Warehouse Receipt System

 

Extract from warehouse receipt system strategy

 

ACE has advocated for a Warehouse Receipt System (WRS) as an integral part of agricultural trade and financing since its incorporation in 2005. There is a substantial need in the market for a system that will reduce risk of contract/performance defaults in agricultural trade and also facilitate competitive financing with agricultural commodities as collateral. Malawi does not have a regulatory framework for warehouse receipts, so the system has to built on a contractual relationship between depositors, storage operators, financial institutions, and ACE. The success of the WRS is very much dependent on the active involvement from all participants and this is why it took 6 years before the first warehouse receipt (WR) was issued, financed and traded in Malawi.


In 2011 ACE registered the GSL silos in Kanengo, Lilongwe as the first WRS storage facility. The GSL facility has a capacity of 12000 MT and it was open to deposits from any interested third party. OIBM was the first bank to confirm that they were willing to finance a WR. OIBM proposed to finance 60% of the value at 20% pa or 70% at 22% pa. These rates are very attractive to the small scale sector and ACE promoted this opportunity, as a way for them to receive financing, retain ownership of the maize and thereby enable them to sell the maize at a time when the market is more attractive than it is immediately after harvest.

 

High moisture content made it difficult for GSL to take early deposits, but many of the sensitised depositors could not wait and unfortunately sold their maize before it could be deposited. Only on the 2nd of August 2011, was GSL able to issue the first WR to Mr Chikasu of Bucow investment, Mchinji. The deposit was 14.5 MT, Maize, ACE Grade 1 (same as NFRA grade). Mr Chikasu was later to make more deposits and increased the WR to 44 MT. With the WR Mr Chikasu accessed financing and later split the WR in 2, one was sold to WFP and the other to a trader. Mr Chikasu could market his WR from a position of strength because GSL was guaranteeing the quantity and quality.

 

When Mr Chikasu sold his WR, the buyer deposited the contract value to the ACE settlement account.  ACE settled the outstanding financing and storage cost, transferred ownership of the WR to the buyer and gave Mr Chikasu the balance. On that deal Mr Chikasu received a 72% increased income after all cost were deducted, compared to the market price prevailing when he deposited the maize. The buyer later went to pick up the maize at GSL and the WR was cancelled. 

 

The benefit for the small scale sector is obvious and ACE anticipates that available third party storage capacity will soon become scarce as more depositors look to utilise space to improve their incomes.  But the WRS will also add value to the large commercial operator. As the volume increases the WRS will become a very attractive vehicle for the flow of easy accessible competitive agricultural financing. Also, WR's from Malawi can be promoted regionally and internationally as a secure instrument, attracting more buyers and perhaps even agricultural investors and speculators that will ensure better prices of Malawian commodities secured on WRs.

 

Life of a Warehouse Receipt

  1. A Commodity is deposited in a WRS registered storage facility, certified to store that commodity
  2. The storage operator issues a WR and thereby guaranteeing the quantity and quality.
  3. The Depositor requests financing from a preferred bank and immediately receives the funds
  4. The Depositor follows the prices and may put the receipt for sale on ACE.
  5. A buyer accepts the offer and ACE generates a contract.
  6. The Buyer deposits fund into the ACE settlement account.
  7. ACE settles the finance and storage cost and transfers ownership of the WR
  8. ACE transfers the balance to the seller
  9. The new owner can either collect the commodity or request new financing from a preferred bank.
  10. The WR is cancelled in the Registry if the commodity is collected. If not, the sequence starts again

Please contact ACE if you have any questions about warehouse receipts. ACE would like to assit you in the 2013 marketing season.