The
Natural Resources Institute (NRI) is leading a consortium in
implementing projects, funded by the Common
Fund for Commodities (CFC), to establish Commodity Trade Finance
Systems based on Inventory Collateralisation and Warehouse Receipts.
The other partners in the NRI consortium are DCDM
Advisory Services (DCDM) and Belmont
Management Company Ltd (BMC). The NRI consortium is subcontracted
to the United
Nations Office for Project Services (UNOPS), which is the Projects
Executing Agency. The projects are being implemented in three countries:
Tanzania, Uganda and Zimbabwe. The projects are: Coffee Market Development
and Trade Promotion in Eastern and Southern Africa (CFC/ICO/03FA)
and Improvement of Cotton Marketing and Trade Systems in Eastern
and Southern Africa (CFC/ICA/12FA).
OBJECTIVES AND COMPONENTS OF THE PROJECTS
The objectives of the projects
are to:
Improve and increase the potential benefits
from coffee/cotton production and marketing to countries in the
region, within the framework of a liberalised global market;
Increase export earnings from coffee/cotton
production and marketing in the participating countries;
Improve the income of smallholder coffee/cotton
producers and small-scale traders in the coffee/cotton trade,
by increasing their share of export prices and limiting their
risk exposure;
Develop and test systems of coffee/cotton financing,
marketing and trade that can be replicated in other developing
producing countries;
Strengthen public and private institutions and
improve local human resource capacities to operate effectively
in a liberalised market.
These objectives were intended to be achieved through
activities under the following project components:
Promotion of privately run warehousing systems
and the establishment of warehouse receipt systems, entailing
carrying out inventory of warehousing infrastructure;
adopting criteria for selecting warehouses and
operators;
facilitating the promulgation of supportive
warehouse legislation.
Development of basic market information systems
Development of quality assurance and certification
systems
Development of a system of commodity trade finance
based on inventory collateralisation and a warehouse receipt system
THE HISTORY OF THE PROJECTS
The projects were initiated in the mid-1990s by
local stakeholders and two international commodity bodies, the International
Coffee Organisation (ICO) and the International Cotton Advisory
Council (ICAC). Project Appraisal Reports were completed in 1997
and implementation began in January 2001.
A mid-term evaluation of the projects, undertaken
in June-August 2003, concluded that although there had been progress
in delivering outputs aimed at improving market information and
quality assurance systems as well as in drafting supportive warehouse
legislation, very little progress had been made in achieving the
primary project objective of setting up viable, sustainable warehouse
receipt systems (WRS).
Following the evaluation, UNOPS subcontracted the
NRI consortium in October 2004 to provide technical advisory services
to local project management units and other stakeholders in carrying
out project activities. The progress made since the NRI consortium
begun implementation in January 2005 is reported by country - Tanzania,
Uganda and Zimbabwe in Country Profiles.
HOW DOES THE WAREHOUSE RECEIPT SYSTEM WORK?
Warehouse
Receipt Systems (WRS) have a long history of use in facilitating
commodity trade and finance. Basically, the systems involve the
issuing of documents, Warehouse Receipts (WR), as evidence that
specified commodities of stated quantity and quality have been deposited
at a particular location by a named depositor(s). Depositors may
be a producer, a farmer group, a trader, an exporter, a processor
or indeed any individual or corporate body.
The issuer of the Warehouse Receipt holds the stored
commodity by way of safe custody; implying that the issuer is legally
liable to make good any value lost through theft or damage by fire
and other catastrophes but has no legal or beneficial interest in
the commodity. In case of liquidation, creditors of the issuer will
not be able to seek recourse to the commodities stored since legal
title remains with the depositor or bona fide holder of the Warehouse
Receipt. The only exception is the warehouse operator's lien covering
outstanding storage costs.
The generic WRS model being promoted by the NRI
consortium in these Projects works as follows:
The depositors deposit their commodities –
coffee/cotton/soyabeans - which meet defined quality standards
at designated warehouses.
The designated warehouses have to meet prescribed
physical standards.
The Warehouse Operators issue Transferable Warehouse
Receipts stating the commodity, the quantity and quality of commodity
deposited.
The Warehouse Operator guarantees delivery of
the commodity described on the Warehouse Receipt and is liable
for any losses incurred.
The Warehouse Receipt issued is transferable,
which means it may be transferred to a new holder – a lender
(where the stored commodity is pledged as security for a loan)
or to a trade counter-party (by which the buyer is entitled to
take delivery of the commodity upon presentation of the Warehouse
Receipt at the warehouse).
Hence, if the depositor requires short-term
financing, he/she can obtain an advance representing a percentage
of the prevailing market value of the commodity from a bank, using
the warehoused crop as collateral.
The depositor can wait until such time when
market conditions are conducive to sell the warehoused commodity.
Where the depositor borrowed using the warehoused
commodity as collateral, it will be required that payment for
the commodity is channelled through the financing bank. The bank
in turn deducts the loan advanced and any accrued interest and
other charges before crediting the account of the depositor with
the balance.
A depositor who has not borrowed against the
stocks will be entitled to the full proceeds from the sale.
A depositor has to pay storage, and where applicable
- collateral management fees.
A depositor is also responsible for the cost
of transporting the commodity to a designated warehouse.
THE APPEAL oF WAREHOUSE RECEIPTS SYSTEM
The WRS can help address multiple constraints
in commodity marketing and finance systems. The main benefits include:
The use of inventory as collateral can ease
access to finance and lowers financing costs, especially for smallholder
producers (participating as groups).
The application of standardised grades allows
trading by description, thereby reducing transaction costs, and
also safeguarding against cheating on weights and quality.
Trade using the WRS shortens the marketing chain
and can potentially increase producer margins.
Commodities are better stored by professional
warehouse operators, therefore reducing storage losses.
The WRS can also help reduce the cost of procuring
and managing public food reserves; create incentives for private
players to invest in new business ventures; encourage proactive
cooperation among producers and other players; and in creating
and maintaining a more enabling policy and regulatory framework
for trade in agricultural commodities.