New rules to oversee trading in tea, coffee

Traders at the East Africa Tea Trade Auction in Mombasa on Kenya’s Coast. PHOTO FILE | NATION 

In Summary

• The CMA will regulate the operations of the Nairobi Coffee Exchange and the Mombasa Tea Auction to ensure increased incomes for farmers and higher production of the cash crops.
• The establishment of national commodities exchanges by the EAC member states is a pioneer to the joint regional commodities exchange that will link Kenya, Uganda and Rwanda as part of the Northern Corridor infrastructure projects (NCIP).
• The heads of state of Kenya, Uganda and Rwanda agreed that each country sets up its own commodities exchange but harmonise trading regulations with the rest of the member states.

By JAMES ANYANZWA
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Kenya’s Capital Markets Authority (CMA) is working on new rules to govern the trading of coffee and tea as part of wider reforms aimed at getting the maximum value from exports, as the East Africa Community pushes for a joint commodity exchange.

The CMA will regulate the operations of the Nairobi Coffee Exchange and the Mombasa Tea Auction to ensure increased incomes for farmers and higher production of the cash crops.

CMA chief executive Paul Muthaura told The EastAfrican that the authority is working on the legal and regulatory framework to manage the operations of the auctions.

“All the markets for securities and commodities will be subject to CMA regulations. We are now putting together the relevant legal framework to cater for the licensing of players and oversight of the trade in commodities,” said Mr Muthaura.

The establishment of national commodities exchanges by the EAC member states is a pioneer to the joint regional commodities exchange that will link Kenya, Uganda and Rwanda as part of the Northern Corridor infrastructure projects (NCIP).

Joint commodities exchange

The three countries agreed on the need to run a joint commodities exchange and warehouse receipting system, to ensure transparency in standards and pricing of farm produce.

Kenya has hired a consultant to help set up its national commodities exchange which is expected to be up and running by the end of 2018.

According to the State Department of Trade, the commodities exchange will start trading in maize, wheat, sorghum, millet and coffee  in the initial phase followed by tea, cow peas, dry beans, groundnuts and pigeon peas in the second phase.

In addition, the exchange will start trading in non-agricultural products when it is fully operational.

Kenya has been blamed by its regional counterparts for falling behind in enacting legislation to facilitate the establishment of a market to stabilise the prices of agricultural produce.

Rwanda already has a functional commodities exchange that is private sector-driven.

Trading regulations

The heads of state of Kenya, Uganda and Rwanda agreed that each country sets up its own commodities exchange but harmonise trading regulations with the rest of the member states.
Kenya’s presidential taskforce on the reform of the coffee sub-sector in 2016 recommended that the National Coffee Exchange (NCE) be regulated under the CMA’s framework, and parliamentarians through the Finance Bill 2016 amended the Capital Markets Act to allow the authority to regulate the commodities markets in the country.

The taskforce questioned the validity of the current trading rules of the coffee auction which has locked out farmers from the market leaving the pricing of their produce to be determined by a cartel consisting of millers, marketing agents and dealers.

According to the report the coffee exchange faces legal, financial and operation constraints that hinder its effectiveness.

“Its legal status is unclear and the validity of the trading rules is questionable. The NCE has serious limitations that impede its effectiveness as an independent, reliable and transparent exchange,” according to the report dated May 2016.

The taskforce recommended that the NCE be upgraded to a fully fledged commodities exchange under the CMA. This will include licensing of brokers to receive selling or buying instructions from clients (farmers, co-operatives, companies, millers, and traders).

Upgrading the NCE is expected to radically alter the coffee industry structure to raise the farmers’ (and country’s) earnings by enabling him/her to sell coffee globally at lower transaction costs.
Currently, 90 per cent of coffee is traded at the NCE. The rest is sold through the direct sale window.

The ownership of NCE is vested in Agriculture Fisheries and Food Authority (AFFA), and held in trust of the coffee sub sector by the AFFA.

Challenges

According to the taskforce, the coffee sub-sector is facing unprecedented challenges which have drastically affected production levels.

These include low earnings from coffee despite its premium quality, delayed coffee payments, mismanagement and inefficiencies in co-operatives, restrictive coffee laws, high cost of production and lack of direct access to the trading floor.

On the other hand tea sales on the Mombasa Tea Auction are currently held under the self-regulating rules and regulations of the East African Tea Trade Association EATTA which consists of about 240 members across the tea industry.

The Mombasa market is dominated by a few large buyers mainly from Pakistan, Egypt and the UK.  

Kenya plans to convert various publicly and privately –owned entities into warehouses for the proposed market. These include  the Kenya National Trading Corporation, National Cereals and Produce Board, Kenya Farmers Association and the Kenya Planters Co-operative Union Ltd.

The warehouse receipting system is expected to help farmers access credit from financial institutions using their harvests as collateral.