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 Project

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.
• 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.