Commodities exchange yet to take off three years down the road

Njoro farmer Samuel Gitonga believes he understands the needs of farmers in the southern Rift Valley.

He is the regional chairman of the Kenya Federation of Agricultural Producers’ (Kenfap) — a small- scale farmers’ lobby — which has made it possible for him to interact with farmers almost on a daily basis.

However, when Business Daily recently asked him about plans to set up a commodities exchange he was lost for words.

“I remember attending a forum that discussed and concluded that the country was ripe for something like that a few years ago,” he said on phone.

He added: “The forum concluded that all players in the sector need to network and popularise it among farmers but things abruptly went quiet.”

Like Mr Gitonga, many farmers are not aware that a grain warehouse receipt system (WRS) that was launched in Nakuru two years ago was meant to pave the way for the eventual launch of a commodities exchange in the country.

Once touted as the silver bullet that would end heavy post-harvest losses and seasonal price swings that have stalked agricultural production in the country for years, the system got stuck at the conception stage.

While players in the agricultural sector, including top Agriculture ministry bureaucrats, regard the commodities exchange as an idea whose time has come.

But translating it into action has proved futile due to low sensitisation of small scale farmers who contribute close to 80 per cent of the country’s grain production.

“The WRS promoters have been busy putting a cart before the horse; we have advised them to try a bottom-up approach but they have insisted on going around the country to promote a system that only they can understand,” said a seasoned researcher at one of the government funded public policy research think tanks who asked not to be named for fear of being seen as criticising the government position

Under the Nakuru WRS system where Equity Bank became the first bank to play the role of financial intermediary, the East African Grain Council (EAGC) joined hands with Lesiolo Grain Handlers, and the National Cereals and Produce Board (NCPB) to launch the country’s first structured grain marketing system in April, 2008.

The warehouse was conceived to allow farmers — usually smallholders who lack access to proper storage facilities — to deposit their harvests with Lesiolo Handlers for drying and storage in exchange for receipts that they could present as collateral to get agreed minimum payments from the bank.

This, the system’s promoters say, would eliminate the usual rush to sell the produce during the harvesting time at cheaper prices, cutting middlemen from the commodity supply chain.

Later, when prices stabilise the farmers are free to sell their produce at better prices, clear bank loans and grain handling charges, and keep the profit.

“Farmers initially avoided the system because of the prolonged drought that resulted in the food crisis and government price controls of 2008, but there has been renewed interest in the system following the recent El Nino rains,”

Kevin Manyara, an administrative manager at the Lesiolo Grains Handler told the Business Daily.

Two more grain warehouse receipt systems have since been set up in the North Rift.

NCPB is also in the process of certifying 12 idle harvest collection facilities to use the system.

A commodities exchange refers to a platform where futures contracts on commodities — whether in stores or in the fields — are traded, cushioning the farmer from the characteristic price fluctuations.

Commodities exchanges build on the database set up by the WRS.

This allows farmers to sell future contracts guaranteeing that their produce will be bought at a specific price several months before harvesting or actual delivery.

Prior determination of the prices at which produce will be sold also shields farmers from seasonal supply fluctuations that serve as a magnet to middlemen who prefer to buy commodities at rock bottom prices during the harvest season often characterised by a glut.

“We will initially consider major grains traded in the EAC region including maize, wheat, rice and beans. But as the exchange develops we will eventually bring in all regionally traded agricultural commodities including inputs such as fertilisers and seeds,” said Adrian Mukhebi, the Kenya Agricultural Commodities Exchange (KACE) chairman.

Joined forces

KACE is also one of the partners that have joined forces with NCPB in the race to set up a commodities exchange.

The Nairobi Stock Exchange had initially indicated it would be willing to provide technical assistance in setting up a platform similar to its own to handle agricultural commodities once a proper price discovery system is put in place.

This would allow information on the traded commodities to be connected electronically to other stock exchanges throughout the world.

However, in spite of the high level planning at the top, participation of small farmers is seen as the system’s weakest pillar that has prevented it from taking off over the last three years.

This reality hit home last month when its promoters were forced to postpone their self-imposed timeline for launching a commodities exchange in the country by mid this year.

Instead, a fresh feasibility study has been ordered to test farmers’ attitude towards both the grain warehouse receipt system and a commodity exchange.

“The launch was postponed after wide consultation within the sector and several visits to other countries that run commodity exchanges in recognition of the fact that acceptance of commodities exchange by all stakeholders is the first step towards its ultimate success,” said Mr Samuel Ruto, a manager in charge of the structured trading at EAGC.

The trips, he added, were made to countries like Ethiopia, Uganda, Zambia, South Africa and Malawi which have varied experiences with WRSs and commodity exchanges.

“In Ethiopia for instance, the team learnt that government’s role is also very critical to the success of a commodity exchange,” said Mr Stephen Muchiri, CEO of the East African Farmers Federation.

The government of Ethiopia, he reckoned, initially forced all farmers to deposit their produce at the warehouses and extended tax incentives to encourage investment in post harvest handling facilities.

Today, the Ethiopia Commodities Exchange (ECX) trades coffee worth more than $300 million (Sh24 billion) annually, along with four other key commodities.

It currently benefits 850,000 farmers and officials say its presence has led to improved agricultural output, trade and food security in Ethiopia.

ECX rides on a national payment system set up in partnership with seven commercial banks and handles 150,000 tones of commodities in 14 warehouses.

The market’s pricing and trading data is displayed in real time on 19 electronic display sites around the country and on the internet for international reach.

Dr Mukhebi says for a commodities exchange to work in Kenya, the government needs to back it with sound legal and regulatory frameworks such as enacting a Commodities Exchange Act and a Warehouse Receipts Act.

“We are also in consultation with the EAC Secretariat to catalyse the establishment of a harmonised legal and regulatory framework able to extend the exchange’s reach to other countries in the region,” he said in an earlier interview.

Stepped up campaigns

Since the region became a fully fledged custom union in January this year, EAGC has stepped up campaigns to extend WRS in Ugandan towns of Kampala, Kasese, Mityana, Jinja, Kapchorwa and Mbale and Tanzanian towns of Kilimanjaro, Arusha, Tanga, Manyara, Morogoro, Dar es Salaam, Iringa and Mbeya.

In this year’s budget speech read last month, Finance minister Uhuru Kenyatta gave the system promoters a new lease of life with the promise that the Government would work on a legal framework to aid the rollout of a fully functioning warehouse receipt system and subsequently, a commodities exchange.

Players also want the government to waive taxes on postharvest handling equipment and provide improved road networks to connect farms and warehouses and make heavy investment in a reliable information and data system on all crops.

For the first time since it was established in 1979, NCPB this year recruited specialists to handle WRS and commodities exchange in the hope the structured agricultural produce marketing system will pick up.

“We are steadily building the capacity to establish a commodities exchange and have realised that there must be a robust WRS in place to before we get to that stage,” NCPB’s spokesperson Evans Wasike, said an earlier interview.

Among the systems promoters, there are those who believe farmers in the region are not ready for a ready for a speculative market with the East African Farmers Federation urging for the rollout to be undertaken in stages, each face targeting specific segment of the market.

They are also divided over the NCPB’s role with majority of them taking a silent position that a state controlled border should not be directly involved in running the grain sector.

“Taking cue from countries such as Ethiopia, we can also say that commodities exchange adequate donor funding to succeed,” said Mr Muchiri