Warehouse Receipts

Warehouse receipts financing is “the use of securely stored goods as loan collateral” and is one method to assist rural farmers in the post-harvest value chain [3]. It can include a number of inter-related components to allow farmers more flexibility in the timing of their sales until they can secure competitive prices in the local market. These components include:

  1. Finance for rural farmers
  2. Storage of produce in local warehouses
  3. Facilitation of sales between the farmer and potential buyers
  4. Provision of key market information through price-discovery mechanisms

In a warehouse receipts system, produce is stored in warehouses and used as collateral for financing from formal financial institutions. Immediate financing for farmers allows them to pay back debts accrued between harvest seasons while safely storing their harvested agricultural products until market prices are competitive again. Price-discovery mechanisms provide farmers with the information they need to sell their produce at opportune times.

There are typically three primary elements associated with a warehouse receipts system:

  1. Rules and Regulations
  2. Receipts
  3. Storage

KKFF Weighing MachineTo implement an effective warehouse receipts system, a secure storage area (with sufficient infrastructure and management) needs to be identified. Secondly, rules and regulations related to insurance, certification, inspection, grades and quality standards need to be established and agreed upon. Quality standards that are accepted and recognized by both farmers and commercial traders are essential to the success of any warehouse receipts program since buyers often purchase produce from warehouses sight unseen. Within these quality standards, a variety of different grades should also be included to address a variety of potential markets. Finally, clear documentation in the form of receipts and contracts needs to be developed. The scale and scope of these elements can drastically differ depending on operating environments [4] .

There are many benefits as well as challenges associated with warehouse receipts. Selected benefits can include:

  1. Reduced post-harvest losses of agricultural crops
  2. Increased profit for rural farmers due to an extended sales period
  3. A reduction in seasonal price variation due to a consistent supply of commodity in the market
  4. Transparency in market prices due to “price discovery processes”
  5. Improved food security through a “buy back” function that allows rural farmers to purchase their food stored at a warehouse during vulnerable periods.

However, there are also challenges that can include:

  1. Operating environment challenges, which include the appropriate legal environment and possible government interventions with controlled pricing and subsidized imports
  2. The possibility that financial institutions can lose money when loans are tied to the value of warehouse inventory (i.e. if market prices drop, the amount of loan paid back to the financial institution will likely be less)
  3. The availability of reliable and secure warehouses as well as small-scale drying or preservation equipment in the farmers’ operating area
  4. Transport of agricultural goods to warehouse facilities [3]

Warehouse Receipts in India

Newspaper Article about Need for WarehousingAlthough India has a long tradition of “futures trading”, rural warehouse receipts systems are still in the initial stages of implementation. In 2000, the Indian Forward Markets Commission, the Government of India and the World Bank collaborated on a study to examine both the current state and potential for the development of warehouse receipts in India. The study concluded that better developed warehouse receipts systems could help rural farmers realize better sales prices by reducing the barriers between the rural farmers, local financial institutions and the market. As a result of the potential for a better regulated warehouse receipts system, “futures trading” was permitted by the government in 2003 on all commodities [5] . However, challenges remain in educating both rural farmers and local financial institutions about warehouse receipts.

Since 2003, three electronic commodity exchanges have been set up in India. These exchanges provide a linkage between producers and buyers by providing storage, market information and, in some cases, financial support to farmers while contracts with buyers are negotiated. In addition, recent efforts have been made to develop the necessary physical infrastructure in the form of suitable warehousing space through the National Commodities and Derivatives Exchange Ltd. (NCDEX), the Central Warehousing Corporation and other quality assurance and grading agencies.

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