Understanding Uganda’s Commodity Exchange

Some people believe agriculture is the ‘green gold’ that can transform Uganda’s economy. But the contribution of agriculture to Gross Domestic Product, according to Uganda Bureau of Statistics (Ubos), has been falling. It dropped to 21 per cent in the 2017/18 financial year compared to 21.5 per cent in 2016/17.

People also believe that the fight against low or no income begins with a farmer especially in Uganda where 80 per cent of households bank on agriculture for profit and food. Statistics from the National Household survey 2016/17 show that 52 per cent of households in rural areas do crop farming as the main source of income.

To be more particular about crop farming, the East Africa Grain Council (EAGC), shows that there are 24.4m small holder grain farmers (3.4 m households) cultivating 2.5m hectares of land and producing 5.6m metric tonnes of grains per year.

Maize alone contributes 2.8m metric tonnes to this figure. Middlemen also known as bicycle traders are buying maize at as low as Shs300 a kilogramme in Kasese, Shs450 in Soroti and Masindi, Shs500 in Kabale, Shs470 in Busia and Shs400 in Lira. The explanation is that the new harvest is on the market while the old harvest still lies in granaries. But the market is liberalised hence the presence of different market channels including middlemen/bicycle traders and farmer-based organisations.

“In the organisation, a small holder’s grain is picked at a warehouse by exporters. But bicycle trading is more dominant and that is why farmers cry of low prices because they find them at home. Probably they have no information about the market and they give them away at any price,” Mr Pausta Clessy Nuwagaba, structured trading systems officer, East African Grain Council, says.

While being East Africa’s food basket gives Uganda comparative advantage, the profit margins for both the country and these farmers have remained low. Farmers selling through structured trading systems are earning about Shs680 per kilo. On the formal export market, 534,000 tonnes of grains, fetching Shs946b a year.

“At Shs300, you cannot improve incomes when someone is earning much less than they invested. A kilogramme of improved seeds is Shs8,000. You have to buy fertilisers, labour and rent land. You will find that someone invests more than Shs500,000 in one acre and most people get less than a tonne from each acre. If you are selling a kilo at Shs300, it means you are selling a metric tonne at Shs300,000. So farmers are selling at a loss but because at the time of harvest they have nothing to do,” Mr Nuwagaba says.

Government will soon address these low revenues according to the ministry of Trade.

Ms Amelia Kyambadde says Uganda needs a national commodity exchange to regulate prices, quality but also to trade online. Such an exchange is a trading floor/platform for commodities from the warehouses especially agricultural commodities, grains in particular according to the ministry. Other commodities are expected to come on board later.

“We have work in progress and we believe by September, we will be able to launch the commodity exchange,” Ms Kyambadde said during the launch of the National Grain Trade Policy Implementation Strategy. Similar commodity exchanges are already existent in markets such as Ethiopia, South Africa, Zambia, Rwanda, Nigeria and Ghana. Tanzania launched it in 2015 but it still awaits to be operationalised. Egypt’s Kenya’s are yet to mature.

The commodity exchange has been transformed and is now called the Uganda National Commodity Exchange Ltd (UNCE) with 80 per cent shares owned by the Private Sector and 20 per cent owned by government through the Uganda Development Corporation (UDC).

How does it work?
Ms Khadija Nakakande, the senior public relations officer, Ministry of Trade, says the UNCE is supposed to operate in tandem with the warehouse receipt system which is managed by the Uganda Warehouse Receipt System Authority.
Through the two systems, small scale producers and traders will deposit their commodities at certified and licensed storage facilities (silos & warehouses) owned by the private sector. It is at this level that quality of exportable agro-commodities will be assured.

The farmer takes the commodities to the warehouse where he/she is given a receipt for the value of the commodities. By getting onto the system, farmers will decide on the price of commodities. It is that receipt that he/she takes to the UNCE Ltd to be transacted on the trading floor.

“Commodities in the warehouse are sold by the warehouse depositors using the electronic warehouse receipts to the trading floor to sell for them. It is after the quality has been ascertained that a warehouse receipt will be issued to the depositor - that is a farmers group, commercial producer or small scale trader),” she says.

This receipt can then be traded on the Commodities Exchange as an avenue that exposes the small producer group to the exporters. The trading floor is supposed to get a percentage of the payment when the transaction is complete. The figure for the percentage has not been agreed on yet but initially, it stood at 0.5 per cent.

Chairperson Uganda Agribusiness Alliance Ms Victoria Sekitoleko doubts it will stabilise prices because of the way commodity exchanges operate but believes it will increase access to information.

BENEFITS
Together with the Warehouse Receipt System, the new National Commodity Exchange will be beneficial to exporters (Cooperative Unions, Companies & Millers) as it promotes access to formal markets, credit, standardised storage and professional handling facilities.
It reduces working capital requirements, as banks provide direct financing through the use Warehouse Receipts (WRs), and depositors just have to undertake only marketing of the commodities.
The system reduces the need to carry out professional analysis of commodities on your own, for example, sampling for quantity and quality checks such as aflatoxin examinations.