Warehouse receipts (WHR) are an asset-based financing mechanism, whereby loans are secured by commodities deposited at a certified warehouse. Under this arrangement, commodity producers and traders deposit commodities at a warehouse, which offers secure storage and issues a receipt that certifies it is in possession of a specified quantity of a commodity that meets specified standards. The receipt can then be used by the depositor as collateral for a loan, whereby the lender places a lien on the commodity, so that this cannot be sold before the loan is repaid (USAID, 2009).
As in the case of asset-based lending, the amount that the firm can borrow is typically a share (50-80%) of the stored commodity value. The costs implied by the mechanisms for the borrower include interest, taxes and storage fees.
WHR can be organised under different warehousing arrangements: a) private warehouses, where manufacturing and warehousing take place under the same roof. It is thus the same manufacturer (borrower) that can issue a warehouse receipt to be used as a collateral with the lender; b) public warehouses, where a specialised operator stores commodities for third parties for a set fee and issues receipts; and c) field warehouses, in which a collateral management or credit support company takes over the warehouse of a depositor or a public warehouse by leasing the storage facility for a nominal fee, and becomes responsible for controlling the commodities to be used as collateral (Hollinger et al., 2009).
Beside the warehouse operator, the WHR system engages specialised service providers, such as those offering both depositors and lenders certification and inspection services, to ensure the warehouse meets necessary standards for safe and secure storage. In addition, insurance companies generally provide protection against commodity losses at the warehouse.
As the warehouses typically maintain records about producers’ performance, this system may also work to build information on current and potential borrowers, which can be useful to financial institutions over time, especially when other credit history information is lacking. Also, as the system is based on consistent standards, their incorporation into receipts improves knowledge in the market, reducing information asymmetry along the value chain about products’ quality and availability.
Profile of firms
WHR are apt for producers and traders of commodities that lack credit history or other collateral to access lending finance. The financial services provided by the system combine with other potential benefits, such as access to reliable storage and hence the possibility to sell the product over time, rather than solely at harvest periods, when prices of commodities may be especially low.
As such, WHR is especially advantageous for producers and traders of storable agricultural commodities such as grain, sunflower seeds and sugar. In these sectors, the use of stored commodities as collateral represents a solution to enhancing agricultural lending, and provides a valuable addition to the traditional use of real estate and land as loan collateral (Hollinger et al., 2009). For small producers, however, storage fees may be too high. This creates an incentive to pool commodities among small firms to access the WHR system (USAID, 2009).
The WHR system relies on a legislative framework that protects the rights and interests of depositors in public warehouses, ensures the transferability of warehouse receipts and their legal equivalence with the stored commodity, defines clear procedures in case of bankruptcy of the warehouse operator, and protects a collateral lien. Furthermore, the system depends on a clear licensing framework for warehouses and a well-functioning mechanism or their control and oversight. In some countries, a Government Regulatory Agency exists, which is responsible for the licensing, regulatory and inspection procedures (USAID, 2007, 2009).
A well-defined system of grades and standards and access to reliable information on commodity market prices and conditions by depositors and lenders are key to the functioning of WHR. A good market information system reduces uncertainties regarding the value of the stored goods and allows for adequate evaluation of the collateral.
According to Hollinger et al. (2009), WHR also requires a predictable policy environment that preserves the incentives for private storage and financing, and governments should refrain from heavy and erratic intervention in commodity markets. In fact, a certain level of seasonal price fluctuation is needed to attract participants and enable them to recover storage and financing costs.
On the side of lenders, the system demands familiarity with the WHR mechanism and specific expertise on commodities, in order to monitor market trends and value loans properly. As Hollinger et al. (2009) highlight, based on the experience of WHR development in transition economies, building confidence in extending finance against warehouse receipts takes time. Initially, banks may only be willing to lend up to 55% to 65% of the collateral value. As confidence in the system grows, this level may increase to 80% or even higher.