The lack of access to credit is a severe constraint for many farmers and other rural small and medium enterprises, which are often unable to secure their borrowing requirements owing to lack of sufficient conventional loan collateral.

Warehouse receipt financing is a collateralized commodity transaction where the goods themselves provide security for the loan. Warehouse receipts are means of accessing post-harvest finance for working capital needs. The financing cycle begins after harvesting the commodities. The commodities are stored in a licensed warehouse that issues a receipt proving that the commodities are physically in the warehouse. This receipt forms the basis of the financing.

This system binds several participants together: farmers, warehouse owners and managers, banks but also the government who has to build a legal and institutional framework to guarantee the performance of the system and minimize transaction costs.

When efficient, the system provides benefits for farmers through an enhanced access to credit, a reduced cost of commodities storage and the possibility to delay their sale and take advantage of seasonal price. Financial institutions gain by decreasing their risk, reducing seasonal price variability and by obtaining collateral that can be easily liquidated.

The major risks of the system are: spoilage, loss and quality depreciation of the stored product, speculative activities because the farmer tries to maximize profits by holding the produce until the price reaches its peak; price decreasing in turn the loan amount available to the farmer as it is tied to the estimated worth of the product and thus the interest that the financial institution collects. Besides, some risks are related to the licensed warehouses: fraudulent activities, mishandling of the commodity and insolvency. Various financial performance guarantee mechanisms (Indemnity Fund, insurance bond, bank guarantee) can, though, mitigate these risks.

Warehouse receipt finance can be provided under different warehousing arrangements (private, field or public warehouses) and for any agricultural commodity which can be stored without loosing its qualities. It is often used for grain but in several countries it has also been used for commodities such as nuts, cocoa, coffee, cotton, cheese, wine...

Warehouse receipt finance has a long tradition in many Western countries as well as in Northern America and in parts of the developing world such as in Africa, but in most EastAgri region countries it has only been introduced since the collapse of the Soviet system. In the beginning, it relied on old rules and regulations, but governments and international agencies were soon making considerable efforts to improve the warehouse receipt system by developing proper legislation and framework.

However, only few countries (Bulgaria, Kazakhstan, Hungary, Slovakia, Latvia and Lithuania) have introduced all or most of the core legal and regulatory elements of a full-fledged warehouse receipt system.

A larger group of countries (including for example Moldova, Serbia and Croatia) have not yet finalized the legislation and/or still lack several other fundamental elements of a warehouse receipt system. In some of these countries, (Russian Federation, Ukraine, Turkey, Poland and Romania) greatest benefits from a warehouse receipt system can be expected, given the size of their grain markets.

An equally important number (smaller countries in the Balkans, the Caucasus and Central Asia) have not yet started developing warehouse receipt legislation. The opportunities for introducing warehouse receipt systems should be further assessed through a detailed analysis of commodity markets.

Where warehouse receipts legislation is not settled yet or as a complement, other financial instruments can be used in rural finance such as repurchase agreements, export receivables, tradable receipt financing, reverse factoring...

Sources: EastAgri; FAO; World Bank.