Updated: Jun 14
President William Ruto announced his government's plan to set up a Commodities Exchange in order to streamline the marketing of agricultural commodities. A Commodities Exchange has the capacity to trigger a multiplier effect across several value chains. An African Development Bank guidebook on setting up such exchanges explains that in agricultural contracts, for example, farmers get greater flexibility to better plan their operations, agro-processors can reduce the impact of price fluctuations on their processing margins, traders can enhance their procurement and better manage their risks, banks will find lending to each of these groups much safer, and government entities can buy and sell more easily and more transparently.
A futures exchange can allow farmers and their service providers to operate in a free marketplace without having to rely on government guarantees or subsidies. It will allow Kenya—and indeed other African countries—to realize their potential as agricultural exporters, and help avoid costly market interventions. It will definitely improve the predictability of agricultural prices and enhance food security.
Prevailing conditions in the country certainly favor the creation of such an exchange. There is a large underlying physical market potential, prices are volatile and farmers and farmers still face challenges accessing because of perceived high risks. On the plus side, payment systems payment systems have vastly improved, especially on the technology front and market players are plentiful.
Many farmers are now able to use their smartphones to learn how to use a commodities exchange properly, without the hassle of traveling over long distances to a physical exchange. Although talk about setting up an exchange is not new in Kenya—it was mooted more than 10 years ago—there does not seem to have been sufficient motivation on the part of past governments to create an enabling environment for the right type of exchange to operate successfully. In Africa, examples of functional commodities exchanges are in South Africa, Ethiopia, Nigeria, Morocco, and Ghana.
President Ruto’s government will have to be very clear on the approach it takes to set up a commodities exchange to preempt the jostling for territory and authority that often attends such efforts. Politics must be shut out to create a licensed and regulated marketplace where buyers and sellers meet to trade in commodities and where contracts are honored and enforceable.
While the Capital Markets Authority can remain the regulator, the exchange must be allowed to operate in an unfettered environment. The government must resist the urge to set up an entity along the lines of a parastatal because of the risks associated with the government taking a strong hands-on role in the development and management of exchanges. Some of the risks include a strong reliance on consultants who do not necessarily have a broad experience in commodity exchange development. They will give the wrong advice, leading to a waste of time and resources.
Government also tends to be slow, taking years rather than months that a private-led initiative would need to establish an exchange. Governments may look at an exchange as a public service, undermining its capacity to make the commercial choices necessary for the exchange to gain the trust of users. President Ruto is planning to implement market-oriented policies to facilitate access to the exchange. The market players and the Capital Markets are awaiting with bated breath as this will be a much-needed stimulant to the economy.
Credit to: Tom Mshindi from The Nation