Friday, 10 February 2012

Commodities Trading in Kenya - Illusion or Possibility?

One of the reasons behind this post is the rise of incidences of robbery coming from coffee farms and factories alike especially from the Nyeri side of Central Kenya, and challenges facing Kenyan farmers in the selling of their produce - be it for cash crops or food crops. As you would know coffee one of Kenya's prized commodities and major foreign exchange earner has over the year taken a major dip in production.
Black Gold 

Black Gold of Kenya?
Part of the reasons this happened was because of the low prices that the international markets attracted up to and around the mid-2000s.  The changing weather patterns and expensive farm inputs have also contributed to a lowered interest in the crop. There is also the swelling population that has put pressure on land and this has seen many farmers opting to go into property development and also partitioning their land for other commercial purposes.
But in the last 2 years, global prices for coffee have been on an upward trend, thanks to increased consumption of the product and also reduced output from the one of the world's biggest coffee producers, Brazil. Locally some would say the rise in coffee establishments have contributed to the same but then again much of the coffee sold has been Grade II and Grade III while the Grade I is exported and repackaged selling at a fortune in major stores worldwide.
A little over 5 years ago, the Government liberalised the coffee milling process ending KPCU's (Kenya Planters' Co-operative Union) monopoly. This encouraged private millers to buy coffee beans from local farmers but it has also seen a rise in theft of the same since most milling companies operate at below optimal or optimal capacity. Again the lure of the improved prices has meant increased demand for the beans.
Calls have been made to brand our coffee and authenticate it as being from this part of the world and Brand Kenya has made a weak case for the same. But this requires more focussed branding and marketing of the product if Kenya's to expect to earn more from its traditional cash crop product. Lessons can be learnt from our northern neighbour, Ethiopia. Some say it's the birth-place of the product hence the general acceptance as the 'national choice of drink'. They have managed to leverage their coffee to be labelled and branded as having come from the country. Also helping their cause is the fact that they have a vibrant Commodities Exchange, Ethiopia Commodity Exchange ,one of the biggest in Africa.
Goodies, Take your pick

Commodities Exchange ala Kenya style
This brings me to the gist of this post, what is a Commodities Exchange and why do we need this to be actively pursued in Kenya?
According to Wikipedia; " a commodities exchange is an exchange where various commodities and derivatives products are traded. Most commodity markets across the world trade in agricultural products and other raw materials (like wheatbarleysugarmaizecottoncocoacoffeemilk products, pork belliesoilmetals, etc.) and contracts based on them." It goes on to say, "...Commodities exchanges usually trade futures contracts on commodities, such as trading contracts to receive something, say corn, in a certain month. A farmer raising corn can sell a future contract on his corn, which will not be harvested for several months, and guarantee the price he will be paid when he delivers; a breakfast cereal producer buys the contract now and guarantees the price will not go up when it is delivered. This protects the farmer from price drops and the buyer from price rises"
Right here in Kenya, we have 4 known commodities exchange namely;
1) Africa Mercantile Exchange - a commodity futures and options exchange, privately registered and is said to be ' Africa's first mercantile exchange, with a truly diversified product portfolio.
2) Mombasa Tea Auction - as the name suggests this is for trading in mainly Kenya's tea as well as other regional tea and used by major tea producers and marketers to buy and sell the product to regional and international buyers. It is managed by among others Africa Tea Brokers Limited. 
3) Nairobi Coffee Exchange - this is run by the Kenya Coffee Producers and Traders Association. This has been actively engaged to buy and sell Kenyan coffee to the wider global market. 
4) Kenya Agricultural Commodities Exchange - This is run by a privately-owned firm started by one Dr. Adrian Mukhebi  - one of Kenya's foremost authorities in agricultural economics. This particular exchange helps small-scale farmers and producers as well as middlemen access price information from various regions on the produce and its availability. It has been able to provide up-to-date info using mobile and other ICT platforms to access commodity prices.

As you can see from the list above, most of these commodities exchanges are privately run ( some bordering on cartel-like structures...) which makes it quite difficult for budding or established smaller-scale farmers to be able to buy and sell their produce. If you look at some like the coffee-farming, most of the time, unless one is a large-scale farmer and managing/running his/her own coffee bean factory, the produce is most;y bought by co-operatives and sold to the milling firms as a body, thus making it more difficult to access price margins.
Tea farming has similar challenges and this explains the reason why most small-scale farmers are still paupers 10-20 years since planting their first bushes. 
Mixed basket - images from & worldcloud

As regards other commodities such as dairy, maize and wheat, the former has seen much appreciation thanks to the State-run milk processing firm Kenya Co-operative Creameries( renamed New KCC after 2003) whose revamped processors meant competition with Brookside Dairies making them the 2 largest milk processors in the region. Other smaller dairy firms have also seen the price of milk rise upwards though a large number of smaller-scale farmers still prefer 'hawking' their milk to kiosks and individual consumers. (Once in awhile, I must confess I do use the KCC collection points for an extra shilling but much of the milk's consumed at home and the rest sold to neighbouring farms...).

All in all, I do hope the little educative post I have done is bound to spur interests in commodities trading which ought to be a gold mine for budding entrepreneurs and ultimately help develop our agricultural marketing skills which have been largely exploited by middlemen in the country. Back to the farm now for a wrap on the week's work...

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