TEM Lab: Kenya – Lesiolo Grain Handlers

Our TEM lab experience in Kenya is based on agriculture – over the course of two weeks, our team has had a crash course on everything related to this industry.  As you dive into the field, you quickly understand how expansive the agricultural value chain is.  It spans a variety of industrial mediums (inland storage facilities, port terminals, railcars, trucking companies, tankers, millhouses and grain processors) involved in a process that eventually places a food product on a consumer’s plate in one form or another.  These large complex institutions exist to fill the country’s agricultural infrastructure voids, but we’re discovering that the entire grain industry depends on a much smaller stakeholder: the Kenyan farmer.

In Kenya – unlike the United States, where the agricultural industry is controlled by a few powerhouse corporations – the agriculture industry is grounded by thousands of independent men and women who plant a seed, tend to it, and eventually harvest it.  Most Kenyan farmers plant white corn (called maize in Kenya), and their harvest is sold to millers.  It eventually finds its way to grocers, restaurants, and the military for use in making staple food products like ugali (akin to the Westerner biscuit, roll or tortilla).  Ugali is found on almost every Kenyan’s plate on a daily basis.  Without the common Kenyan farmer, large millers would have no grain to process into flour.  They would lose billions of shillings in revenue and the food security of the nation would be jeopardized.  In Kenya, the large agricultural companies need the small farmers’ inputs, but, as we’re learning, small farmers need the support of larger entities in the agricultural industry to advance their livelihoods.

The farmers’ need for organized corporate entities is in large part due to the powerful economic force of supply anddemand, which is nowhere more evident than in the grains industry.  As farmers harvest their maize or wheat the market is flooded with excess supplies of both.  As we know, when this happens, the prices of those commodities drop.  If a farmer is forced to sell at the moment of harvest they are almost assured to receive the lowest price for their toils that the market has to offer.  If however, if the farmer can wait until the initial shock of over supply to the system diminishes as inputs are used up, they will receive prices 50% higher or more for their goods.

This is where a socially responsible company like our client, Lesiolo Grain Handlers, Ltd., provides an extremely valuable service to farmers.  Lesiolo has instituted what is called a Warehouse Receipt System (WRS), and helping Lesiolo grow their WRS is a key component of our TEM lab project. A Warehouse Receipt System works like this: Kenyan farmers take their harvested grain to Lesiolo’s facility.  LGHL dries, fumigates, and stores the grain until market prices for the wheat and maize goes up.  It can be several weeks or several months depending on market forces.  At the proper point in time the farmers can sell.  The extra income earned by waiting to sell is enough to elevate them into an entirely new income bracket.  It is a system that Carl Tundo, owner of Lesiolo Grain Handlers, has instituted in large part to better the lives of Kenyan farmers.  The service is mutually beneficial both the small farmer and Lesiolo Grain Handlers – the company sees a small increase in revenue through the processing fees that make grain suitable for storage.    For the country of Kenya, the WRS is an essential way to keep grain values high, ensure financial rewards for farmers, and instigate the growth of more crops. Further planting and harvesting of maize and wheat encourages greater Kenyan food security, which is a constant concern for emerging market governments.

So, small farmers need larger corporations to survive, and larger corporations need farmers’ inputs to sustain their businesses.  Large corporations and small farmers also share a common need:  banks.  Even in relatively small scale farming, banks can make or break a farmer’s ability to survive.

The diagram below (constructed by TEM lab member Ryan Wegner) visually represents a WRS cycle.  Within the cycle, there is a point where a Kenyan farmer needs a loan. After the farmer has taken his grain to Lesiolo for storage there is a waiting period.  It is during this time that farmers need an infusion of cash, as market prices rise and farmers wait for the right time to sell.  This cash is used to start next year’s crop and pay for current household expenses.  Once the farmer’s grain is safely stored in Lesiolo’s silos, they are given an actual receipt for the grain.  With this paper certificate (receipt) the farmer can approach a bank and get a loan, using their stored grain as collateral.

Banks could logically work within this system when a farmer presents their grain as collateral and the bank loans them money.  However, at prevailing interest rates as high as 23%, the farmer can no longer make a margin that makes it worthwhile to hold their grain in storage.  Instead, they sell at market lows.

So here we are, thousands of miles from the United States, nowhere near New York’s institutional lenders, or Chicago’s bond market, in the middle of The Rift Valley.   Here there are no skyscrapers or massive industrial projects that would logically require the intervention of banks.  As far as the eye can see, there are green valleys and national parks.  Yet, the fragile construct of the most important industry in Kenya is beholden to banks.  Subsequently, a key success factor of our project is the ability to find affordable financing for the inner-workings of Lesilo’s Warehouse Receipt System. Another challenge is to find an institution that is willing to work at lower interest rates, or to find a large infusion of cash that Lesiolo can use to lend to farmers.

By our figures, supporting just a quarter local farmers in the 12 provinces of the Rift Valley could cost $3 million USD.  There are, however, worldwide credit unions with large coffers and a vision to help emerging market agricultural communities.  We are tapping our large Thunderbird Alumni network to engage this type of organization as well as the likes of USAID, IFC and various NGOs.

Once a proper lender is secured, the next step will be to communicate the benefits of the Warehouse Receipt System to thousands of farmers across the Rift Valley.  Our team member Rula Andriessen is crafting this communication strategy and platform.  In my opinion, the communication strategy is the most important component to our project.  The success of our clients’ lofty ambitions to make their Warehouse Receipt System an indispensible component to Kenya’s agricultural infrastructure depends on sound communication.  We’ll be consulting local experts for the best ways to communicate with our target audience, and we’ll update next week’s blog with our progress.

Posted: 06|5|12 at 3:02 pm.
Filed under: David Doane.
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