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Ideas & Debate

Kenya can use warehouse receipts to boost agriculture

A National Cereals and Produce Board manager displays bags of maize kept under the warehouse receipt system at the Eldoret depot in 2013. FILE PHOTO | NMG
A National Cereals and Produce Board manager displays bags of maize kept under the warehouse receipt system at the Eldoret depot in 2013. FILE PHOTO | NMG 

The agriculture sector in Kenya is dominated by smallholder farmers in rural areas. In 2016, the sector directly contributed 32.6 per cent to the GDP and a further 27 per cent through linkages with manufacturing, distribution and service-related sectors.

In recent years, Kenya has been experiencing food deficits resulting from low production and post-harvest losses, majorly caused by poor storage.

This occasions huge income losses to smallholder farmers and higher prices for consumers, constraining increased production.

Further, poor access to markets creates room for middlemen to exploit farmers — diminishing returns on their labour.

These challenges are caused by the fragmented and unstructured nature of agricultural activities.

If agriculture is to realise its full potential, supply chain logistics need to be streamlined, post-harvest wastage reduced, and farmers facilitated with access to credit.

These are challenges we could overcome with the creation of an efficient warehouse receipt system and establishing an exchange for agricultural commodities. A warehouse receipt is a document that provides proof of ownership of commodities stored in a warehouse.     

A warehouse receipt system facilitates trade and enhances market efficiency. It helps in creating liquidity for agricultural com­modities and improving access to credit.

It allows farmers to avoid selling after harvest, when prices are depressed, by enabling them to deposit their commodities in a certified warehouse, which issues them with a receipt that serves as document of title.

This can in turn be used as a security for short-term credit, helping to mobilise funds. 

But for a warehousing receipt system to work, it must be founded on solid legal and institutional framework as well as high level of awareness among stakeholders.

Currently, operations of commodities warehouses in Kenya are governed majorly by ordinary laws of contracts. Such a framework is inadequate to sustain operations of a modern warehousing receipt system.

Various policy frameworks, including the Vision 2030 blueprint and the Capital Markets Master plan, have bemoaned the haphazard supply chain in the agricultural sector and called for this issue to be addressed.

Fortunately, some efforts have been made. A Warehousing Receipt System Bill 2018 is currently before Parliament.

The Bill proposes mechanisms for certification of warehouses and sets up a regulatory institutional framework.

It stipulates standards for a warehouse receipt and establishes a central registry where users can confirm the validity of receipts issued.

It provides for the negotiation and transfer of receipts, these being negotiation by endorse­ment and delivery, the rights acquired by negotiation, rights and obligations of transferors and transferees, among others.

If enacted and well implemented, this proposed law has the potential to create a stable warehous­ing receipt system in the country.

The Bill has been pending at the National Assembly for a while. The House should prioritise it as it is a key legislation on addressing issues of food security in the country.

A regulated warehouse receipt system will certainly incubate stable agricultural commodity exchanges in the country.

Agricultural commodity exchanges have been in oper­ation in one form or another for long time, the best-known being the Chicago Board of Trade, established in 1848. 

The joy of commodity exchanges, just like stock exchanges for securities, is they enable those buying produce to be confident the produce indeed exists, belongs to the person selling it, and meet specified standards.

The idea of commodity exchanges in Africa had top-level political support for a long time. The Organisation of Africa Union, the predecessor of the AU, floated the idea of an African commodity exchange and the use of warehouse receipts through the Abuja Treaty of 1991.

In 2005, the AU made the Arusha Declaration on African Commodities, which called for the establishment of commodity exchange initiatives a and introduction of warehouse receipts.

Kenya has been lagging behind in actualising these initiatives. The commodities mar­kets presently consist of the Mombasa Tea Auction and the Nairobi Coffee Exchange.

These markets, however, operate as private clubs. Informa­tion on the market prices achieved does not reach farmers on account of the opaque marketing systems that char­acterise them.

Through the Finance Act 2016, the Capital Markets Act was amended to introduce the elements of commodity exchange.

The Capital Markets Authority (CMA) was given the mandate to facilitate the rollout of regulated exchanges to trade in all forms of commodities.

The CMA may have received this mandate with an air of indifference, for they have barely mentioned it in their 2017 annual report.

However, the delay in enacting the warehousing receipt system law has been the obstacle to the establishment of commodity exchanges.

This is because warehouse receipts boost the spot markets, which provide accurate price signals that are essential for the development of commodity markets.

A warehouse receipt can further be used as a derivative instrument, to be traded either as a forward contract in the over-the-counter derivative markets or if standardised, as a futures tradeable in a futures exchange.

When the legal framework will be in place, the Nairobi Securities Exchange (NSE) should apply to operate a commodity exchange for the following reasons:

First, it will be an opportunity for the NSE to make huge profits for its shareholders by tapping the agriculture sector.

Second, a commodity exchange will create synergies with the securities exchange and boost the performance of both.

Third, a commodity exchange will provide linkage and enhance the performance of the yet to be rolled out Futures Exchange.

Lastly, NSE will have an opportunity to be integral to the economy of the country by fusing in a degree of professionalism in the commodities market.

Revamping agriculture will have a multiplier effect on other sectors of the economy. This will boost economic growth and help in poverty eradication efforts and attainment of Vision 2010 aspirations. 

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