The government should seriously rethink its strategies for revitalizing agriculture. It is saddening that despite Kenya having an agro-based economy, has citizens who continue to experience food supply shortages.The problem has led to high incidence of hunger, malnutrition and, in some extremes, starvation. While the efforts that have produced the Agricultural Sector Development Strategy are commendable, a lot needs to be done to revamp agricultural production and development.
As part of the efforts to revitalize agriculture, Kenya urgently needs to set up a formal Commodity Exchange.This shall significantly help in the trade and marketing of agricultural products.
What therefore is a Commodity Exchange? It is a market organized to allow for the selling and buying of commodities.
These may be traded in three types of markets: cash, futures and options. Maize, Cocoa, crude oil, and gold are some of the commodities traded across the world. Anybody may trade through member firms. The organisation itself regulates the trading practices of its members while prices are determined by supply and demand.
The organisation provides the rules, procedures and infrastructure for commodity trading, oversees trading practices while gathering and disseminating marketplace information.
Transactions take place on the floor — the pit — and must be effected within certain time limits.
Floor traders, floor brokers and futures commissions merchants working on the floor must be registered by a regulator.
The goal of the exchange would be to promote efficient markets and boost price discovery while enhancing risk management hence protecting players like farmers.
In the Kenyan context, agricultural products to be traded include items like maize, wheat, beans, barley, sugar, cotton and fertilizers.
Contracts based on the same products may also be sold at the exchange.
The concept is not a novelty in Kenya. The Nairobi Coffee Exchange has a long history dating back to the 1940s while the Mombasa Tea Auction which serves East Africa and parts of Southern Africa has gained prominence as a major tea auctioneer and is currently the second largest in the world after Colombo in Sri Lanka.
These two commodity exchanges have not only provided a centralized and organized export platform for the two cash crops but also ensured effective competition among buyers and sellers.
The Kenya Agricultural Commodity Exchange Limited which was established in 1997, is the first major attempt to establish a commodity exchange for agricultural products other than Coffee and Tea in Kenya and in the East African Community (EAC) region.
SAFEX of South Africa is one of the most active commodity exchanges in Africa that deals in grains among other products.
The Chicago Board of Trade in the USA, with its origins in 1848, is perhaps one of the oldest commodity exchanges in the world.
However, for a Commodity Exchange to grow and flourish and serve its purpose effectively, it requires a legal and regulatory framework.
With the implementation of the Vision 2030 under way, the establishment of an effective Commodity Exchange for agricultural products should be made a priority for Kenya and the wider EAC region.
A successful commodity exchange is dependent on the availability of tradable volumes of commodities, a big market, sound infrastructure and an effective telecommunication network.
Financial services
It also relies on sound financial services, the existence of strong players, a network of secure and reliable warehouses and the existence of a sound legal and regulatory framework for a commodity exchange and for warehouses. Most of these building blocks are already in place.
The National Cereals and Produce Board alone has 110 depots and silos with a combined storage capacity of 1,890,000 metric tonnes.
Other institutions including the Private Sector have warehouses mainly located in major urban centres.
A Commodity Exchange will create a market for tradable documents generated by this huge Warehousing Network and their respective derivatives.
It will also attract participants from the region.
The ongoing effort by the Eastern Africa Grain Council (EAGC) for the promotion of structured grain trading in the EAC Region have already initiated the establishment of a Warehouse Receipt System recognized by the stakeholders in the grains industry.
Due to the improved co-operative movement, many Kenyan Farmers, Millers, Traders and other stakeholders have formed associations that advance their business interests.
These structured groups will use the exchange and the Warehouse Receipt System as the best instruments for consolidating their products into marketable volumes and marketing them efficiently and profitably.
Both local and international financial institutions have introduced products that recognize the use of warehouse/warrants as collateral for accessing credit and are ready to support structured trade through regulated exchanges.
There is the presence of internationally recognized and experienced collateral management companies interested in the professional management of warehouses for the Warehouse Receipt System.
The East African Community provides a large population and hence a market of nearly 130 million people.
The grain market in East Africa is ready to support initiatives that would market grain quantities surpassing 10,000,000 metric tonnes, which represents a minimum total production of maize, beans and rice annually.
These commodities are traded at various open markets and across borders within the EAC Region.
The Strategic Grain Reserve function of the Kenyan Government can be well served and managed, for instance by the Government purchasing commodities and holding warehouse receipts while releasing them through the Exchange at an appropriate time.
This gives the Government the instrument and power to effectively intervene during times of shortages and surpluses, thus providing stability
Also, an Exchange provides vital information that assists stakeholders to keep in constant touch with market trends especially in commodity prices through regular publications and dissemination of the information.
Lastly, it regulates trading activities by monitoring performance of authorized players.
Kenya currently needs a vibrant all inclusive Commodity Exchange to improve and promote agricultural trade in domestic, regional and international markets for her commodities.
This will improve agricultural growth and food security, enabling the agricultural sector to contribute more effectively to the success of Vision 2030 for the country.
While stakeholders in the agricultural sector are actively addressing the critical issues that need to be addressed for this noble idea is to be realized, the Government should put in place sound legal and regulatory frameworks in terms of a Commodities Exchange Act to support the initiatives.
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