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April 17, 2008

Kenya launches new agricultural commodities market

Kenya will on April 21 launch a new agricultural commodities market that will see farmers instantly realise the value of their produce and free them from the grips of exploitative middlemen.

Establishment of the warehouse facility, the first of its kind in Kenya, is also seen as the precursor to the long awaited setting up of a commodities exchange in Nairobi.

The facility, which will trade as the Nakuru Wheat Silos is expected to shield farmers from the sharp swings in commodity prices by offering safer storage when prices are down while at the same time allowing them to use stored produce as promissory notes upon which they can access bank loans to grow their business.

For many years, Kenyan farmers, who form the bulk of the population, have been forced to sell their produce to profiteering middlemen at throw away prices, only for the middlemen to reap huge profits from the same as prices rise with scarcity. Farmers will now have a chance to temporarily store their produce in well equipped and professionally managed warehouses as they await the stabilizing of prices in the post harvest period.

While their produce is stored at the warehouses, farmers will use receipts issued at the warehouses to get loans from commercial banks using their produce as security. This is money they can use to finance their growth needs and prepare for the next planting season before selling their previous harvests. Millers and other organizations wishing to procure grain such as the numerous food aid agencies operating in the country can buy the warehouse receipts, whose quality is guaranteed.

The warehousing initiative is being supported by the Financial Sector Deepening Trust, the USAID Kenya Maize Development Program (KMDP) and Regional Agricultural Trade Expansion Support (RATES) and Lesiolo Grain Handlers Ltd. A self regulatory members body, the Eastern Africa Grain Council (EAGC) will be charged with regulating the commodities warehousing scheme, setting the rules and admitting new members.

Ms Anne Mbaabu is the new council’s executive director. EAGC marketing information manager Bridget Okumu says that the warehouse receipt system initiative started operating in mid March, but the official launch is set for April 21 in Nakuru.

Core members of the council include producers, millers and traders while other associate service provider members such as banks, warehouses and insurance companies.

Equity Bank has already advanced loans to six farmers based on the ‘warehousing receipt’ system while other banks such as KCB, Cooperative and Family are said to be interested in joining the scheme. “The warehousing receipt system will help farmers to pay their school fees and meet other household needs without feeling the undue pressure to turn to exploitative middlemen,” says Ms Okumu.

And as the commodities market opens up even more, the ‘warehousing receipt’ is likely to form the basis for the formation of a commodities exchange market; opening up a new, potentially huge economic front. The envisaged commodities exchange market would operate by trading in the warehouse receipts on the same principle as shareholders at the Nairobi Stock Exchange (NSE) trade in shares, creating a new investment opportunity for all Kenyans.

The NSE Chief executive officer Chris Mwebesa says that the stock exchange is willing to provide necessary expertise and the platform for hosting a commodities exchange, as a basis for developing a fully fledged futures exchange market. However, the warehousing receipt would have to first gain acceptance as a financial instrument before it can be traded at a commodities exchange.
“The launch of the warehousing system is a major development but other steps will need to be taken before the establishment of a commodities exchange and later a futures exchange,” says Mr Mwebesa.

The EAGC says that farmers will deposit maize in certain certified warehouses during the harvest period between the months of December to March after which they will be issued with warehousing receipts.

Farmers with an urgent need for cash will then borrow from commercial banks using the warehousing receipts, after which they can then sell their stored maize at a margin in the months of May to August when prices are expected to have stabilized.

EAGC has negotiated for minimum storage costs with warehousing owners, who shall be approved by the council based on specified criteria that spells out the technical aspects of the warehouses.

The council has approved only maize as the acceptable product so far, but Ms Okumu says that other commodities such as wheat and beans shall be acceptable later in the year.

Each farmer will be issued with a single warehousing receipt upon the submission of 100 metric tomes (MT) of maize, equivalent to 1,111 90 kilogram bags of maize. The warehouse has so far received 1,000 MT of maize from 10 individual farmers, but is encouraging the small scale farmers to form small groups and submit their harvest in bulk. Six of the ten farmers have already applied and received loans from Equity Bank using the warehouse receipts as collateral.

Ms Okumu says that the council hopes to have warehouses in all the agriculture rich areas including Eldoret, Kitale and the South Rift regions.

Kenya already has three commodities exchanges: The Nairobi Coffee Exchanges dealing with coffee, Tea Auction in Mombasa and the Kenya Agriculture Commodity Exchange (KACE), a spot exchange that deals with a variety of commodities but mostly maize and beans.

KACE’s managing director James Kundu said additional commodities exchange would be welcome as it would help improve marketing of produce in the region. “The main challenge, however remains the quality of the produce that farmers deliver and the reality that most are small scale and find it difficult to deliver in bulk, which is the ideal for an exchange like this,” said Mr Kundu.

Other challenges are that most of the commodities in Kenya are heavily regulated by boards and are grown and marketed in an environment of struggling cooperatives, which are inefficient, mismanaged and have cumbersome internal bureaucracies.

Commodities that would be popular in the local commodity exchanges include maize, beans, potatoes, vegetables, wheat and barley.

Ethiopia and South Africa are other countries in Africa that have functional commodity exchanges, complete with warehouses. The Ethiopia Commodity Exchange (ECX) trades in six commodities: coffee, sesame, haricot beans, wheat and maize.

ECX provides a marketplace where buyers and sellers can come together to trade and be assured of quality, delivery and payment. The exchange includes a trading floor in Addis Ababa, six warehouse delivery locations, and 20 electronic price tickers in major market towns.

““ECX will allow farmers and traders to link to the global economy, propelling Ethiopian agriculture forward to a whole new level,” said Gabre-Madhin, the exchange CEO.

The Johannesburg Stock Exchange houses the South African Futures Exchange for farm produce.

Business Daily Africa

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