for processing and seed multiplication – with aim of producing frozen chips for export • Government has made additional land available to ensure clean land for production • Production and consumption of potato has become critical to increasing food security - >100kg per person, per year • Introduced irrigation to provide additional annual crop

19. Agenda • Exec Summary • Potato Market Overview • Intervention Deep Dives and Business Cases • Recommendation and Roadmap

20. 15 Potential Intervention Areas Assessed • Processing (Chips, Crisps) • Other Processed (Frozen, Starch) • Retail Consumption • Industry Co-ordination • Regulation • Government Intervention • Financing • Development / Corporate Programs • Seed Multiplication and Storage • Production • Farmer Groups • Mechanization (Production) • Irrigation • Marketing and Aggregation • Ware Storage • Post-harvest Loss 1 9 2 10 3 11 4 12 5 13 6 14 7 15 8 16

21. 1 Seed: Overview Quality seed meets <4% of minimum demand Kenyan Seed Industry Overview • Most seed recycled by farmers, with Shangi dominant. Limited adoption of other varieties • Most certified seed being produced is for varieties without a clear market • 3 main business models for growing seed • From breeder seed: license local or international varieties, grow them from mini-tubers through to C2 (e.g. Kisima, ADC) • Buy basic seed: followed by 1-2 multiplications (e.g. AgriCo, Charvi, Suera) • Clean seed multiplication: buy from certified producer, before multiplying on local scale • Recent investment with Charvi, AgriCo, Suera, Kirinyaga ramping up, and others considering (Bubayi, AgriVentures) • “Clean Seed” has come in & out of popularity – currently not promoted (or fully legal) • KEPHIS responsible for regulation and certification Based on planned production 5 main farms supply ~80% of seed Expected 2000t in seed expected to be added by Kirinyaga Seeds in 2021 Source: TNS Analysis, Seed Producer Interviews, FAOSTATT, KEPHIS Interviews

22. 1 Seed: Overview • Suera Flowers (Nyandarua) • Seed imported in partnership with Meijer • Focus on processing varieties • Current annual seed production ~700t on ~40 hectares (from 2019) • AgriCo (Nakuru) • Seed imported (AgriCo) • Focus on processing varieties, but expanding into table • Current annual seed production ~1800t on ~50 hectares • ADC Molo (Nakuru) • Grown from breeder seed • Mostly local varieties suitable for table and processing • Current annual seed production ~1100t on ~70 hectares • Kisima (Meru) • Grown from breeder seed. Partner with HZPC • Mix of local and imported varieties suitable for table and processing • Current annual seed production ~1700t on ~100 hectares • Charvi (Nakuru) • Seed imported in partnership with Europlant • Focus on processing varieties • Current annual seed production ~1100t on ~40 hectares • Kirinyaga Seeeds (Kirinyaga) • Grown from breeder seed. Partner with IPM for varieties • Mix of local and imported varieties suitable for table and processing • Expected production in 2021 of ~2000t on 100 hectares Major potato growing counties Source: TNS Analysis, Seed Producer Interviews

23. 1 Seed: opportunities and challenges Opportunities Challenges • Only ~5% of low case demand for certified or clean seed currently satisfied • Discussions with farmers and collectives show desire for quality seed, but a lack of awareness of how to get it • Collectives interested in seed multiplication • Models combining seed production with extension services and market linkages increase seed demand and improve smallholder yields • Government (county and national) increasingly interested in addressing seed shortage and removing bottlenecks • Processors demand better quality, which provides market for early investors in seed • Investment required for clean seed multiplication relatively low • Farmers and market prefer Shangi, which is a difficult variety to grow and store for seed because of short dormancy • Limited amount of disease free land available for seed multiplication • Large scale certified seed requires large farms and investment. For genetic material model – can take >2 years to generate revenue. Financing may be complicated • Potato bulky: distribution & storage difficult • Challenges with regulatory environment: • KEPHIS inspection costs high and capacity to rapidly inspect low (not enough resources) • Seed producers unclear on standards around imports, disease • C2 limit for multiplication (based on disease threshold) increases unit cost of seed

24. 1 Seed: Key Success Factors

25. 1 Seed: Certified Seed Investment Thesis (from in-vitro) Consider Investment: particularly for large commercial farmers due to under-served market and potential for high margins. High investment cost, access to land and time to value biggest risks. Also provides good rotation crop and boosts sustainability Major Risks: Requirements: • Financing: likely >100M KSh for certified seed. Some possibility of PPPs for storage and land • Discussions with KALRO / CIP / KEPHIS / int’l breeders regarding best placed varieties and arrangements on certification and licensing • Access to land: test for suitability of climate & soil. Choose site without competitors. Minimum land of 200 hectares (assuming 4 year rotation) needed • Outreach to local smallholders and processors to ensure market demand and provide support • If you can stagger planting and harvesting, you can reduce investment in machinery and storage • Need to multiply for 4 seasons before having a saleable crop  cash flow delayed • Large investment required in storage and mechanization – financing costs and risks • Introduction of new diseases or contaminated land, as well as climate change, can impact yields or result in crop’s destruction • Choosing varieties without clear demand can result in write-offs

26. 1 Seed: Certified Seed Business Case (from in-vitro) Annual Profitability Based on Farm Size and Yield (KSh) Insights • Land size and yield the biggest drivers of profitability • Under normal conditions, seed multiplier be able to make a profit – but difficulty is achieving return on investment • To secure a positive return on investment within 6 years, investors should look at minimum 60 ha p.a. and aim to achieve a yield of at least 27t/ha (incl. waste and ware) • Benchmarks suggest such a yield is achievable • Lower financing cost or existing land or equipment allow sustainability on smaller land sizes or lower yields Yield (t/ha) Land (ha) Achieve 45M KSh profit p.a. and payback investment within 6 years 100KSh = 1USD Source: TNS Analysis, Seed Producer Interviews & Financial Reports

27. 1 Seed: Certified Seed Business Case (from in-vitro) Key Assumptions • Seed grown from genetic material • Seed sold at 55KSh/kg. Ware sold at 13KSH/kg (avg. of market) • Royalties of 2.5% of revenue based on KALRO. Using foreign varieties can attract royalties up to 10% (for exclusive varieties) • ~80% of output sold as seed, 15% waste (in field or storage), rest is ware • 100% of seed and ware sold • For a farm with 100 hectares under production p.a., investment of ~150M KSh includes: • 45M KSH for 1000t cold storage • 100M KSh for tractors & equipment • 10M KSh for packaging • 3M KSh for aeroponics • Assumed risk weighting of 10% • 10% cost of finance • Aim to break even in 6 years of start. Takes 2 years to generate revenue

28. 1 Seed: Certified Seed Investment Thesis (from basic) Consider Investment: particularly for large commercial farmers due to under-served market and potential for high margins. High investment cost and having imports seized due to disease the major risks. Also provides good rotation crop and boosts sustainability Major Risks: Requirements: • Financing: likely >100M KSh for certified seed. Some possibility of PPPs for storage and land • Discuss best varieties with KALRO / CIP / breeders • Partner (can be exclusive or non-exclusive) with an int’l or local breeder to source basic seed • Discuss how to import / purchase with KEPHIS • Access to land: test for suitability of climate & soil. Choose site without competitors. Minimum land of 200 hectares (assuming 4 year rotation) needed • Outreach to local smallholders and processors to ensure market demand and provide support • 2 multiplications to reduce unit cost of production • If you can stagger planting and harvesting, you can reduce investment in machinery and storage • Feasibility of compliance with KEPHIS regulations while achieving profitability. When importing, moderate risk of container seizure • Large investment required in storage and mechanization – financing costs and risks • Introduction of new diseases or contaminated land, as well as climate change, can impact yields • Choosing varieties without clear demand can result in write-offs

29. 1 Seed: Certified Seed Business Case (from basic) Annual Profitability Based on Farm Size and Yield (KSh) Insights • Land size and yield the biggest drivers of profitability • Under normal conditions, seed multiplier be able to make a profit – but difficulty is achieving return on investment • To secure a positive return on investment within 6 years, investors should look at minimum 60 ha p.a. and aim to achieve a yield of at least 30t/ha (incl. waste and ware) • Benchmarks suggest such a yield is achievable • Lower financing cost or existing land or equipment allow sustainability on smaller land sizes or lower yields Yield (t/ha) Land (ha) Achieve 40M KSh profit p.a. and payback investment within 6 years 100KSh = 1USD Source: TNS Analysis, Seed Producer Interviews & Financial Reports

30. 1 Seed: Certified Seed Business Case (from basic) Key Assumptions • Seed imported or bought locally at basic stage • Seed sold at 55KSh/kg. Ware sold at 13KSH/kg (avg. of market) • Royalties of 10% of revenue for imported seed with exclusive rights, 2.5% for local seed (or free depending on variety) • ~80% of output sold as seed, 15% waste (in field or storage), rest is ware • 100% of seed and ware sold • For a farm with 100 hectares under production p.a., investment of ~150M KSh includes: • 45M KSH for 1000t cold storage • 100M KSh for tractors & equipment • 10M KSh for packaging • Assumed risk weighting of 25% due to higher risk of importing / moving seed • 10% cost of finance • Aim to break even in 6 years of start. Takes 1 year to generate revenue

31. 1 Seed: Local Clean / Certified Seed Multiplication Investment Thesis Consider Investment: for small / medium (2-5 hectares) farmers to undertake late stage multiplication for seed due to underserved market and potential for high margins. If certifying need to manage KEPHIS costs and risk of disease. For clean seed, potential for KEPHIS crackdown Major Risks: Requirements: • Financing: ~250K KSh / hectare upfront for inputs, testing and land for first season. ~800K KSh for 50t seed store (ideally DLS) • Buy C1/C2 seed from local producers and multiply 1-2 times for sale as certified / clean seed. Try to ensure consistent supply • Identify local varieties w/ clear market: often Shangi • If certifying, connect with KEPHIS • Access to land: test for suitability soil. Choose site without competitors. Minimum land of 2 ha for clean seed (per season) and 5 ha for certified. Account for crop rotation of 3-4 years • Cost of investment in storage • Certifying seed can result in destruction of crop if disease found • Clean seed is in a legal grey area due to lack of KEPHIS certification. Also dependent on other farms for starter (certified) seed • Introduction of new diseases or contaminated land, as well as climate change, can impact yields

32. 1 Seed: Local Certified Seed Business Case Profitability per Season Based on Farm Yield (KSh) Insights • Yield the biggest profitability driver. Land size important, but limited benefits of scale after 2 ha (or 5 ha for certified seed) • Under normal conditions, seed multiplier should be able to make a 50K KSh profit per season and pay-off loan within 6 years with a yield of at least 15-20t/ha (incl. waste) • Limited investment cost after ~250K KSh financing for first season secured, and ~800K KSh seed store paid off • Benchmarks suggest such a yield is achievable – some farmers achieving 30-40t/ha Minimum profit per hectare for viability 100KSh = 1USD Source: TNS Analysis, Seed Producer Interviews & Financial Reports

33. 1 Seed: Local Certified Seed Business Case Key Assumptions • Farmer multiplies certified seed and sells as clean • Seed sold at 45KSh/kg. Farmers don’t re-use seed but buy new each season • Seed purchased at 55KSh/kg • Seasonal KEPHIS certification (~13K KSh / ha) • 15% waste (in field or storage) • 100% of seed sold • Investment only required for storage (~800K KSh for 50t) – land rented and mechanized service provider used • Minimum suggested size of farm ~2 hectare, but limited scale advantages • Assumed risk weighting of 10% • 15% cost of finance, 7% for insurance • Minimum profit per hectare: 50000 KSh

34. 1 Seed: New Technologies - Cuttings Overview Business Case • Apical Cuttings an alternative to mini-tubers • Produced in greenhouses from tissue culture – then planted to generate tubers. From there, normal seed production continues • Advantages: • 20-100% higher yields than from mini-tubers • Reduced disease risk as mini-tuber stage of planting in soil is skipped • Can multiply extra time & still certify (TBC) • Disadvantages: • Need to be planted & watered immediately (24 hours) – then requires regular water. Some form of irrigation recommended • Currently in testing between CIP & Stokman Rozenfor a range of varieties • KEPHIS approved for use as certified seed Successfully applied, using cuttings can reduce cost / ha of sellable seed by ~30K KSh Source: TNS Analysis, Expert Interviews, CIP Cuttings Trials

35. 1 Seed: New Technologies - Cuttings

36. 1 Seed: Case Study - Kisima Overview • Started investment in 2012, partnering with HZPC for imports, and using local varieties • 80% for table, and 80% local • 30% Cherokea, 15% Asante, 15% Dutch Robin, 9% Unica, 8% Panamera • Seed grown from genetic material • Now growing on 100 hectares a year, producing 1500-2000t of seed • Sales at farm gate – no distribution required • Key Lessons: • Invest in cold storage to reduce waste • Use a mix of varieties, including popular local table varieties to ease marketing  introduce new varieties slowly to manage risk and test market and consumer acceptance • Target and support local smallholders to guarantee market and improve yields • Patience on returns important  particularly when working from genetic material

37. 1 Seed: Enabling Environment Recommendations Gov’t & Regulatory Interventions Other Enabling Environment Interventions • Accelerate path to privatised certification to reduce bottleneck through KEPHIS. Reduce cost burden to incentivise certified over clean seed multiplication • Clearer communication between seed producers and KEHPIS and investigate permanent extension of C3 multiplication limit • Support with construction of seed storage – particularly for farmer groups interested in last-stage clean / certified seed • Make public lands available (investigate PPPs) where clean private land not accessible • Create greater market transparency on where demand for seed is, and where it can be found • Continue training smallholders on profit opportunities from using quality seed  ensure certified seed part of packages • Support farmer groups to undertake their own multiplication: financing / insurance packages; training on agronomic practices • Identify and connect certified seed producers to grants and sources of cheap financing (where possible) • Support marketing of new varieties where practical benefit vs. Shangi • Continued research into new varieties, particularly focussed on table

38. 2 Production: Overview Volumes steady despite more land under production due to falling yields Kenyan Smallholder Overview • Potato used as a cash crop, with small amount saved for home consumption • Most smallholders grow potato as part of a broader mix, including dairy, other horticultural products (like cabbage) or maize • Land under production slowly expanding – particularly in Rift Valley and Western, though lower yields in central have hampered growth there • Yields have been falling over time, due to land fragmentation which prevents crop rotation and efficiencies of scale, as well as increasing build-up of diseases like PCN • Traditionally recycle seed or buy from neighbours • Most smallholders still work independently and depend on brokers to pack and take potatoes to market Most farmers working on <1 acre land Note: FAO data has been adjusted due to inexplicable jumps in yields (from 8 to 20t/ha and back some years) Source: TNS Analysis, FAOSTATT, Expert Interviews, Value Chain for Seed & Ware Potatoes (2013)

39. 2 Production: Overview • Nyandarua • 170K farmers, annual production ~270kT • 1 seed producer: Suera • Elgeyo-Marakwet • ~130K farmers, annual production ~290kT • Bungoma • ~6K farmers, annual production ~120kT • Meru • ~110K farmers, annual production ~160kT • 1 seed producer: Kisima • Kiambu • ~120K farmers, annual production ~60kT • Nakuru • ~20K farmers, annual production ~160kT • 3 seed producers: ADC, AgriCo, Charvi Major potato growing counties Source: TNS Analysis, Value Chain for Seed & Ware Potatoes (2013), Modernization Options for the Potato Value Chain (2016), county reports (2016)

40. 2 Production: opportunities and challenges Opportunities Challenges • Kenyan smallholders currently 70%below Africa best practice – significant opportunity for improvement, which would also significantly increase their profit • Growing volumes of certified / clean seedavailable (investment from seed multipliers) which is the key driver of increased yields • Numerous extension / training programs to improve agronomy practices (GIZ, 2Scale, Bayer, UPL, Mavuno Zaidi…) • Government considering re-allocating subsidies from maize focussed fertilizers to general input provision • Farm improvement technologies (mechanization, soil analysis) becoming more affordable and available • Small land sizes (90% on <1 acre for potato) makes investment riskier and rules out certain technologies (mechanization) • Poor agronomy practices result in lower yields and higher post-harvest loss • Build up of PCN due to re-use of seed and lack of rotation reduces yields • Use of subsidized DAP has increased soil acidity and reduces yields • Dependence on rain-fed farming results in over-supply that deflates prices • Farmers and market prefer Shangi, which is difficult to store because of short dormancy, and has higher susceptibility to disease • Lack of clear market beyond broker model results in lower prices • Lack of strong farmer groups reduces negotiating power

41. 2 Production: Key Success Factors

42. 2 Production: Investing in certified seed and quality inputs Investment Thesis Consider Investment: allows smallholders to achieve far higher yields – even on smaller plots of land – but profitability highly dependent on price achieved at market. Any investment should be staged, with a clear eye on the likely sale price for produce Major Risks: Requirements: • Financing: ~15K KSh / acre upfront for certified seed (extra ~15K KSh if soil testing and improved fertiliser desired) • Buy quality seed for 1/3 land as an initial test plot, and to multiply seed for future seasons. This also manages risk of investment • Choose variety(ies) with clear market (either contract farming for processor, or local table variety) • Work with local farmer group to reduce costs of transport, access to seed and open up post-harvest options (storage, market) (see farmer group section) • Soil testing and appropriate fertilizer can potentially be skipped initially, but over time will improve yields • Only scale up once model proven • Higher investment increases smallholder risk in case of any adverse climactic or production issues (consider insurance, but doesn’t cover everything) • Low market price (7-10 KSh / kg) can lead to losses even with higher yields. These losses can also be higher due to higher initial investment • In some areas, years of intensive potato farming have increased PCN density which limits uplift even with quality seed • Lack of clear market can prevent sale of increased production (or result in lower prices)

43. 2 Production: Quality Seed vs Re-used Seed Business Case Cost of Production (KSh/kg)* Profit at 12 KSh/kg sale price (KSh/hectare)* Profitable even at 10KSh / kg market price Profitable even at 10KSh / kg market price Profit at avg yield – hard to sustain under current model Profit at avg yield – covers initial seed investment Expected Yield Range 100KSh = 1USD Insights • Yield and market price the biggest drivers of profitability. At current avg yields farmers re-using seed need price of 15-16 KSh/kg to cover family labour and make small profit. Farmers using certified seed need only 11-12 KSh/kg • In general, certified seed farmers need to get 5-8t/ha more to justify investment * Does not include ~10K KSh estimate for family labour Source: TNS Analysis, Smallholder & Expert Interviews, Seed Producer Interviews, KALRO Cost Analysis

44. 2 Production: Quality Seed vs Re-used Seed Business Case Key Assumptions • Assumed smallholder, so no advantage for scale (since all relatively small size) • Assumed cost of labour 250KSh / day. Mixture of family and hired labour used • For quality seed: • Seed purchased at 55KSh/kg, and refreshed every 3 seasons. ~ 80K KSh required for first season • Specialized fertilizer purchased (~31K KSh/ha) • Regular spray regime (~19K KSh/ha) • For re-used seed: • Most seed re-used from previous season, and some supplementary farmer-saved seed bought if not enough • Subsidized DAP fertilizer purchased (~15K KSh/ha) • Semi-regular spray regime (~9K KSh/ha) • 15% waste (in field or storage) • Assumed risk weighting of 10% • 15% cost of finance, 7% for insurance • Seed sold at 15KSh/kg • Minimum profit per hectare: 30000 KSh

45. 2 Production: New Technologies – Managing PCN with trap crops and banana paper Risk of PCN Trap Crops – African Nightshade (Mnavu) • PCN present in >50% of samples in 20 potato growing counties – many with rates about 80% • Over time, PCN concentration can result in 80% yield reduction – may explain difference between current yields in counties. For instance: • Nyandarua grows up to 3 seasons a year, with a long history of potato and seed sharing – yields falling to 6-8t/ha • Elgeyo-Marakwet has been more isolated, with a lot of virgin land – yields still at 13-15t/ha • Best practice management involves crop rotation, but hard in counties with small land sizes (<1 acre) • Solanum scabrum can be used as a rotation crop that trigger PCN hatching without completion of lifecycle, reducing PCN density by ~80% and increasing potato yields by 2-3x • Berries of African nightshade can be eaten, and thus serves as supplementary food crop • Cost of planting and yield of nightshade to be investigated Banana Paper • Currently being investigated as a wrapping for potato seed that both insulates the seed from PCN, and triggers hatching to reduce density over time • Initial trials have increased yields from ~7t/ha to 25-30t/ha • Challenge currently cost of production and distribution

46. 2 Production: Enabling Environment Recommendations Gov’t & Regulatory Interventions Other Enabling Environment Interventions • Support local production of seed (or transport from other counties) to increase access • Alter existing subsidy schemes (fertilizer) to enable best potato practices – e.g. voucher for seed or other fertilizers • Prioritise services for farmer groups to maximise reach • Enforce bagging sizes / charge by weight – may require changes to CESS to avoid increased broker costs being passed down to smallholders • Continue training smallholders on profit opportunities from using quality seed  ensure certified seed part of packages and encourage them to start small and scale up • Support farmer groups to undertake their own multiplication and access to market: financing / insurance packages; training on agronomic practices; links to processors • Research into innovative technologies to improve production: • Managing PCN: trap crops and banana paper • Reducing seed cost: cuttings • Single row mechanization that can access hill areas • Cheap testing for soil nutrition and disease

47. 3 Farmer Groups: Overview • Farmer groups / co-operatives for potato have been traditionally under-developed, particularly compared to dairy, where more success has been had with aggregation • Success of dairy groups has been in part driven by daily routine – milk collected each day provides incentive for ongoing co-operation, and consistent cash flow • Most co-operatives for potato are very local – under 100 farmers on small tracts of land. These generally focus on buying seed as a group (to reduce transport costs / provide some bargaining power) and sometimes also provide rough storage for seed and ware to their members • However, on this scale it is difficult to drive down costs for seed and inputs. Ware storage often stays empty as brokers collect direct from farm and there isn’t a clear model to aggregate

48. 3 Farmer Groups: opportunities and challenges Opportunities Challenges • Market currently lacks in formalisation and aggregation – farmer groups have opportunity to make significant impact by bringing this • Smallholders appreciate and support efforts to work together to achieve greater buying and selling power and access • Introduction of certain methodologies depends on scale that can be provided by farmer groups (e.g. mechanization, irrigation, storage) • Existing co-operatives could be expanded to cover potato business (e.g. dairy co-ops in potato growing areas) • History of challenges with farmer groups – particularly relating to governance (fears of corruption and added complexity) • Potato is a seasonal crop, and doesn’t have the same regular touch point as dairy • Not many large potato farmer groups currently in place – a lot of work to do • Adapting existing farmer groups (e.g. dairy) to cover potato could be difficult due to lack of existing capability (for potato) and capacity

49. 3 Farmer Groups: Key Success Factors

50. 3 Farmer Groups: two main models to pursue for potato