Commodities market: The idle silver bullet that could save farmers from price fluctuations
When it is Kenya, the talk of agriculture being the backbone of economy is now a cliché but so is the sad tale of farmers who supply commodities in exchange for loss. Despite the season long hassle from preparing land to harvesting and drying grains, a typical Kenyan farmer faces the constant threat of running into losses when they eventually take their produce to the market. The government has tried to save the farmer by providing subsidized fertilizer and seeds but at least every year, farmers remain trapped next to losses. In fact, most of the time, the price the government offers to buy their cereals, many farmers claim, is not enough to cover the expenses. One such person is Christopher Kiptum, a farmer in Eldoret who plants both maize and wheat. He says that prices that Kenya Cereals Board offers are not attractive. "Most of the time, the board offers us (farmers) about Sh2,200 for a 90 kilogram bag of maize. When you factor in transport, you remain with just about Sh1,900 per bag. This leads to loss," he said. His counterpart, Tom Korgoren,a large scale farmer who plants maize in Eldoret and wheat in Narok, says that at the heart of his worries is prices and middlemen. He says, middlemen-menace and government offering lower prices has been a perennial problem dating before 1997. Protests from farmers have not saved the situation. Fluctuations in prices of commodities such as maize, added to threats such as afflatoxin and limited storage capacity have only made it harder. But all this, experts in commodities market say, could be easily avoided. A commodity market trades in primary economic sectors such as agricultural products and minerals as opposed to manufactured products. In the region, Ethiopia and Rwanda have such markets. According to Kenya National Chamber of Commerce and Industry CEO Matanda Wabuyele, such a market could save farmers from low prices offered by speculative middlemen. Many farmers, especially small holder ones, are at the mercies of middlemen. Currently, most Agricultural products are traded through means such the warehousing and receipting system of National Cereals Board (NCB), the Nairobi Coffee Exchange and Tea Exchange in Mombasa. NCB relies on marketing teams from across the counties who announce prices for farmers to know where prices are better. This, Kiptum says, is sometimes not followed. To strengthen the market, East African Exchange (EAX), set its foot in Kenya in 2014. The exchange also offers commodity trade services in Rwanda, Uganda and Tanzania. Commodities such as maize, beans, wheat, sorghum and soya are part of what is traded. The firm has full-fledged commodities market, with clear rules, trading floor and clearing house in Nigeria and Rwanda. Despite the market having developed in Rwanda, not so much has been achieved in Kenya. According to the firm's business development officer Christine Wachira, the support from Rwanda government offered immense boost. "Rwandan government pumped in money and even gave us 13 warehouses and one silo to manage. Therefore, farmers are able to store their grains at no cost as we concentrate on getting a market for them," she says. In addition, Rwanda has cooperative agencies that also disseminate information on when and where farmers are harvesting. According to Kenya Farmers Association Director Kipkorir Menjo, farmers are looking for a balance beteen waiting for better prices and minimising their storage costs. "Farmers are tired of middlemen. They want a market where prices are transparent and can give returns. Middlemen are the ones benefiting from farmers' donkey work," said Menjo. The entry of EAX has not excited the market a lot yet agricultural activities are most popular in the country. According to the EAX Kenya business development officer Christine Wachira, the slow uptake is due to lack of awareness. The firm relies on National Association of Securities Dealers Automated Quotations (NASDAQ), a unique international trading platform that allows to trade from any part of the world. The firm's NASDAQ platform has over 100,000 farmers trading in Rwanda compared to Kenya's only 672. Through the platform, the farmer gives the reserve price, which is the minimum price he or she would want the cereals sold. This information is only shared with EAX trading manager, CEO and the farmer. "There is a 20 minutes trading session once we have received the reserve price. The top bidder gets the commodity," explains Ms Wachira adding that a day has three trading sessions. The transaction is completed in a trading session and the farmer gets paid immediately. Currently, the exchange operates a certified 4,000 metric tonne warehouse in Eldoret where farmers can take their grains for storage at a fee as they await better prices. In the process, they are issued with electronic warehouse receipt. "Farmers can use this receipt as collateral to get financing from any of the banks we have partnered with. They can also trade their grains from whatever location they are using this receipt," says Ms Wachira. Certification of the grains is done by an independent firm, Collateral Management International which is centred in South Africa. According to Ms Wachira, this saves buyers from threat of getting poor quality grains. In Kenya and Rwanda, there are seven banks on board who can issue credit to farmers by relying on the electronic receipt as collateral. Some of the financial players involved are Equity bank, ABC bank, KCB and Ecobank. Once farmers have the electronic receipt, they only need to communicate to the exchange that they wish to sell their grain and they will be added in a trading session. Last week, Eastern Africa Farmers Federation rolled out the e-Granary platform that seeks to bring together farmers to enable them access markets and financial services. Ms Wachira told Business Beat that this platform will offer a huge opportunity for them to roll out futures and forwards contracts. She said that EAX will tap into the e-granary database that has so far 13,000 grain farmers to know where farmers are and what they have harvested or intends to harvest. "The data will help us know when we expect harvest to come through in a given period. Therefore, it will be possible to try and predict prices and therefore run the futures and forwards contracts," she added. The firm plans to establish at least three more warehouses this year in Nairobi and Kitale with a long term plan to have them spread out in the country. By October, the exchange intends to roll out a preposition. It wants to start paying farmers prevailing market prices then as prices improve, they sell the grain and share the gain with the farmers.