WAREHOUSE RECEIPT SYSTEMS
About the Project
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 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 THE WAREHOUSE RECEIPT SYSTEMS WORKS
Warehouse Receipt Systems (WRS) have a long history of use
in facilitating commodity trade and finance. Basically, the systems involves
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 meets 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 Operators guarantee delivery of the
commodity described on the Warehouse Receipt or is liable for any losses incurred
- The Warehouse Receipts issued are 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 addresses 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.