Coffee trading will now be regulated by the Capital Markets Authority (CMA) as the Treasury moves to tame cartels, who have been blamed for diminishing earnings by farmers.
Draft regulations published by Treasury Secretary Ukur Yatani state that coffee trading companies as well as the weekly commodity auction will now be regulated under the Capital Markets Act — a departure from the current situation where the operations are controlled under the Coffee (General) Regulations through the Agriculture and Food Authority’s Coffee Directorate.
The Treasury said the changes to be effected through Section 12(1) of the Capital Markets Act would cover all key coffee trading functions, including licensing of brokers, establishment of companies trading in the commodity, as the establishment of a direct settlement system would guarantee speedy and transparent payment of proceeds from sales.
And in a move aimed at limiting diversion of sales proceeds, the Treasury said a direct settlement system shall be established by a licensed commercial bank competitively selected by a coffee trading company subject to approval from the CMA.
Proceeds of the sale of coffee at the auction will be remitted by a coffee buyer or roaster through the direct payment system for onward settlement to the service providers with the net payment going to the grower. “(The new regulations) will provide for the protection of the interests of the grower, the buyer and other stakeholders at an exchange,” Mr Yatani further states in the draft Coffee Exchange Regulations, 2020.
According to the new rules, officials will now be required to maintain a database for records of coffee sales at the auction floor and establish a linkage between the direct settlement system provider and licensed coffee warehouses to facilitate release of coffee to buyers or roasters upon payment.
Further, coffee trading companies will be required to establish a direct link between their systems as well as software with the CMA’s in a move meant to boost transparency in their transactions. They will also be required to disseminate market information for every coffee auction and an analysis of performance on a daily, weekly and monthly basis.
Isabella Nkonge, the head of the Coffee Directorate, confirmed the far-reaching changes, saying the directorate would continue regulating other aspects of coffee farming as the CMA takes over the trading function. “The auction will no longer be under us as it has now been taken by the Capital Markets Authority,” she said.
Farmers have the option of selling their coffee directly to international buyers, or they could contract and authorise their marketing agents to sell through the weekly Nairobi Coffee Exchange (NCE) auctions. About 85 percent of Kenya’s coffee trade at the weekly auction is managed by NCE. Much of it is exported after the auctions.
Daniel Mbithi, the chief executive officer of the NCE, welcomed the neew directive by the Treasury, noting that this will enhance the performance of the auction.
“We are looking forward to it as it is expected to improve our performance,” he said.
Coffee production in Kenya has registered poor growth compared to other countries in East and Central Africa. Industry data by the International Coffee Organisation (ICO) shows that as of 1990, the country’s coffee production was fairly in step with that of Uganda and Ethiopia. Today, however, the local coffee sector is by far overshadowed by its counterparts in the region. Production has tumbled while farmers’ earnings have declined and are no longer predictable.
For example, between the early 1990s and 2011, the area under coffee in Kenya had declined by 35 percent — from 170,000 hectares to 109,795 hectares. Similarly, production has dropped from 130,000 tonnes in 1988 to 45,000 tonnes in the last season (2016/17) as farmers abandoned the crop due to poor management of the sub-sector, compounded by poor earnings. Many farmers uprooted their coffee bushes in exchange for better-performing crops such as avocado. Real estate projects have also wiped out coffee farming in large swathes of land — with the trend projected to worsen in coming years as disgruntled farmers seek alternative sources of income.
Crop husbandry has worsened in Kenya with estimates by the Coffee Directorate showing that farmers routinely harvest two kilogrammes of berries from a coffee tree against the recommended standard of 10 kilogrammes or more. The directorate blames poor investment for the drop in performance of the cash crop.
Industry insiders have also blamed the rot in the Kenyan coffee industry on long-running collusion between regulators, millers, traders and brokers which has purposefully kept coffee prices down — even when top grade produce fetched exceptionally high prices at the international market.
In an attempt to break the price stifling cartels, a 2016 taskforce had proposed an increase of direct sales from the current 10 to 30 percent, promotion of speciality coffee and turning the NCE into a public limited company.