Warehouse receipt system has potential

In June, the President assented to the Warehouse Receipt System Bill. The new law provides for the establishment of a system whereby warehouse receipts will be issued by licensed warehouses to depositors upon delivery of agricultural commodities produced in Kenya.

This warehouse receipt system paves way for a national commodity exchange making it possible to trade in agricultural commodities, an important development that will further improvement profitability, liquidity and price stability in the trade of agricultural commodities, but the law has surprisingly received little attention.

A warehouse receipt system for agricultural commodities is a widely used market intervention policy. Receipts constitute a document of title to the commodities held in the warehouse and may be produced to a lender as collateral for a loan or be transferred to another party by way of sale.

Warehouse receipt system allows agricultural producers to access credit by borrowing against receipts issues for goods stored in controlled warehouses. These systems enable producers to delay the sale of their products until after harvest to a moment when prices generally more favourable. Warehouse receipts systems can therefore mobilise credit for the agricultural sector and improve trade.

In Kenya, agriculture for four decades has been the largest sector contributor to the country’s GDP. An estimated 80 percent of Kenya’s population lives in rural areas and mainly depends on small-scale agriculture for food and income. Most smallholder farmers in Kenya grow maize, and six million people are employed in the coffee industry and remains an important source of employment in rural Kenya. This suggest that small holder agriculture remain the major engine of rural growth and livelihood.

Therefore, policy interventions conceived as a necessary response to weak market access targeting the improvement of smallholder farmers in Kenya has a huge impact in lifting millions of the rural poor out of poverty. Kenya’s poor’s income levels are about five times lower than those of the non-poor households.

So, the key issues for small -scale farmers shift from subsistence production to commercial production has been market access. For example, according to a report by Tegemeo Institute the market concentration of agricultural produce results show that the top 20 percent of the selling households account for over 70 percent of the marketed volume for maize, vegetables and fruits and about 60 percent of the marketed volume of milk.

This suggests that the commodity markets are generally very highly concentrated, and majority of the smallholders are essentially cutting Kenya’s rural farmer’s out of the market. This is due to lack of well-developed infrastructure adversely affecting farm productivity.

So, the duality of improving productivity among subsistence-oriented households and transforming smallholder farmers out of semi-subsistence production to a more commercialized agriculture is critical. With the warehouse receipt system in place, it should aim at addresses the market access problem associated with transport and logistics, and improvement of farm productivity. But these outlined benefits of a warehouse receipt system are largely based on the design and enabling framework and the rules governing the warehouse receipt system.

For the Kenyan case, the new law establishes the Warehouse Receipt System Council that facilitates the establishment, maintenance and development of the national warehouse receipt system by providing the licensing and inspection of warehouses for the application for a licence to operate within the Warehouse Receipts System and the revocation and suspension of the licences.

This is where the success of the warehouse receipt system will be largely dependent because the structural efficiency, effectiveness and integrity of the system lie here.

This is the body charged with providing the issuance of warehouse receipts, obligations and rights of a warehouse operator upon their receipts, negotiation and transfer of receipts among other things, therefore how this council is constituted will be the most fundamental starting point.