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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