The commodities exchange will benefit farmers from Kenya, Tanzania, Uganda, Rwanda and Burundi. Photo/REUTERS
The Nairobi bourse is set to launch a commodities exchange by mid this year, offering farmers a new safety net against the price turbulence that has diminished their earnings and left tonnes of agricultural produce to go waste.
The market, a product of a joint effort by the National Cereals Produce Board (NCPB), the Kenya Agricultural Commodities Exchange (KACE), Eastern African Grain Council (EAGC) and Nairobi Stock Exchange, is to be launched by June this year and is seen as the long term solution to seasonal variation in commodity prices.
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.
This means a wheat, sugar, maize, tea, coffee or pork farmer can sell future contracts that guarantee that his produce will be bought at a specific price several months before harvesting or actual delivery.
Prior determination of the price at which a farmer intends to sell his produce in future also shields the farmers from exploitation by middlemen who buy commodities at rock bottom prices during the harvesting season often characterised by market gluts.
Last stage
“The plan is at an advanced stage and the market should open before June this year,” said Dr Adrian Mukhebi, the KACE chairman
Deloitte & Touche, a consultancy firm, is searching for two senior managers who will act as the link between NCPB and the commodities exchange, signalling that the project that has been on the cards for three years has finally entered the last stage.
Deloitte has proposed a much leaner structure for NCPB that splits its commercial wing from the strategic reserve function as well as the establishment of the commodities exchange.
The board has recently advertised a number of senior and middle level positions to accommodate new structures aimed at turning the parastatal, which remains heavily dependent on the exchequer, into a commercially viable outfit.
“These advertisements confirm that we have started implementing the Deloitte recommendations,” Agriculture minister William Ruto told the Business Daily on the phone.
NCPB is to use its silos and warehouses to store produce earmarked for trading at the commodities exchange.
“The market will initially trade major grains produced in East Africa, including maize, wheat, rice and beans but will ultimately trade other agricultural commodities, including inputs such as fertilizers and seeds,” said Dr Mukhebi.
Last year, the NSE chief executive officer, Mr Peter Mwangi, confirmed that the bourse, which mainly runs a secondary market for shares and bonds, would launch a commodities platform once a credible price discovery mechanism is established.
Some commodity traders however remained sceptical about the country’s preparedness for a centralised commodity exchange, pointing at the wooly policy landscape.
Mr Daniel Mbithi, the secretary of the Kenya Coffee Planters and Traders (KCPT), the association that runs Nairobi Coffee Exchange, said the country has not established the fundamentals for a credible commodities exchange.
“We do not have the necessary legal framework for this market. The current sense of urgency is merely the product of recent reports that a similar market has been established in neighbouring Ethiopia,” he said.
Reports indicate that the Ethiopia Commodities Exchange (ECX) trades coffee worth more than $300 million (Sh22.8 billion) annually, along with four other key commodities.
The market has also been credited with improvement of agricultural output, trade and food security in Ethiopia and benefits 850,000 farmers.
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.
Experts reckon that for a commodities exchange to work in Kenya, the government needs to back the initiative with sound legal and regulatory frameworks such as enacting a Commodities Exchange Act and a Warehouse Receipts Act.
The system also requires major improvements in road networks connecting farms and a substantial investment in NCPB facilities to fit them with modern equipment like sievers and driers to enable hold grains for longer periods.
Dr Mukhebi, however, said the commodities exchange would be regional in outlook and would benefit farmers from Kenya, Tanzania, Uganda, Rwanda and Burundi
“We have also partnered with the EAC Secretariat to catalyse the establishment of a harmonised legal and regulatory framework for the exchange in the region,” he said.
In 2008, the Eastern Africa Grain Council, in partnership with NCPB and Lesiolo Grain Handlers set up a pilot maize receipt warehousing in Nakuru but the project funded by Equity Bank has performed below expectation due to prolonged drought and government price controls.
Bumper harvests
The plan required farmers to deposit their grains with Lesiolo — a professional grain handler in exchange for receipts that can be cashed at Equity Bank at Sh1,800 each — the pre-agreed price for one sack of maize.
Over time, however, the government has revised the producer prices per bag of maize from Sh1,300 to Sh1,950, settling at Sh2,300, which has killed interest in the system altogether.
“Initiatives such as warehouse grain receipt system are better applied under conditions of bumper harvests as long as pricing is left for market forces,” Unga Ltd Managing Director Nicholas Hutchison told the Business Daily in an earlier interview.
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