Kenya is renowned for its high-quality coffee, ranked among the world’s finest, making the sub-sector a significant contributor to the economy and a leading force in the global market.
At the heart of the country’s coffee trade is the Nairobi Coffee Exchange (NCE), a transparent marketplace of buyers and sellers. Domiciled at Wakulima House in the busy Wakulima Market – separated from Nairobi’s Central Business District by the 690m-long Haile Selassie Avenue – one can scarcely imagine that high-level trading takes place every Tuesday on the second floor of this building.
The area near the basement of the State-owned Wakulima House, which is part of the defunct KPCU complex, is usually a hive of activity, with other traders selling and buying various farm produce.
But the deafening noise fades as one enters the thick-walled building. And a contrasting calmness reigns on the first floor, which hosts rented private offices.
The NCE is on the second floor, with one section hosting its offices and a sizeable boardroom whose walls are neatly pasted with black and white publications detailing the history of the coffee auction.
“The first coffee auction was conducted by White traders in September 1935 under the Kenya Coffee Auction (KCA),” says Ms Lisper Ndung’u, the NCE Chief Executive Officer (CEO) while pointing at one of the pasted publications.
She adds that the trading was manual, where buyers and sellers engaged physically in the auction room every week, unlike the current case where the exercise is conducted online through an electronic system, allowing for efficient and real-time transactions.
Major strides made
Since the first auction, there have been several advancements in regulations and technology to improve coffee marketing. On 1st July 1947, for instance, the Coffee Marketing Board (CMB), which was established under the Coffee Marketing Ordinance No. 6 of 1946, started operations and would later be combined with the Coffee Board of Kenya (CBK) on 5th July 1960 under the Coffee Ordinance Cap 333.
However, Act 13 of 1971 abolished the CMB and consolidated the function of coffee marketing with the regulatory mandate of the CBK. The CBK controlled the industry until July 2001 when a new Coffee Act was enacted to amend Cap 333. The new Act specified new roles for CBK as an industry regulator.
The Coffee Rules of 2002 authorised the formation of an association to oversee NCE. In 2006, Section 62 of the rules was revised to designate the Kenya Coffee Producers and Traders Association (KCPTA) as the managers of NCE, a role they played until July 2013.
Legal Notice No. 79 of 2012 solidified the functions of NCE within coffee legislation and stipulated that it would be governed by an Exchange Management Committee, as per NCE Trading Rules of 2012.
According to the 3rd April 2020 Capital Markets (Coffee Exchange) Regulations 2020, and the Crops (Coffee Exchange) General Regulations 2019, NCE and coffee brokers were to be licensed and supervised by the Capital Markets Authority (CMA). This was to take effect from 1st July 2020, with a one-year window for the Coffee Exchange to fully comply.
Until 31st July last year, NCE had been approved by CMA to continue operating as a Coffee Exchange to give it time to fully comply with the Capital Markets (Coffee Exchange) Regulations 2020, including onboarding of a Direct Settlement System (DSS) provider.
“We are happy that the auction now has the DSS, which was part of our mandate as the committee and a major stride towards enabling the NCE to comply with the current industry regulations,” said Mr Kenneth Gitonga, the Chairperson to the nine-member Working Committee on the transition of NCE into the coffee exchange.
He added that the committee is determined to enable the NCE transit to a legally working exchange as per the CMA rules and finally register the Exchange as a limited liability company with farmers as the major shareholders.
“We envision an NCE which is farmers-owned, something we trust will boost the growers’ morale to increase their production owing to the transparency mechanisms we are putting in place,” said Mr Gitonga.
The coffee sample room
The other section of the second floor hosts the coffee sample room, which is about 3,600 square feet. Here, brokers and sellers prepare coffee samples to ensure only the best grades are ready for auction. “Kenyan coffee is known for its distinct flavours and high quality. There is a legal framework that requires brokers to maintain high standards of the commodities to be sold,” notes Ms Lisper.
The wide room becomes very busy daily as the sampling team goes through 9kg brown bags of green beans from different coffee warehouses. They open the big bags and scoop one-kg samples, which they transfer to smaller sachets. This eases the process of making the final price catalog of every sample delivered.
As a result of these unsealing, scooping, labeling, and resealing processes, some beans spill to the floor, which has since been made rugged using long timber rods neatly fitted in rows with spaces in between. The fallen beans collect there.
“The rods are fitted this way to prevent injuries on attendants since spilled beans make the floor slippery,” says a vigilant security guard.
Before the auction
According to Ms Lisper, before the auction every Tuesday, samples destined for sale must be ready by the previous Thursday to enable NCE to determine which commodities are up for marketing. “Brokers have an ample time of 10-12 days to work on the samples delivered from warehouses. During this period, they are expected to prepare price catalogs with correct labeling in concurrence with farmers’ outturn details at the warehouse,” she explains.
After this, buyers are allowed to pick the labeled samples with the price catalogs to help the two parties come up with the final price catalog. This could take up to a week, during which time the farmers are informed of each process.
According to the Crops (Coffee) (General) (Amendment) Regulations 2022, the sales catalog should be prepared by the coffee miller-marketer in consultation with the Exchange and grower millers. The data is then uploaded on the NCE system for marketing approval, a process which sometimes delays the sales, as was witnessed between January and March this year.
“Our system is not yet fully automated; thus, we still rely on brokers to give service charges such as milling costs to be incorporated in the system to enable the making of payments once the produce is sold,” says Lisper.
At the warehouses, it is the brokers who have the farmers’ parchment details, including outturn numbers and grades. When the details are entered well, a farmer should be paid within six weeks of delivery.
According to the CEO, NCE markets 80 percent of all the coffee produced in the country and is currently selling up to 800,000 bags of 50kg each per season, translating to about Ksh15 billion. However, this figure fluctuates due to farmers’ diverse practices and differences in harvest time and yields.
“We normally have 50 buyers per season and 10-15 brokers representing the over 4,000 coffee growers in Kenya,” she notes.
Reforms facing bottlenecks
Several bottlenecks slow down the trading at NCE, but they are being resolved, thanks to the recent coffee reforms spearheaded by the Office of the Deputy President. “The reforms are on the right track. Farmers are happy with the current payment duration, which is five days after the sale of their produce,” said Mr Gitonga, adding that growers are also enjoying good prices at the Exchange.
The current price list posted by NCE on its communication channels indicates that ‘Sale 28’, one of the latest, had a grower rake-up of USD480 per 50kg bag of grade AA coffee. “Our system of pricing and payment is more transparent today, giving both growers and buyers a view of how the trading floor looks like and the expected income”, says Mr Gitonga. He cites the DSS as further evidence that the reforms are achieving their intended goals.
Direct settlement system
Commercial banks normally provide a facility for receipts and disbursements where all proceeds from the purchase of coffee and other financial obligations are directly settled.
According to Lisper, this system allows coffee producers to engage directly with buyers. Recent regulations state that contractual agreements between the two parties should be overseen by the Agriculture and Food Authority (AFA).
However, capturing the logistics into the system is a great challenge to many growers. It is also difficult to find properly licensed companies to transport farmers’ produce.
Last August, the NCE appointed the Co-operative Bank for its Direct Settlement System (DSS) for coffee value-chain players for every sale countrywide. Since then, the system has been the platform for coffee trading, as provided for in the new coffee trading regime supervised by the Capital Markets Authority (CMA).
“These regulations and others introduced recently place growers above all other industry players,” says Mr Gitonga. “It is time for growers to thrive and, as such, all the other actors in the value chain should endeavour to educate coffee farmers on how to achieve the best quantity and quality.”
Both Gitonga and Lisper praise the current government for implementing reforms in the coffee sector, which had long remained stagnant.
Good future plans
Given the current regulations, many of which are to be implemented by NCE, Lisper says there is a need for the Exchange to have wider space for its operations, more staff, and improved facilities. “We’ll continue modernising NCE to global standards, making trading more efficient by adopting new technologies. We will finally make NCE a farmers-owned platform,” she pledges.
In addition, NCE will be at the center of coffee marketing, informing farmers of new and emerging hubs. Currently, the marketplace has 17 licensed brokers and 45 active buyers, all registered by AFA.
On his part, Mr Gitonga urges the government to increase funding to NCE to enable it to improve its staffing and upgrade to better offices with good structures and facilities. “We are trying to raise funds from the commissions we get at the auction, but with more allocation of funds by the government, which has shown commitment to the industry, we will, in five to 10 years, make NCE a market of choice for growers,” he said.
In addition to staffing and better structures, there is a proposal for a coffee cupping laboratory to streamline the pricing of the commodity. “Currently, it is the buyer alone doing the cupping, something that leads to price variations with no scientific backing. This might disadvantage the farmer,” said Mr Gitonga, adding that there is increasing demand for Kenyan coffee, hence the need for a standard facility that cannot be compromised.
