Warehouse Receipts and Commodity Financing

Warehouse Receipts and Commodity Financing
Lack of access to credit is a severe constraint for many farmers. A main reason for their difficulties to obtain credit is that farmers are often unable to offer sufficient conventional loan collateral.

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

This system binds several participants together: farmers, warehouse owners and managers, banks and the government. The role of the government is to build a legal and institutional framework that guarantees the performance of the system and minimizes transaction costs. If properly designed, the system provides benefits for farmers through an enhanced access to credit, a reduced cost of commodities storage and the possibility to delay their sales and take advantage of the seasonality of prices. Financial institutions gain by decreasing their risk exposure, through the utilization of collaterals that can be easily liquidated.

The major challenges for the system include: spoilage, losses and quality depreciation of the stored goods, and speculation (farmers might try to maximize their profits by holding the produce until prices reach a peak). Other risks are related to the licensed warehouses: fraudulent activities, mishandling of the commodity and insolvency.

Various financial performance guarantee mechanisms (Indemnity Fund, insurance bonds, bank guarantees) can however mitigate these risks. Warehouse receipt finance can be provided under different warehousing arrangements (private, field or public warehouses) and for any agricultural commodity that can be stored without losing 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, and wine.

Warehouse receipt finance has a long tradition in many Western countries, including the USA, and in parts of the developing world. In the EastAgri region, it has only been introduced since the collapse of the Soviet system. It initially relied on old rules and regulations, but governments – with the assistance of international agencies – soon decided to improve their warehouse receipt system by developing specific legislation. A few countries (Bulgaria, Hungary, Kazakhstan, Latvia, Lithuania, Serbia, Slovakia and Ukraine) have already introduced all or most of the core legal and regulatory elements of a full-fledged warehouse receipt system. Some other countries, such as the Russian Federation or Turkey, would also gain from developing a full-fledged warehouse receipt system given the size of their grain markets.

For more information on Warehouse Receipts and Commodity Financing please contact philine.wehling@fao.org or emmanuel.hidier@fao.org.
Sources: EastAgri; FAO; World Bank.

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  • Necessary Conditions for an Effective Warehouse Receipts Activity (2007)
  • Lithuania: Financing of warehouse receipts Legal review (2002)

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