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Ag Sector Council
Warehouse Receipts for Food Security:
Benefits and Challenges
November 2010
Participants
Steve Mikkelsen - Director, Strategic Performance and Evaluation, Farm Service Agency, USDA
Robert Fries - Managing Director, Financial Services, ACDI/VOCA
Kofi Owusu-Boakye - Financial Management Specialist, Office of Development Credit, USAID
Moderator
Mary Ott - Acting Deputy Assistant Administrator, USAID/EGAT
Sponsor
United States Agency for International Development: Microenterprise Development Office
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Mary Ott: I’m really pleased to be here for this event. This is quite an important topic for
USAID. This event is jointly sponsored by the Bureau for Economic Growth
Agriculture and Trade and our new Bureau of Food Security. It’s a topic that’s
been of great interest and importance to all of us. In my various roles within
USAID and the various countries I’ve worked, one of the biggest puzzles that we
seem to have great difficulty solving is the puzzle of agricultural credit. I’ve
been in the agency long enough to remember back in the days of dreadful
public sector ag banks, and we’ve tried all different things within the
development community to find ways to extend credit to farmers. Many of
them have been quite challenging.
It’s always a pleasure to look at a model that has shown that it works, that it has
promise for even the poorest farmers, and that it can be implemented in a
variety of settings. That’s the model that we’re going to be discussing here
today, which is using warehouse receipts as collateral for credit. We’ve had
some positive experiences with this in the agency, which you’ll hear about later
in this session. For this reason, this is an important topic for us, as it’s
something that we no doubt will be looking into further as we pursue our
agriculture programs around the world. I think we have some good examples. I
think there has been material regarding a program in Tanzania that we can look
at, and we have other models as well.
Through this mechanism of collateral through warehouse receipts, we’ve been
able to pursue a number of possible benefits to small farmers. It’s a way for
them not to be forced to dump their crops on the market all at once and receive
low prices. It’s a way to have secure storage. It’s a way to have something that
can be recognized as collateral by banks, and it’s a way to improve their income.
There’s evidence of all of those positive effects through these sorts of programs.
So, I’d like to turn this over to our experts today who know a great deal about
this and many different angles. Our first speaker, who will provide background
and context for the use of warehouse receipts programs is Steven Mikkelsen,
Acting Director, Office of Business and Program Integration, Farm Service
Agency at USDA.
Our second speaker is Robert Fries, Managing Director Financial Services at
ACDI/VOCA, and he will talk about his experience of applying warehouse
receipts in three different countries to explore the extremes of what warehouse
receipts programs can look at.
Finally, my EGAT colleague, Kofi Owusu from USAID’s Office of Development
Credit will talk about warehouse receipts as they relate to access to finance and
will speak to the use of warehouse receipts in the Lindi region of Tanzania
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where our warehouse receipts program has recently showed much promise.
You’ve seen the bios of all of our speakers, so I won’t go over them in detail. I’m
sure you agree that we have an impressive set of experts on this important
topic, and I guess I will proceed by turning over the microphone to our first
speaker, Steven Mikkelsen.
Steve Mikkelsen: I’m Steve Mikkelsen with the United States Department of Agriculture, and I’m
in fact, with the Farm Service Agency. We’re the main interface between the
Department of Agriculture and most of the American producers. We have 2300
offices across the United States in which we sit down across the counter with
the farmers every day. So we are, in many respects, the face of USDA out there
in rural America.
Today I’m going to talk about the experience that the United States Department
of Agriculture has had and the United States Government in getting to where
we are with warehouse receipts, warehousing licensing over the past 200 years.
I’m going to start off with a quote here from George Washington, who you all
know if our first President of the United States, and I believe this is as true today
as it was then. He said, “I know of no pursuit in which more real and important
services can be rendered to any country than by improving its agriculture.” If
you don’t have food security, you’re not a secure nation. I don’t care what
anybody says. That’s where people’s hearts are. You impact their lives. You
impact their families. If you cannot eat, how can you survive?
US History – we started down this trek at least 150 to 160 years ago. 1848, the
Chicago Board of Trade held its first meeting. The Chicago Board of Trade is the
oldest operating exchange in the world. It is very interesting, Chicago, the
confluence of all agricultural products. It was a good rail transportation center.
It was just geographic location, location, location that brought the merchants to
Chicago up and through the 1850s that made it the dynamite city it is today and
still is because of agricultural trade. We had a lot of interest from congressman
way back in the 1850s. A congressman from Illinois suggested that the United
States need to have a bonded warehouse receipt law that people operating
warehouses should have to put up a guarantee for their performance. Fantastic
idea. It took us a while to get there though.
In 1856, the Chicago Board of Trade came up with the idea of a warehouse
receipt and uniform grain standards. What an interesting concept. Believe it or
not, these were not new ideas. They had used history to develop their thoughts
and their processes on how grain trade, marketing, warehousing should occur.
In 1871, New York started getting on the bandwagon with their own National
Board of Trade, which is now called the New York Board of Trade. In 1890, New
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York started the legislative process. In 1897, they came up with a Uniform
Negotiable Instruments Law and adopted it, but it took us until 1916 to get to a
federal law and 1954 for all of the states in the United States to ratify the
Uniform Commercial Code, which a portion of it is uniform warehouse receipts.
This is just a little page that shows how the states approved Uniform
Commercial Code and Negotiable Instruments Law. They took the original New
York concept and kept passing state by state by state. You can see I go up
through 1902, and I don’t have the rest on that list that went successively on
through 1954. Today on-farm grain storage in the United States is 11.9 billion
bushels, 321.1 million metric tons. That number has been increasing and
increasing and increasing. Probably 10 years ago it was 9 billion bushels.
Farmers are very much today taking control of their own grain storage away
from some of the concepts of warehousing. There’s a lot of issues around that,
transportation being big ones, consolidation, size, etc. It’s a very interesting
trend. The off- farm storage US warehouse space in the United States is 9 billion
bushels, 245 million metric tons. We also have cotton storage of 40 million
bales.
The United States Warehouse Act, which is regulated and patrolled by the
United States Department of Agriculture, that I mentioned started back in 1916
with our warehouse receipt law has 50 percent of the US capacity licensed
under its statute. 4.5 billion bushels of grain, 123 million metric tons, and also
50 percent of the cotton capacity, so you’re asking what happened to the other
50 percent? Well, the United States has states – state statutes, state laws,
state regulation. So that other 50 percent is controlled by the states.
Most of the members of the United States Warehouse Act are the larger firms in
the United States that operate in the multiple states. Many of the facilities are
companies that operate in one state. They may have a state license, but if
you’re operating in 3, 4, 5 states or 20, 25, 30 states, its easier to go the United
States Government and have one regulator than having to pay homage to 5
different regulatory authorities. So that’s why we’re essentially with the larger
firms.
Under the United States Warehouse Act we have 185 cotton warehouses, 2,700
grain warehouses, 25 other warehouses that are mostly peanuts. We have
1,200 inspectors, weighers, classifiers, graders. A very important fact of any
warehousing system is to have accurate weights and grades and they must use
the United States standards, even those that are in the state-licensed
warehouses. Everybody in the US must use the United States grain standards.
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Financial losses. We average less than $500,000.00 yearly over the last 10 years
on $60 billion of commodity handling. That number has been going down,
down, and down. Maturity of the program – everybody knows what they
should do, what they are responsible for. You can ask a grain trader, and they
can tell you what a warehouse is supposed to do. You can ask a banker. They
know what warehouse shouldn’t do.
The direct true history of the United States Warehouse Act – we were passed in
1916. In 1931, we had a major amendment to the act. The United States
Government and the states got into a big tiff about federalism versus state
rights and the legislature and the federal government legislature bodies made it
clear, the federal government is going to be in control. So, they did
amendments to a lot of acts, ours being one of them.
In 1947, we had a challenge to that amendment. It went to the Supreme Court
called Rice v. Santa Fe, and the Supreme Court also said we agree with Congress
that the federal government is prominent over the state. In 1988, we had a
ruling that was very interesting on the type of negotiable instrument,
warehouse receipts. It was a cotton case where used bearer warehouse
receipts versus to-the-order warehouse receipts. Depending on the commodity,
we use different types of receipts, bearer, order, negotiable, non-negotiable.
It’s up to the commodity how they want to function, but we have all of these
avenues and different facilities for them to take advantage of our system.
In 1999, we got into a court case of grain storage versus grain merchandising
and that one is still being played out. The essence of that decision is we should
be responsible for all grain merchandising as well as grain storage. The federal
government has only chosen to regulate grain storage, but the courts are trying
to push us on to a whole other level of guarantee.
In 2000, I made a major rewrite to the United States Warehouse Act. This was
confluence of many things that I had been doing. I started in 1995 with a lot of
overseas development of warehouse receipts systems. I spent a lot of time in
Eastern Europe and it caused me to reflect back upon the core issues and the
core values of what we’re doing with warehousing, warehouse receipts. I came
back to the United States and rewrote the statute in 1998. In 2000, Congress
finally passed it and the big major change was the adding of electronic
documents; not only electronic receipts, but also any electronic document it
takes to handle merchandising activities, in-transit documents, shipments from
A to Z, in the country, out of the country, within the country, etc. It was a very
interesting experience for me.
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The United States Warehouse Act is a voluntary statute, meaning you choose
whether you want to be regulated by us. It is not mandated by the federal
government that you belong to the United States Warehouse Act system. You
choose. Once you choose to be regulated by us, then we own you until you
decide you’re going to get back out of the system, but it essentially, as I
mentioned earlier, takes the state out of the play of regulating you. If you are
usually within a state, it is mandated that you either have to have a state license
or the federal government license, one of the two. You cannot operate a
warehouse without a license, okay?
There where we talked about earlier, storage obligations are regulated; not
grain merchandising, but the courts are trying to push us on into grain
merchandising regulations.
Okay, The Warehouse Act was developed to provide depositors with liable
protection, inspection bonding and insurance, produce a uniform regulatory
system for storage of agricultural products. We talked about the grades and
weights, and this is the biggie: firmly establishes the warehouse receipt as a
legal title to the commodity, which provided real loan value. One of the things
that Congress did in 1916 was to say all Federal Reserve member banks must
accept warehouse receipts as collateral. A major issue.
What we require from our warehousemen is they’ve gotta meet financial
requirements, maintain current active records, operate the facility in the
manner that protects agricultural products, maintain quantity and quality of the
product at all times. If it’s in there for 5 years, you put it in as US #2 hard red
winter, five years later you get back US #2 hard red winter. Not only that, if you
have a certain protein quality as well, say 14 percent instead of 11, you get the
14 percent back.
Development. Since 1995, I’ve been involved in developing warehouse receipt
programs around the world. I’ve lost track of all the countries that we’ve
started and stopped, worked with, still are working with. It has really taken off.
I’ve been impressed beyond belief how much the world has taken an interest in
agricultural marketing, development, warehousing, warehouse receipts. It is
really fantastic.
Lenders, in my opinion, are the rock. Program financing – I’ve been USAID,
various states, trade associations, World Bank, etc., etc. It’s really interesting to
see where the development comes from.
To develop a proper program, you need to have the following items. Integrity
and ethics of the supervising agency I cannot say enough about. If there’s no
trust in whoever the entity is supervising, I don’t care what you’ve got back
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behind it as far as guarantees, legislation, etc. If they don’t have faith in the
people running the system, you’re not going to get it going. Of course, you
don’t want to over-control either. Setting the right amount of control is very
important. Don’t oversize the government machine, and of course you need
funding and support services. You need a security, bond, indemnity fund.
There’s many different ways to do it. You’ve got to reduce or eliminate market
intervention. A lot of the programs that I was involved with in Eastern Europe,
that market intervention killed them. They tried to hang on to the old Soviet
style interventions. It killed them.
Grading standards, we talked about – need those. Supervision of the system,
with integrity. You need a legislative horse. Boy, that’s a big difference. You
might have one body, maybe a Senate, another body a House, or lower body.
Both of them need to be involved and need somebody to really push them and
have it as an issue for their country they believe benefits agriculture and
benefits market. Involve and educate all sectors. I can’t say enough about that.
You need everybody. I don’t care who it is. Anybody that touches the
commodity, touches the money, is involved – you know the old adage, “Follow
the money”? Follow the money everywhere. Get everybody educated,
convinced about this.
Public comment. Another one in the old Soviet style. They didn’t like public
comment on many things. They just say, “Hey, we’re going to do it. I’m in
control. Let’s make it happen.” It doesn’t work. You’ve gotta have public
comment. It gets all us folks involved.
A big one is one part versus two part receipts. Many of the old Napoleonic
uniform commercial code countries love the two-part warehouse receipt. It’s a
killer. You need to understand what the liens are on the commodity in addition
to the title on the commodity. They can’t be separate. You need to be able to
determine the price and value of the commodity at a glance. As soon as you
look at that warehouse receipt, somebody; a banker, merchandiser, needs to
know what the value of that commodity is today.
Redelivery, we talked about. Delivery on demand we talked about. Public
access. Publically announced fees and charges. Gotta have a public tariff where
everybody gets treated the same. No special deals for my best legislative friend,
which happened to accompany me in the country I was involved with, Romania.
The Chairman of the Senate Ag Committee happened to be the owner of the
largest export warehousing system in Romania. Death, absolute death.
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Warehouse receipt forgery. You might get by without it for a while, but as soon
as they realize – the criminals – that these documents have value, they are
going to try to steal it. You need to have penalties, administrative and criminal.
Rights of appeal for people who are contesting the grade they were given by the
warehouse, the weight they were given by the warehouse, but they didn’t get
the right amount of commodity or something back from the warehouse. You’ve
gotta have an appeal system for people to use that keeps it out of the court
system, makes it fast, simple, gets things settled, and move on.
Statute granting full and clear title, we talked about. Imperative. Short-term
collateral. Everybody needs to understand that most warehouse receipt
financing is short-term, nine months, six months; usually no more than a year
because you’re coming into the next commodity cycle. So everybody needs to
understand that it’s short term collateral, not long term.
Finally, the lender and the bank must be the person who has first place claim on
the grain and the commodity. The banker has to be number one.
Okay, with that, I’m going to turn it over to Bob and I’ll take questions, I guess,
later.
Robert Fries: Good morning. We’ve worked – we, as in ACDI/VOCA - Steve and I have never
met each other before today, but we’ve worked on a number of programs. My
role is not as intimately involved in the warehouse receipts. I’ve been asked a
few times to try to analyze across the programs we’ve been doing and to extract
some lessons from them. Perhaps the first one is embedded in that title slide.
We were asked to speak about warehouse receipts and its promise for food
security. I kind of cheated and I changed it to grain warehouse systems, and
that’s an element I think of the lesson here that will be woven through this
presentation.
We’ve worked with Steve, with other folks from USDA, with USAID, with EBRD in
a number of countries in the former Soviet Union, Eastern Europe and more
recently in Africa looking at this role of warehouse systems and warehouse
receipts for agricultural and rural development. I would propose to look at this
as three steps, and I do that analogy on purpose because with the staircase, it’s
better to start at the bottom and make sure that that’s firmly in place, which
isn’t to say that you ignore where you are going or already are assembling things
to make sure you can put the top step in place, but to break it in terms of first
and foremost there is accessible and secure storage. Secondly, there are rules
of the game and someone who is in place to enforce it so that all the players
understand basically what goes in terms of volume and quality is what is going
to be coming out.
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Then receipts, the documentation that shows all of the players; who owns
what’s in there and who has claims on it. In a nutshell, those would be the
three steps among the many elements that Steve has pointed out, that it gets a
lot more complicated than that; but from a distance, that’s the vision.
Let me put a little bit more detail behind it. When we’re looking at storage,
we’re looking at both the infrastructure – a lot of places don’t have the facilities.
They need upgraded facilities. They need facilities in more locations in order to
be effective to provide accessible and reliable storage. We’re looking at
management capacity. It’s one thing to have the building in place with the
physical capacity, but you need the management capacity behind it.
In terms of rules of the game, Steve mentioned that the incredibly important
part is grades and quality because the rules of the game are there to ensure that
what goes in comes out. If you can’t name what went in, you have a hard time
ensuring what’s coming out is the same. Certification and inspection system.
This builds on the fact that you are certifying that there is this management
capacity in place to maintain the value of that product that is being stored. An
inspection system that routinely verifies that that capacity is not only there, but
it’s being applied. Then these guarantees; things can go wrong and value of the
product can be lost while in storage. Are there insurance or self-funded
indemnity funds in place that allow the owner to cover that loss that might take
place?
When we look at the receipts, these, as I mentioned, are legal documents, but
along with them is a registry; whether it’s a paper registry or electronic registry,
as Steve mentioned, so that these receipts can be verified.
We found two very different experiences in Eastern Europe and in Africa, and
we found different experiences country to country, but the bigger difference is
where the context that we tried to apply these elements in these two regions of
the world.
In terms of storage, what has been put in place are larger public warehouses. In
Bulgaria, they are averaging 10,000 metric ton capacity. There’s about 50 of
them around the country, and they have been operating in the last 10 years,
building off a bit of the experience that Steve and others provided in terms of
technical assistance more than a decade ago. In Africa, we’re looking at trying to
develop a hub and a spoke concept. The size of the production units are
significantly smaller. The notion that these hubs, which would be certified
warehouses have on average 1,000 to 3,000 metric ton capacity, are quite a bit
smaller than what we’ve had in the Eastern European model. These spokes,
because of the transport costs that Steve made reference to and how that can
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be a significant barrier to a large number of producers – an interim storage
facility that may not be certified, so it doesn’t really enter the formal system
until it reaches the hub, but it allows for that aggregation at a more accessible
level for smaller producers.
In terms of the rules of the game and the umpire, state certification, inspection,
registry, these functions have been handled by
parastatal organizations most commonly in Eastern Europe. In the case of
Bulgaria, they were able to put in place an insurance system as well as an
indemnity fund so that with each deposit there was a fee that fed a system fund
to help pay out on losses that wouldn’t be covered by insurance. In Ukraine,
that final indemnity fund did not get put in place. In Africa, the question of the
confidence in the state and the capacity of the state to play the umpire role is
not widely held - that first integrity ingredient that Steve made reference to -
and grains councils, trying to set standards and rules of the game for the
industry itself and develop a form of self-regulation has been more the norm.
They don’t have the capacity and the staffing to reach out and provide a full-
blown inspection service, so it’s married with contracts with commodity
management companies, which makes it a little bit more expensive as well.
Insurance has been tapped in the Kenya experience and is planned for in the
Ghana experience, but indemnity funds have not been developed.
As far as the receipts itself, in Eastern Europe we saw negotiable and non-
negotiable receipts in Bulgaria. In Poland, a receipt was developed with a
negotiable and non..it was a two-part receipt. When we looked at it last year
we found that the vast majority of the deposits are not documented with
receipts. The depositors don’t want the receipts. The buyers don’t want the
receipts. This notion that the receipt could be transferred over to the buyer and
the buyer could go and collect the grain instead of the depositor is not attractive
to most of the buyers because they don’t have confidence that if they go, the
available deposit will be there, and they’d much rather the depositor be
responsible for picking up and delivering. So, a large part of the benefits of the
system are not there. Without the receipts, you don’t have the same form of
collateral with the banks.
In Kenya, the notion of being able to move that legislative horse to get in place a
receipt that was a legal title was challenging, had its standing in the law itself.
They have attached a receipt managed by the grains council to contract law and
attach it to contracts. That makes it a more cumbersome product, but it makes
it effective. For banks who are willing to accept it, it’s starting to get financing.
It’s starting to be a source of collateral.
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As I look across these things, there’s some common challenges. Steve alluded
to a few of them. Trust within the system becomes imperative. The legislative
framework, the legal framework that was invested in Ukraine hasn’t been taken
up at the base level because there’s a strong skepticism about the reliability of
the warehouses and being fairly treated; that the weighing would be fair, that
the grading would be fair, that the capacity to dry your grain rather than burn it
was there. So, having in place more sophisticated legal framework, while
potentially helpful, has not been realized because of the lack of trust.
The constant challenge is what is the appropriate legal environment? It would
be great to have a receipt with full legal backing. So, do you wait until that’s in
place or do you try to attach yourself to what’s already on the ground, as has
been attempted in Kenya. Government interventions in Kenya, the first year – 2
years have gone through in this pilot effort. The goal is 5 years to be more than
100,000 metric tons managed through its system and that is self-sustainable.
The first year 1,000 metric tons was the pilot goal. They achieved that. The
second year they were trying for 8,000 to 10,000 metric tons and didn’t come
close. We’re faced with the situation with the government, I believe, dumping
some imported grains at very low prices, which put into question how
predictable is the price pattern?
And, a viable business model. I think this is captured best by this graph, which I
recognize is hard to read, but there’s a straight line that starts with some fixed
costs of 5 cedes per 100-kilogram bag, and then you see how the price has
fluctuated. In 2007-08 cycle, it was very attractive throughout most of the
period to pay the cost of storage and sell your grain later in the year. In the red
and the yellow years, it fluctuated. In the pink year, it really wasn’t that
attractive. The smaller the producer, the greater the percentage of fixed cost is
to that variable storage fee across the year, and so it becomes more
problematic for them.
We’ve talked about benefits that are not just collateral and finance-based.
Reduced losses from reliable storage that farmers may not have. A longer sales
window even if they don’t have a full system in place. Transparent quality,
fungibility of a stored product as opposed to keeping them in separate bags in
the warehouse. Incentives in place to improve quality with grades and
standards in place. Improved storage and trust of depositors, buyers, and
lenders in the system if you can get into place these more sophisticated legal
frameworks and performance guarantees. Finally, a solid pledge instrument,
more efficient commodity sales because you can just sell by trading the receipts
and the basis for commodity exchange are bigger benefits at the top of the
staircase.
Page 12 of 24
I would say that building the system has benefits throughout. Systems get
bigger at the top, but for smaller producers in some of the poor countries that
we’re looking at agricultural development challenges there are benefits that
accrue along the way. Thanks.
Kofi Owusu: Good morning. My name is Kofi Owusu, and I am with USAID’s Office of
Development Credit. The DC Office, as some of you may be aware, has
supported USAID’s development initiatives in many sectors where access to
credit has become a constraint. As of the end of the last fiscal year, we have
made available about 2.3 billion dollars in credit guarantees throughout the
world. At some point over the past 12 years or so that we’ve been doing this,
our missions have called on us to use a guarantee to support the beginnings of
warehouse receipt systems for the simple reason that, as Steve indicated
earlier, banks and I will use the word financial institutions play a crucial role in
making warehouse receipt systems work. They give loans and they provide that
link that converts the deposits into cash.
Because of our experience working with banks we have, as I indicated, been
called on to help banks bring them closer to using their credit instruments to
support these initiatives in warehouse receipts lending. We have had a lot more
misses than hits, but in those misses we have learned quite a bit. Today, I want
to use this occasion to share with you the one significant hit, if you will, success
story that we have observed. This one was actually achieved in concert with the
African Development Bank.
Two years ago, we signed a joint guarantee agreement with the African
Development Bank to provide access to credit to agro businesses in Tanzania
broadly read. Unbeknownst to us, the bank had their own plan of using this
guarantee scheme, which was $20 million to support the gradual transition, if
you will, into warehouse receipts backed lending. Now, because the law, the
warehouse receipts law, which they now have in Tanzania, was put on the books
in 2006. Frankly, none of the banks had made any effort to tap into it. This, I
would say, was quite an ingenious plan by the bank to use or to work with the
development community to reduce the perception of risk that they saw in
agriculture.
So, they used as guarantee instead of the pilot initiative in perhaps one of the
poorest regions in Tanzania, which is the Lindi region, about 540 kilometers
outside of Dar es Salaam. The goal was to see how well they could make loans
within this region to cashew farmers and producers by organizing them, using
their own resources to pool the small holder producers together and bringing
them up to scale in terms of teaching them the skills, the management skills if
Page 13 of 24
you will, needed to be able to access credit, but also to be able to tap into the
warehouse if that was freely available within that region.
So the bank observed a few key risks that I wanted to point out here in a sense
that in our experience, especially in Zambia previous to this experience, we
realized that the development community in general, and I think especially
USAID, because of our specialty in working with small holder producers as well
as in working with the commercial and the value chain work that we do, we
tend in our engagements with the warehouse receipts sector to not focus as
much on the banking side and we neglect that, if you will, at our own peril. I
think that was the experience that we saw in Zambia where we had done quite
a lot of work with the small holders, bringing them together into associations,
aggregating their produce. But the bankers still did not have any faith in the
system that had been created, the legislative environment within which they
were working. They didn’t have confidence that indeed this receipt will give
them the rights of ownership should the farmers not be able to repay the loans
that they had given them up front. The bank, CIDB Bank in Tanzania wanted to
address this borrower risk, if you will, but forming these Agriculture Marketing
Cooperative Societies.
Now, AMCOS or cooperatives in Tanzania was not a new thing, but I think the
experience, according to what I heard from the banks as well as from the
cooperative managers was that over time the strength of the cooperatives had
been weakened by centralization. The warehouse receipts law essentially
decentralized the power of the cooperatives by making these AMCOS essentially
responsible for being able to make moves without necessarily getting the
blessing of the mother ship or the mother cooperative.
So the bank formed a task force whose main objective was to actually go into
these very remote regions where they didn’t necessarily have any branches, but
then they had a mobile banking unit that would drive out there on a weekly
basis to make disbursements as well as to make collections. Then they had this
taskforce whose job it was to go out into these remote areas where producers
were bringing together these weak associations, teaching them, investing in
their capacity to manage their produce as well as enticing them with financing
for imports.
So the bank made a strategic decision to train borrowers so that they could
reduce the risk associated with making loans against the receipts that these
aggregated borrowers or these associations would present to them during the
harvest season. One of the main risks that he observed was the risk of side
selling; the idea that they would train these associations and eventually at the
end of the season because the borrowers didn’t have any faith in this future sell
Page 14 of 24
or this promise of better prices in the future or in a few months, they would sell
on the spot.
So, it was a real risk that they took, but I think they also had – and this is a
perhaps a question that will be addressed later – they had this thing called the
cashew board, TCB, Tanzania Cashew Board that set a guaranteed flow price, if
you will, at the beginning of the season. That flow price allowed these small
holder producers or gave them an incentive to sell back to the associations so
that they would promise the additional disbursements as opposed to just one
time selling it to the traders who would come through the villages. So that
reduced the incentive to side sell, having that flow price.
The other risk that they anticipated was the warehouse risk, and I think that the
previous speakers alluded to that. The idea that you needed to have integrity,
the banks not only needed to have faith that the deposits or the receipts
reflected what had actually been deposited, but also that the quality will be
maintained while they were deposited at the warehouse. So the bank through
these taskforces went out there and created personal relationships because
they don’t have public registries that they could easily tap into to verify the
veracity of these receipts.
So, they actually had to create relationships with the warehouse managers so
that when the receipt was presented to them by one of these AMCOS that they
had trained, they could also make a quick phone call to verify, but indeed
deposits of this quality and this amount had been made. The final risk that they
wanted to control for was in the price risk that the risk that the prices of these
commodities would go down after the end of the period that they expected to
gain some increases in. That risk was somewhat mitigated, but not exclusively
by the idea that there was a market for cashew nuts. The market previously
was being sold in an informal sector to various traders coming through. Now
that they had this warehouse receipts law in place, it required that the
warehouses or cashew be sold through an auction basis.
So, associations and the AMCOS were incentivized to make deposits with the
expectation that the bidding process of the auction would yield them higher
prices, but this was a key risk that they had to mitigate for. That is also one of
the key reasons why the guarantee was especially useful here because if the
prices did not materialize, they were at least guaranteed a certain degree of
repayment up to 50 percent according to our shared risk guarantee with them,
with the African Development Bank providing the key component of that risk
provision in USAID managing it.
Page 15 of 24
So, I want to start with you here, the case study of what happened last season
according to the bank. So, during the preseason, as I indicated earlier, CRDB
would work with these AMCOS by in some cases starting ones from scratch. So
they would send task forces out there to go into the villages, aggregating the
various cashew producers in that village, forming associations, helping them to
write association constitutions and registering them as a legitimate association
with the AMCOS hierarchy or the AMCOS board. In that process, they would
also educate them. So we saw AMCOS managers who had received hands-on
training from members of the CRDB team with the skills necessary not only to
track the deposits that were coming in from their members, but also to be able
to identify which techniques would yield the best results because at this
particular point, quality translated to premium prices.
The quality of the produce coming out was mitigated by the fact that the bank
was investing in the training of the small holder producers. Then, during the
harvest season, the AMCOS would aggregate. That’s when the bank would
make a loan, would make the initial loan to these farm associations to buy up
the produce at the established market price with the expectation that once the
produce has been adequately aggregated, they would deposit it at the
warehouse. The warehouse would issue them this warehouse receipt with the
quality and the grade and the quantity stated explicitly on it, and then they
would use that receipt, return it to the bank, and the bank would issue them
another loan. So, essentially it became a revolving credit line, but the key risk
for the bank in this particular instance was at the beginning of the season where
no deposit had yet been made, and so they had to be sent to pre-finance the
AMCOS with the capacity to buy up the initial produce that they were collecting
from the association members.
Subsequent purchases were financed at 65 percent of the market value of the
receipt. So, the association managers would bring their receipt and the bank
would make them a loan for 65 percent of the value, and then they would in
turn use it to buy up more produce from the producers. Essentially, what that
ended up happening was the producers would get 70 percent of the farm-gate
price. In 2009, the farm-gate price was established at 800 Tanzania shillings per
kilo, but during the season where they are doing the auctions and during the
sale season, that is where various buyers usually from Asia or from the Middle
East will come in to inspect what has been deposited, and then offer their
tenders for how much they want to buy it for.
As the bids come in, they would aggregate and average the prices and sell it to
the highest bidder. In 2009, during the last season what was being sold at 800
Tanzania shillings per kilo eventually were sold to the buyers at 1530 Tanzania
shilling per kilo. Once the sale has been completed, the bank would deduct
Page 16 of 24
their original investment as well as the warehouse would also take out the
storage and associated expenses with the warehousing. Then the remainder of
that sale funds would return to the AMCOS managers for redistribution, which is
what they call the second distribution or the second payment, which essentially
will bring the farmers whole; bring them up to the level of the original farm-
gate. From the 70 percent, another 30 percent would make them whole.
The key bonus here is with the third distribution, which is what is left over after
the farmers have been made whole of the original farm-gate price. Last year, 60
percent of what the association has left after they pay all of the expenses
associated with the warehouses is required by law to go back to the farmers
proportionately to what they have already deposited. In this particular
instance, farmers received about 20 percent of the auction sale price back to
them in the form of this third payment.
After this initial example of having seen it work and the farmers having received
these payments, the demonstration had been made. It wasn’t as tough an
uphill battle if you will, trying to convince more farmers to aggregate their
goods in the next season. So, the model was proven after the first season.
I want to share with you some thoughts overall based on our experiences with
some of these places like Zambia and now Tanzania of what has and what hasn’t
worked and the role that credit guarantees can play in it. It is fair to say that
credit guarantees or the availability of shared risk, credit enhancements are no
panacea for weak or non-existent institutional frameworks. I think we tried to
convince banks to make loans against warehouse receipts. We couldn’t have
traditional structural standing with the expectation that the bank would feel
confident because they had a 50 percent guarantee. Banks are not in the
business of selling coffee or corn or even cashew. They want the trust factor to
be there that the grain maintains the quality that it says so on the receipts, and
also that in case of default the rights of ownership transfers to them.
Credit guarantees will never incentivize the bank to guarantee in and of itself.
Then, credit guarantees can also be an effective to the warehouse receipts
systems, especially during the initial stage where banks are naturally wary of
new products or new systems. Agriculture especially is one of those sectors
where banks – well, in my experience in Africa have been very, very, very wary
of getting engaged in. So, giving them the added layer of guarantee assurance
with a shared risk arrangement on top of the discounted prices that they are
giving these warehouse receipts gives them more protection than they need
and the comfort needed to get exposure, experience it, and then be able to do it
without a guarantee in the future.
Page 17 of 24
The partnership with the right financial institutions – and I use the word
financial institution instead of bank purposefully for the simple reason that I
think the aggregated nature of these small holders naturally placed to the
advantages of microfinance institutions because working with big banks, that
was one of the mistakes we made in other places. Working with big banks with
branches remotely situated from the small holder producers do not yield uptake
of these systems, but rather finding the right institutions that have a hunger for
wanting to spread their branch networks, have a localized workforce that
understands these systems has a very positive role in helping the banks take up
these new innovations in Ag finance.
Finally the demonstration effect. One positive thing that I saw in Tanzania was
other banks were getting into the action because they have seen this CRDB bank
model working positively. They have seen the task force at work, and they were
actually in a market to coach some of the associations that had been trained by
CRDB, and that is the kind of thing we want to see encouraged; see other banks
see the positive benefits of agricultural finance backed up by warehouse
receipts and be willing to engage with that sector and that space on their own.
While I have your attention, I will put in a plug for access to financial
information sources that we, the Office of Development Credit have put
together. You can follow us on Twitter. You can visit us on Facebook or you can
subscribe to our weekly newsletter. I think you will find it very useful. Thank
you. I think the real fun part begins with the questions.
[Applause]
Moderator: Okay, I would like to thank our panelists for a very interesting set of talks. So, I
invite you to give your questions to the panelists. For those online, you can type
in your questions and we’ll try to ask them here in real time. I’d also put in a
plug to – you had some surveys on your chairs. If you can fill those out before
you leave, I would greatly appreciate those, and you can put them outside the
door. With that, please give your name and organization when asking a
question and we can start.
Jim: Jim Yazman, Office of Agriculture USAID. Question for Steve, does the grades
and standards system in the US have to take into account now organics and
GMO food commodities in the warehouse receipts system? Do we have to keep
organics separated from non-organics?
Page 18 of 24
Steve Mikkelsen: No, it is not required, but our system has always had the option of adding
additional remarks, comments about the particular commodity that you may
want to store or handle. One of the methodologies is called identity-preserved
storage, but if you want to agree with the particular warehouseman that you
want your lot held separately from anybody else because certain quality factor;
whether it be GMO or something else, usually they will work with you. You’re
going to pay a little more on the storage price for that type of thing, but it also
depends on how many other customers they have trying to do the same thing.
We have certain places in Iowa where they have been into certain particular
varieties of soybeans that are very demanded in the market in the Orient and
they’re feeding that.
So, it started many times with one or two, three, four, five growers and has
expanded to 100 in the community. So yeah, our system allows for that.
John: John Lichte, Abt Associates. I’m concerned about the price risk particularly in
situations like Africa and West Africa. Some work that was done by the
INSORMIL CRSP seems to indicate that they believe that in West Africa ,based
on limited data I’m sure, that they expected warehouse receipts to provide
benefits to farmers perhaps two years out of five, lose money two years out of
five, and sort of be neutral the fifth year. That makes the whole issue of
investing in warehouse receipts, investing in new warehouses that would be
necessary because most of these areas don’t really have the infrastructure, the
trust that one might have, the interest of the financial institutions to invest in
things that may lose money half of the time. This thing has been treated a little
bit like a silver bullet and yet not being addressed in a risk management context,
which it seems like it should be. I’m just wondering about your reaction to that.
Steve Mikkelsen: I’ll go ahead and take a stab at it. Commodity markets in the United States are
free to trade up and down however they wish. One of the biggest assets for any
country or any product is the ability to produce a produce on a quality and
timely basis. If you’re a reliable supplier you’re going to get a premium in the
marketplace. So, looking at past statistics where based on our actions of the
last 20 years, it’s a 2 out of 5 chance. Yeah, I can see where they come up with
that, but as they say, give me a set of numbers and I’ll give you anything you
Page 19 of 24
want. It’s really about feeding that market, being a supplier, good producer.
You’ll find a good market.
Kofi Owusu: I think I’ll piggyback on that by saying that the market for the particular
warehouse good in terms of the quality premium that is added to that – and I
will use the Tanzania example. You had associations that were previously just
collecting anything and selling to the traders that would come through the
village, but the introduction with the warehouse receipts model where cleaning
and moisture content and quality premium cashews were now receiving a
higher price. There was an international demand for the product. I think the
selection of the commodity in question is a key component of what you are
referring to. So, for cashew for instance, there is demand from the Middle East.
There is demand for it from Asia.
For that reason, those buyers are paying a premium and I think when producers
are made to understand that if you produce quality cashews, for instance, you
will get a higher price, and the bankers through their experience with the prior
season of guaranteeing or making loans against quality cashews, it mitigates
somewhat –not exclusively – the price which you are referring to. I think the
solution is going to be adding the price premium that comes from investing in
quality produce.
Steve Mikkelsen: I’ve got one other short comment. Many of these developing countries have a
50 percent loss of the commodity in the countryside before it ever gets to the
marketplace, so that in itself is a huge bonus that you can essentially double
production and you didn’t plant an extra acre. Yeah, quality control after you’ve
harvested.
Robert Fries: I made reference to the challenge of the business case, and I think this gets right
at the heart of it. I think there’s a couple of implications. If the warehouse
receipts system is seen as a silver bullet in the short term to benefiting small
farmers, I think that’s an unrealistic expectation. There is a speculation
dimension to this and there is a fixed cost dimension, which makes it less cost-
effective for a small farmer to pay the cost of storage over time and try to reap
the benefit of the price. Aggregation, traders, and other players, there’s a
better fit for. I’d love to be able to see the data that say it doesn’t move
Page 20 of 24
downstream over time, but the registries just don’t capture that data very well,
at least as I’ve been able to find, and that might be a good investment for a
community of donors to look at because there is great promise.
The second thing, as both have alluded to, improvements in reductions in loss,
incentives for producing to a better grade or standard because there is a grade
and standard in place and looking at this as a set of steps building from the
bottom where you’ve got an appropriate link between the risk and the
credibility of the system and confidence in the system and what the system is
comprised of at that point in time is how you have to look at it rather than
focusing exclusively on the grand slam home run of a warehouse receipt system
that’s completely anonymous.
Steve Mikkelsen: Yeah, it is basic step, preserving the quality of the product first. Once you have
the quality of the product integrity, then watch the markets grow. Your cash
market will take off, and eventually you want to get to the place where you
have a futures market so you can look forward and determine what prices are
going to be in the future, what you’re going to plant, what you’re not going to
plant, how much you’re going to plant. It all comes together over time, but
these are the basic steps. You’ve gotta get step one first.
Moderator: From Muhammad El Hawari with Andalusia Financial in Cairo, Egypt, and he
would like to know the warehouse receipt system is obviously very important
for starting a commodities or futures exchange. Did any of the developing
countries you helped launch the system in, evolve enough to start a
commodities or futures exchange?
Steve Mikkelsen: Some are still working on that. That, again, is in my opinion, the last step that
any country will take. As the US example, we had a market starting with a
Board of Trade and went backwards and then came back up the ladder. That
doesn’t work normally. It just doesn’t work. Normally, you’ve gotta have the
basic steps, the quality control, the warehouses, the system of cash operating,
and you’ll see a cash market emerge initially and later on a futures market to
serve the cash, but the futures is the last.
Page 21 of 24
I went to, I believe it was Romania, and the first thing they wanted to show me
was their new Board of Trade, which they had used US money to develop. I
walked into the trading floor, and it looked exactly like a living room where you
had coffee every day; not trading coffee; you drank coffee and had pastries. I
said, “Well, what is this? Where is the floor?” They had not traded a thing in
two years, but they called it their Board of Trade. They did not understand the
steps as we’re discussing today that first you’ve gotta have the base instruments
in palace to make a cash market happen and then work up to the futures.
Robert Fries: I’m not certain. I have not really looked at the evolution into the futures
markets. One thing I would recommend and I mentioned to Steve earlier is a
recent paper came out by the FAO called Use of Warehouse Receipts Finance,
and it’s a really good analysis qualitatively of the pieces of the systems that have
been put in place in different countries. It captures a moment in time 2008 to
2009. I believe one of the elements in there was the extent to which it was
linked with commodity exchanges or not, but I don’t recall explicitly, but that
gives a good snapshot of a wide number of countries, and how they have
applied or not been able to apply the range of these elements.
Steve Mikkelsen: For example, in Bulgaria that you spoke of, we had US traders use the Bulgaria
system in worldwide export markets, and they used the exchanges around the
world no matter what the commodity that best suits them, whether it be here
in the United States, whether it be in the orient, whatever the case may be. So,
even though Bulgaria itself may not have a futures market, there are established
futures markets all over the world that people use no matter what country you
are in today. One of the best ways to access that for your country is through a
licensed warehouse system with valuable warehouse receipts that can be
issued, negotiated, and eventually delivered upon for a futures contract.
Dawn Thomas: Thank you. Dawn Thomas from the Office of Agriculture. I want to, first of all,
thank you all for the excellent, excellent presentations and say how terrified I
think it is this wonderful manifestation of collaboration here. The question I
have is addressed to Steve, and it’s actually a two-part one. In your presentation
you spoke about some of the requirements for a sound system including ethics
integrity and one of the things you mentioned was funding of support services.
I wondered if you could say just exactly what you meant by that. What would
be some examples?
Page 22 of 24
The second part perhaps relates to a question that someone else asked earlier,
which had to do with success in Francophone countries. You mentioned that
there is a one part or a two part system, and in the countries with Napoleonic
experience, they tend to go for the two-part system. Could you explain that a
little better, and perhaps we could understand a little bit more why in the
Francophone countries the experience is as it is?
Steve Mikkelsen: Okay, the first question on supervision. Supervision needs to be applied to the
system you’re developing in a proper manner so that we get to the level of
integrity and confidence by all people involved in the grain trade. I’ve seen it
done two ways; over supplying manpower and undersupplying manpower by
whoever the authorized entity is that’s going to “supervise” the system. Again, I
believe it was Romania – they wanted to take an old system that they had in the
Communist style that was essentially their quality control graders, of which
there were something like 5,000 employees and dump them onto warehouses
and warehouse licensing.
I gave them the example of the United States. Here we are monitoring $60
billion worth of commodities and we have less than 100 employees. You’re not
going to get there right away. You don’t have quite the infrastructure we do,
but you sure in the heck don’t need 5,000. So you can overkill it and you can
underkill it. What happens with the overkill many times is it ends up being
graph corruption side, back pay. Those guys aren’t paid enough to do a proper
job, and they’re all of the sudden part of the fraud scheme. Underdeveloped is
you’ve got 5 employees. I think we were looking at Indonesia. I did a lot of
work with them over the last year. They were talking about an office of 5
people or 10 people that they might apply to this system. Come on. You’ve
gotta have a system or you don’t have a system. It’s gotta be the right people.
They’ve gotta be educated. They’ve gotta understand agricultural markets. Just
because they have a Masters degree in economics doesn’t mean they
understand agricultural markets. You can overkill it, underkill it. There’s a lot of
different ways you can mess up supervision.
The second question on one and two-part receipts. The two-part receipt is an
instrument that was developed in the Napoleonic commercial code or common
code, whatever I think they called it. Somehow in their system they believed
Page 23 of 24
that you would rip apart in two different streams the collateral size or the food
putting lean against the commodity versus the face of the commodity, which
actually shows the title to the commodity. They’d run it two different routes.
Well, that worked fairly well for the bankers because they could keep it right
close to their vest, but it absolutely killed the marketing side because nobody
knew how much to pay for it. Which bank had the lien? Where is it? Once you
separate the two, you’ve got disaster. You’ve gotta be able to at a glance with
one document whether it be electronic or paper or whatever you’re using, to
determine the value of that commodity and the liens against it. So that’s why it
needs to be one receipt.
Now, we’ve solved that issue several times in several countries by saying, “Okay,
we’ll take the old code and allow the two documents to exist,” but when we
printed them, we made sure that there was a perforation where we could
separate the documents. It was integrated into one document and they
couldn’t cut around it. So that’s just a little American capitalism there, applying
common sense to a system that didn’t work.
Kathleen Curtis: Kathleen Curtis from the Academy for Educational Development. I also want to
thank for a very interesting set of nice complimentary talks. I just wanted to ask
about how to view this. How much can the smallholders benefit versus the
large holders? Is somebody too small to be able to participate or does it depend
on co-ops? The 30 metric tons was about the smallest I saw. So how do
smallholders take advantage?
Kofi Owusu: Without forming associations you mean? I think the Lindi model that we show
in Tanzania answers your question quite well in the sense that in some of the
most remote places where there is no electricity, no bank branch, but if you can
put in the support services to be able to aggregate and train the farmers so that
they see the benefits of aggregation in the first, second, and third payments,
after they have seen that, it doesn’t matter how little you can produce. You can
be part of or a member of one of these associations. You receive the benefits of
the increased prices or the premium that comes with having quality produce.
I believe what we are seeing in Tanzania, certainly the benefits of the
warehouse receipts; however, which way it is adapted to the circumstance of
Page 24 of 24
the country in question, the benefits ultimately will affect everybody within the
value chain from the very smallholder farmer to the traders and the processers
as well as to the buyers who buy in bulk. Ultimately, the price benefit touches
the smallholder farmer if they are a member of an association; otherwise, it’s
too small and the cost of warehousing precludes any benefit coming to them
from just taking a warehouse storage unit on their own.
Moderator: I’d like to thank the panelists. We’re kind of running late on time. If you have
any additional questions, feel free to send them to agrilinks, that’s
agrilinks@kdid.org, and we’ll try to follow up and connect you with the
speakers. Once again, I’d like to thank the panelists for a great presentation.
[Applause]
[End of Audio]
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