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Govts should allow a free market economy to establish grain prices

Saturday July 19 2014

The Eastern Africa Grain Council (EAGC) has been at the forefront of promoting open pricing of commodities in the region.

Following the recent launch of the East Africa Exchange, The EastAfrican spoke to EAGC executive director Gerald Masila on the impact the exchange is expected to have.

How are you involved in the East Africa Commodities Exchange that was recently launched in Rwanda?

The East Africa Commodities Exchange is a member of the Eastern Africa Grain Council. The EAGC believes the emerging commodity exchanges will help in providing a transparent price discovery mechanism for commodities, as well as crucial trade linkages between producers, buyers and processors.

How can a farmer in any of the East African countries participate in the Kigali exchange?

A farmer can participate through a registered agent, who will place the commodities for sale at the exchange on his behalf. Once the produce is sold, the farmer pays the agent a commission.

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How many agents are there by country, and what commissions apply?

The EAX has just finished preparing the procedure for registration of members to the exchange who will act as agents. They are planning to start registering members soon.

The same goes for agency commissions. The commission structure could take the shape and form of South Africa Futures Exchange (SAFEX), or the NSE, and it may be a percentage of the value.

What success have you had with the warehouse grain receipting system in Kenya?

The EAGC has trained more than 13,000 farmers in the warehouse receipt system. Some 1,000 have registered and participated in the WRS over the past three years under the AGRA-supported warehouse receipt strengthening project.

The EAGC has certified warehouses at Moi’s Bridge, Kitale, Eldoret, Nakuru, Nyahururu and Makueni, with a combined capacity of 33,000 tonnes. Farmers have deposited more than 20,000 tonnes of maize, wheat and pulses over the past three years.

A total of $1.3 million has been lent to farmers, secured by warehouse receipts, and these loans have been repaid at the time of selling of the produce.

What is being done to improve the handling capacity?

More warehouses are set to be certified to increase capacity. WRS will be upgraded from the current paper-based system to an electronic system.

Farmers are being mobilised into groups to bulk their produce, and deposit it in certified warehouses. Banks are encouraged to register and provide financing through WRS.

The enactment of the WRS Bill, now in draft, will also give financial institutions the confidence to participate in WRS. A trading platform to link sellers and buyers in a transparent process, like a commodity exchange, is also necessary to complete the full cycle.

The EAGC was to take over some National Cereals and Produce Board stores that were not in use. How far have you gone with this?

The warehouses did not meet the requirements for certification.

You were championing the launch of a commodities exchange in Kenya. What is the progress?

The EAGC has recommended that such an exchange should be regional, as opposed to each country setting up their own. The reason is that a commodity exchange requires sufficient throughput for it to be economically viable.

Second, the EAGC has recommended that the establishment of commodity exchanges be done by the private sector, not by governments. The government’s core competency is not business.

We are urging governments to establish legal and regulatory structures, including an authority, to oversee the commodity exchanges. It should also provide policy measures such as a level playing ground.

The regulations should allow a free market economy, like in South Africa, where market demand and supply forces determine commodity prices.

What are the key challenges facing warehouse grain receipting?

The main challenge facing the grain receipting system in Kenya is the setting of prices by the government, through the NCPB, without reference to either production costs or market demand and supply.

There is no basis for setting the price of a 90kg bag of maize at Ksh3,000 ($35) when research by Tegemeo Institute has demonstrated that the cost of producing a bag of maize is between Ksh1,000 ($11) and Ksh1,800 ($20).

Some farmers also receive subsidised fertiliser. This ends up favouring certain growers as indirect income through redistribution.

There are also concerns that after buying the maize at Ksh3,000 ($37) from the farmers, NCPB later sells the maize for about Ksh2,500 ($29), which is a loss considering that the maize accumulates more costs in storage, fumigation and labour.

In addition, the storage of maize leads to deterioration as the NCPB does not sell old stock to buy new stock.

When NCPB releases their stored maize to the market, though sometimes of lower quality due to the long storage, this distorts the market. So distortion at producer price and distortion at selling price is the biggest challenge to grain receipting in Kenya.

Have you engaged stakeholders on this?

The EAGC has recommended that the government stop setting producer prices. We have also advised the government to use the tendering system to procure supplies for the National Strategic Grain Reserve.

This way, the government would buy maize at more competitive prices and perhaps buy more quantity that they can keep moving on with the market price.

The recently announced restructuring of NCPB is a welcome move and we are waiting to see the implementation, which we expect will benefit the sector in general.

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