Warehouse Receipt System; Kenya’s magic wand for food security

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By DAVID ONJILI

Kenya, like the rest of Africa is not spared from the inefficiency of the agricultural market whose defining feature is high distribution margins and seasonal price unpredictability. Poor road infrastructure especially in areas that have surplus production and lack of good storage facilities compounds the nightmare.

A World Bank survey of 2017 stated that close to 30% of grains harvested are lost due to the above-mentioned factors. This is not just in Kenya; it is in the Sub Saharan region at large. With a majority of her agricultural sector being rural based, Kenya experiences a lot of poor handling as farmers get exploited by middlemen. Transactions are cash based and are not in favour of the farmer who fears losing the produce to bad weather and lack of market.

The arising liquidity problem can be cured, if well planned, only by a Warehouse Receipt System (WRS). The haphazard nature with which the government brought in the capping of bank interest rates must always come to mind whenever we want to introduce something into the market.  Experts are key in any formulation of policy but we must always let market lead and be followed by policy and not a few technocrats to dictate how things should work.

With this in mind, the adoption of WRS must be first clearly thought out. The first step is for the Government, through the Counties, to first set up warehouses in each or most of the 47 counties to enable easy access by farmers to them. Private individuals too can be allowed to have warehouses in areas the government may find it challenging to put them up.

Having the warehouses is one thing but informing the farmers of the existence and benefits is another. This can be through advertisements using various media platforms and more importantly, through farmers’ Saccos.

It is also important that financial institutions are made ready to accept the receipts. Equity Bank has already shown a willingness to embrace this.

Problems it addresses

Smallholder farmers who make the majority in Kenya are often isolated from markets. They have limited market for their produce due to a small network of buyers and they are usually skeptical to enter into contractual agreements due to lack of trust. This thus makes them vulnerable to buyers who exploit them when assessing the weight, quantity and quality of their produce. While some group themselves into Saccos, a WRS can assist farmers overcome these challenges.

Substandard drying and preservation methods, aided by inadequate storage facilities force the small-scale farmers to be at the mercy of exploitative buyers who reap from the seasonal price variations of the produce. Hence, farmers taking goods to the warehouses and getting paper money as collateral would addresses their liquidity problems immediately. This may include paying fees for their children or meeting other domestic and business expenses. Proper storage (as the warehouse must meet government grain storage standards) enables farmers to wait for the right time to sell their produce without the fear of loss.

Chitra Prakash of the University of Nairobi in her 2014 paper titled, Factors Influencing the use of Warehouse Receipts as a financial instrument in Kenya observes that the Government has always intervened in agriculture to support prices and ensure a measure of food security by directly purchasing from producers and since the Warehouse Receipt is a guarantee of existence of the physical agricultural goods in the warehouse, government could just purchase the receipts when prices drop rather than actual delivery of the produce, and help in price stabilization and food stability objectives.

Kenya is majorly an agricultural economy, which contributes about 24% of the country GDP while employing not less than 80% of the rural population. Yet, a majority of smallholder farmers take loans from moneylenders with exploitative terms rather than established financial institutions where they could use their produce as collateral.

To protect farmers from thieving middlemen, a legal structure must exist to support the receipts as reliable collateral. It is incumbent on the government to stop wavering in the Warehouse Receipt System Bill 2018. This will not only protect farmers but as aforementioned, would help in addressing food security for government, which remains a huge part of its agenda.