First published in the Business Daily on November 2, 2015.
Food insecurity continues to be a real threat in several parts of the country. This would call for measures to incentivise farming, but such measures are yet to materialize, at least not for some produce such as maize.
For instance, a farmer in Uasin Gishu County who sold his maize late last week made half as much as a farmer who sold his at the beginning of the month. A 90 kilogramme bag of maize has had a dramatic fall in price by almost half in three weeks.
That is how volatile the prices of agricultural produce can be, thanks to the seasonal nature of the farming patterns and in the case of maize farming the elephant in the room; the middlemen. With such a fall in prices, it means a farmer may either not meet the cost of production, thereby making a loss, or the return on investment will be vehemently diminished, rendering farming an unattractive venture.
Both scenarios have a negative impact on our aim to achieve food security. While the National Cereals and Produce Board (NCPB) has stepped in to propose a plan to eliminate the middlemen and stabilize the prices of Kenya’s staple food, farmers have a chance to plan for the rains before they start hitting.
Derivatives
The capital markets regulator last week gave a nod to the Nairobi Securities Exchange (NSE) to establish the trading of derivatives and futures. Simply put, futures are agreements between the buyer to buy a product at a particular amount and the seller to sell the product at that particular amount at a set future date.
There are several types of futures, including commodity futures which relate to products such as agricultural produce and minerals. Using commodity futures, farmers and buyers of the produce may lock in a particular price at which the produce will be sold at the date when it is harvested.
This cushions farmers against the price volatility experienced during the harvesting season owing to the increased supply of the produce. By giving farmers the comfort of a predetermined price of their harvest, commodities futures are bound to provide an incentive to perspective farmers, mapping the road towards food security in the country.
The futures contracts can then be traded on an exchange. Their prices rely on speculation and changes in the weather which may affect the produce.
As the NSE prepares to launch the trading platform, resources should be channelled towards educating the public, especially farmers, on the hedging possibilities that futures present.