February 4, 2021

What is the Nairobi Coffee Exchange?

The Nairobi Coffee Exchange (NCE) manages the auction of all coffee produced in Kenya. It’s managed by the country’s Exchange Management Committee, and regulated by the Kenyan Agriculture, Food and Fisheries Authority. At the NCE, auctions are held every Tuesday unless there is an insufficient volume of coffee to justify doing so. 

The NCE is the sole auctioneer of Kenyan coffee. While it is a hugely important part the country’s coffee supply chain, it has historically been criticised by producers for a range of reasons.

To learn more about why this is, and to explore the NCE in greater detail, I spoke to three stakeholders from across the Kenyan coffee sector. Read on to find out what they said.

You may also like our guide to Kenyan coffee.

Breaking down the Kenyan coffee value chain

After harvesting their cherries, farmers take them to a local washing and pulping station, often known among Kenyan producers as a “factory”.

Here, the coffee will be processed and dried, before being transported to the dry mill. Subsequently, at the dry mill, it will be assigned a unique tracking number (also known as an “out-turn number”) before being milled, graded, and stored. 

The green coffee is then handed over to a marketing agent, who prepares a catalogue for all their lots. This catalogue is then passed on to the traders who will participate in the upcoming weekly auction. 

On the auction floor (also known as the trading floor) buyers bid for the coffee, and as is standard for an auction, the highest bidder will win that particular lot.

Upon payment, a worker at the warehouse where the coffee is being stored (known in Kenya as a warehouseman) will issue a coffee warrant. This is a document that gives the buyer formal ownership of the coffee.

However, this money doesn’t go to the farmer, but instead to the marketing agent. The agent then summarily deducts their fees. It is then their responsibility to pay farmers or co-operatives for the coffee, but this process can sometimes be delayed.

As a result, this system comes under frequent criticism from producers and other stakeholders who work further back along the supply chain.

Salome Muringi is the manager of a washing station. “It sometimes takes almost a year before we get paid,” she explains. “I think we should get some advances at least to cover the labour required in the farms.

“Even though at auction, the coffee is always bought, it takes a year for the money to get to us, yet the marketing agents are [often] paid within seven days. Why should we not be paid in at least a month or two? There is just too much that is wrong with the whole auction system and the payments.”

So, what does the NCE do?

As well as operating the trading floor, the NCE also manages the sample room for all coffee that is set to be auctioned.

The Nairobi Trade Sample Room contains around 9kg of each lot set to be auctioned on the following Tuesday. This 9kg will be divided up into parcels of 250g. These are then sent as pre-auction samples to participating and prospective buyers.

When auction day comes around, each lot is displayed with its out-turn number (assigned at the dry mill) along with its lot number, grade, number of bags, total weight in kilograms, and the name of the producer.

Each lot has a reserve price, which is tied to the C price as well as the coffee’s grade and quality. This reserve price is set by the seller or marketing agent. However, depending on how the coffee is valued by the buyers on the trading floor, bids may not reach this price. 

For example, if a lot has a reserve price of 220 Kenyan shillings (Sh), but bids start at Sh100 and only reach Sh160, the auctioneer may accept the price as a “noted bid”.

After the auction, the buyer who made the noted bid will negotiate with the auctioneer. At this point, there is a possibility that a price below the predetermined reserve price may be accepted.

After trading ends, the NCE prepares a document that details and records which coffees were sold to whom, from which parties, and the price they were sold at. This is distributed to the marketing agents and buyers for transparency purposes. After bids are accepted, buyers must make payment promptly (generally within 7 or 14 days).

Auctioned coffee that does not sell at the NCE remains in the Trade Sample Room. This is referred to as the “sweepings”. Sweepings are collected by the marketing agent who offered the lot for sale in the first place. Generally, more samples will then be drawn from the dry mill and the coffee will be offered for auction again. This process is repeated until a buyer is found.

A source, who wished to remain anonymous, says: “All this drawing of samples decreases the [volume that the producer retains] while benefiting the auctioneer.”

In theory, these 9kg samples could keep being drawn at a cost to the producer, ultimately eating into their profits the longer the coffee is being auctioned.

The NCE: Is it the future of Kenyan coffee?

The NCE is Kenya’s sole coffee auctioneer. As established by Salome previously, there is a strong sentiment by some producers that the NCE process is ultimately unsuitable.

This is for a number of reasons, but the two main criticisms are the duration of the process and a lack of transparency. Producers often lack financial stability, and waiting up to a year to be paid only exacerbates this existing issue. Similarly, with the auction system, most don’t know the price they will be paid until the sale is complete. This leaves them little to no room to negotiate.

However, another major concern is that the price of coffee sold through the NCE is consistently undervalued. Many contend that a better price could be achieved through direct trade models. Some producers say that even when they do grow higher-quality coffee, the prices at the NCE don’t truly reflect this.

In response to this criticism, the government introduced something called the “Second Window” in 2006. This decision was welcomed by both roasters and producers, who wanted an option that was closer to direct trade.

Under Second Window legislation, producers and buyers can do business directly (albeit through a private export company). This allows them to bypass the NCE’s auction platform. 

Grace Mganga is the former chair of a co-operative in Kenya. She says: “[In this model], the farmers have all the bargaining power and can establish personal relationships with the buyers.

“Therefore, prices are higher, and there is a higher level of trust. [Many producers] had reached a point where they were almost abandoning their farms. Whenever our coffee went to the auction, we had no idea what to expect.”

Grace also says that the lack of transparency with the NCE is a real issue for farmers. “There is no transparency as far as pricing coffee is concerned. We just wait for whatever prices come, and hope that they are fair.”

Despite this, it is estimated that between 85% and 95% of Kenyan coffee is traded through the NCE today. While the Second Window’s promise of direct trade may yield higher prices, it can be difficult for producers to trade in this way.

This is why direct trade accounts for just a fraction of Kenyan coffee sales, despite the fact that Second Window legislation came into effect some 15 years ago.

Japheth Wambugu is a coffee expert in Nyeri County. He says that the biggest challenge by far is logistics.

“How many farmers or cooperative societies can afford to ship two or three containers to the US or South Korea? Few, if any,” he explains. “This will eat into the profits of the farmer and eventually will fail. The capital required is just too high.”

Instead, he advocates for a transparent auction system that benefits all stakeholders.

“If the government was stricter in its oversight of auctions, the coffee would fetch high prices and ensure the farmers are well paid,” Japheth says.

“There needs to be very clear guidelines for producers and buyers. At the auction, there should be [government] representatives to ensure transparency.”

While the auction model does have its shortcomings, for many producers, it is the only option. The direct sales model under the Second Window can be both costly and risky for producers. Ultimately, a more transparent auction platform would be a welcome development.

As such, the government has proposed measures that will supposedly curb irregularities and issues with the auction system. Some of these include modernising the auction system by digitising the operations. For instance, screens have been installed in other counties, allowing farmers to monitor the auction in real time. There has also been discussion about making the NCE a public limited company. 

Furthermore, there are plans to introduce a central depository unit at the NCE. The idea is that this would ensure that farmers are paid directly, rather than through the marketing agent.

These changes aside, the important thing is that producers and co-operatives are informed about both models. They should then be able to choose between them based on the benefits that they each offer. And while direct trade under the Second Window is promising in theory, the NCE is often the only feasible option many producers have.

Enjoyed this? Then read our article about how “micro co-operatives” are transforming the Kenyan coffee sector.

Photo credits: Peter Gakuo, MTC Group

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