Why commodity exchange is future of our produce sale

Dr Chris Kiptoo is the Principal Secretary in the State Department of Trade, Ministry of Industry, Trade and Cooperatives.

The ministry is working to come up with a commodity exchange akin to the stock market, where farmers would sell their produce through auction.

He spoke toMichael Oriedoon why this is what the country needs if agribusiness is to put money in farmers’ pockets

What is a commodity exchange?

This is a market where agricultural produce such as maize, wheat, bananas, sugar, barley, milk, cotton, beef, fruits, milk products and beans are traded.

The market is organised to allow the selling and buying of commodities, just as it happens at the Nairobi Securities Exchange.

In the US and India, however, there are commodity exchange for various non-agricultural products including oil and metals.

At the commodities market, farmers trade through member firms. Then the exchange itself regulates the trading practices of its members while prices are determined by supply and demand.

If prices are determined by demand and supply, how different is it from the way farmers sell their produce currently?

There is a great difference between a commodities exchange and the way farmers sell their produce today. Currently, brokers determine prices, putting them lower exploiting farmers. With commodity exchange, brokers will be eliminated and farmers would be able to sell their produce depending on demand and supply as seen at the exchange.

As it happens with the stock exchange, a farmer in Kakamega would sell maize at the same price as that in Nyeri, for instance. This stabilises prices.

The commodity exchange will also make the government keep off the market, especially when it comes to maize. For the last one or two years, the government has been forced to purchase maize from farmers at set prices, which sometimes distorts the market.

And unscrupulous people have taken advantage of this system. This will not happen at the exchange.

What commodities should farmers expect to trade at the exchange?

We are looking at all produce, but to start with, we will focus on maize, Irish potatoes, sweet potatoes, fruits and even vegetables.

But running a commodity exchange needs infrastructure, which we do not have?

First, we need to amend the capital markets regulations to bring on board the commodity exchange. Second, we need to come up with standards of various commodities that would sell at the market.

For instance, if it is maize, we must define the quality that would be sold because a commodity exchange cannot operate like an open air market.

We also need regulations on private warehouses, a bill which is in parliament. The private warehouses would hold the commodities that would be sold at the exchange. This method would be private sector driven.

The warehouses and cold storage facilities are part of the physical infrastructure we need across the country. Farmers would be taking their produce there for storage and sale through the exchange.

And they would be able to use receipts from the warehouse to even get loans. That would be the beauty of this system.

It seems like we are a long way to go for the government to actualise this dream..

The commodity exchange is the way to go for Kenya if farmers are to reap from their produce.

We are working with various government agencies and ministries and we are keen to implement this though I agree it will take some time because it is something new.

The government will also need to carry out massive campaign to educate farmers on the new system.

We are convinced that commodities exchange will help boost our food security and cut post-harvest losses because farmers would keep their produce in cold chain stores and get good profits encouraging them to farm.

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How commodity exchange works

In India, agricultural produce like chana, wheat, corn, pepper, turmeric, dhanya, chilli, cotton, sugar, potato and soya complex, among others, is traded.

There are two ways how commodities can be traded. That is trading in the spot market, which means that the commodities are exchanged immediately when setting a deal, either for cash or other goods.

The price is set according to the current market prices and delivery occurs immediately or a few days later. The second is trading in the form of futures contract; which means that the buyer and seller exchange the contract which obligates them to buy or sell the commodity on a specific date in the future and at a particular price.

Trading in futures contracts serves rather for price speculations and risk management, than for the actual exchange of goods.