Kenyan cereal farmers long buffeted by post harvest losses and poor farm gate prices have found relief in a new scheme that allows them to store produce until a market shortage while using it as collateral to access financing.
Traditionally most of the cereals harvested were susceptible to post harvest losses especially attack by weevils. And then there was the risk of a market glut due to farmers harvesting and selling at the same time. The end result was poor pay. Middlemen would also cash in on farmers desperation to buy it at a rock bottom prices.
But a new model is now allowing small farmers to store their produce in certified warehouses and use it to obtain credit from banks, avoiding middlemen who paid them and enable them buy good seeds and fertilizer and raise their yields.
“Brokers have always been a thorn in the flesh of poor farmers because they take advantage of the harvesting season to purchase farm produce very cheaply, then sell (inputs) to the farmers very expensively when such commodities are scarce in the market,” said Paddy Likhayo, a Kenyan-based grain storage expert.
Joseph Karanja, a smallholder farmer in Rift Valley, said prices of farm produce, especially cereals, are always very low at harvest time and very high during the planting season, making it impossible for poor farmers to buy farm inputs at the right time.
“Sometimes we end up planting without fertilisers because we cannot afford it, or at times we plant when it is too late because we did not get the finances in good time,” Karanja said.
Experts say that a one-week delay in planting can reduce a crop’s yield by more than 50 percent, and Peter Njau, a research scientist at the Kenya Agricultural Research Institute (KARI) , says late planting because of financial problems is one of the main reasons for poor yields among small farmers.
To bridge this gap, the Eastern Africa Grain Council (EAGC), in collaboration with theAlliance for Green Revolution in Africa (AGRA) and selected commercial banks, is supporting farmers by letting them store their cereals in certified warehouses and use the warehouse receipts as collateral for loans to finance their farming activities.
The process is known as a ‘Structured Grain Trading System,’ said EAGC Executive Director Gerald Masila, “This is a business venture for smallholder farmers. Those who tried it at first two years ago have already become self sustaining and can obtain loans without our support.”
Many Kenyan smallholders do not produce enough to make up a consignment of 100 tonnes, the minimum required by standard EAGC warehouses, so they form groups and deliver their cereal together. In exchange, they receive a warehouse receipt which they can present to a bank as collateral for a loan.
“In January 2011, we stored 113 (90kg) bags of maize at Lesiolo Grain Handlers and used the warehouse receipt to acquire a bank loan of Sh200,000 ($2,500). This enabled us to prepare our pieces of land in good time, buy the required farm inputs in advance, and plant on time without having sold our produce to brokers,” said Lydia Njoroge Gichuma, chairwoman of the 25-member Mwihoko Self Help Group in Nakuru, in the Rift Valley.
“That was the first bank loan of my life,” said Gichuma, a mother of four.
Lesiolo Grain Handlers Ltd is a private company that has joined the warehouse receipting system.
Lending money to smallholders, particularly farmers, has always been a challenge because shifting climatic conditions and emergencies in the form of pests and disease mean there is no guarantee the crops will perform as expected, says Nixon Bugo, the Programme Officer, Innovative Finance, Policy and Partnership Programme at AGRA.
Gichuma’s self-help group sold their grain in April, when the price had risen to Sh3,600 per bag from Sh2,200 in December. “This enabled us to pay off the bank loan at once, pay the warehouse charges and divide the remaining amount among ourselves depending on the amount of cereal stored by each individual,” she said.
They now have another crop growing, which they expect to harvest soon, and take to the warehouse. Another group, the Kirima Self Help Group, deposited 111 bags of maize at Lesiolo in 2012, and withdrew it after the price appreciated.
“The warehouse system reduces many risks because once the grain is stored, we do not worry about it being attacked by pests or aflatoxins, or being stolen. There is always a guarantee that we will get back our grain as indicated on the receipt whenever we need it,” said David Kamau Thuo, of Kirima SHG in Menengai, Nakuru.
So far the EAGC has certified 10 warehouses with a capacity of 30,000 tonnes each in different parts of the country.
Masila says that banks and related financial institutions are crucial to the scheme. “Their willingness to accept warehouse receipts as collateral is an important achievement for smallholder farmers,” he said, as it enables them to plant in good time and get better yields.
The UN Food and Agriculture Organization (FAO)’s Gender and Development Plan of Action underscores the importance of financial capital for farmers to improve production. “Buying seeds, fertilisers and other agricultural inputs often requires short-term loans, which are repaid when the crops are harvested,” the report reads.
“With innovative financing, many banks are already changing their perception about giving credit to smallholder farmers. And that is the way to go, if we are to achieve a green revolution in Africa,” said Bugo of AGRA.