Agriculture employs about two thirds of sub-Saharan Africans, and is responsible for up to a third of GDPs in the region. And yet, less than 1% of commercial loans go into the sector. As the majority of the continent’s farmers are smallholders, they are effectively ignored by large-scale lenders, and smaller-scale social lenders have limited scope and can charge staggeringly high interest rates. Without access to capital, farmers cannot afford things like fertilizer, improved seed varieties, irrigation systems, and storage facilities. Thus, they are trapped in a cycle of low agricultural productivity and high post-harvest losses.
It is in this context—and because of this context—that warehouse receipt systems are gaining momentum in Africa. In a warehouse receipt system (WRS), a farmer deposits his or her agricultural products into a warehouse, where operators evaluate and grade the commodity, and agree to maintain and insure it. Farmers are then issued a detailed receipt which contains information including the quantity and quality of the deposited commodity.
This receipt, now in the hands of the farmer, becomes a powerful tool under WRS: it becomes a negotiable item that can be traded, swapped and used as collateral against which farmers can borrow. However, farmers are often only able to borrow a proportion, rather than the entirety, of the value of their commodity—in Kenya, for instance, borrowers can access finance for up to 60% of the value of their commodity. The ability to borrow against warehouse receipts is essential for the cash-strapped smallholder; offering access to storage facilities means that farmers gain the ability to sell their goods when they want to, or when prices might be higher. Therefore, a successful WRS requires access to price information—increasingly delivered now via SMS—as farmers must be able to better decide when they should actually sell their commodities.
Collateral management agreements (CMAs) are similar to warehouse receipt systems in a number of ways, and often act as a sort of gateway through which a WRS can develop. They do, however, have a number of key differences, including the fact that the receipt from the deposit is given directly to the financing bank, and is not negotiable. Participation in CMAs is generally expensive—most participants are required to and can afford to rent entire warehouses or silos, meaning that CMAS are more appropriate for large-scale, commercial participants.
In order for a warehouse receipt system to function, there must be; seasonally fluctuating prices that make the idea of delayed sale attractive; a functional storage industry; a commodity grading system; an effective legal system; and a supportive government that does not intervene in the prices of the affected commodities.
This last issue of government non-intervention is particularly important in Africa, as many governments have a history of intervening in crop markets—particularly in “political” crops—or those that are integral to food security (and thus integral to political stability). Although these interventions may be well intentioned, they generally remove price differentiation, which is necessary in order for a WRS to function. Even in countries where the government is not presently intervening in crop markets, the fact that a government has intervened in the past or could possibly intervene in the future creates a level of uncertainty in crop prices that is not conducive to the establishment or the stability of a WRS.
Warehouse receipt systems can be transformational, but they are complex and fragile and must be carefully implemented in order to ensure their survival and success. As the United Nations Conference on Trade and Development (UNCTAD) noted, “A warehouse receipt system doesn’t create an orderly market. It is a product of one.”
Zambia has a long history with collateral management agreements (CMAs), but the system was expensive and its use limited to large-scale operators seeking financing. Consequently, the southern African country launched its first attempt at a warehouse receipt system in 2001. The newly established, donor-funded Zambia Agricultural Commodities Agency (ZACA) oversaw the system, certifying and inspecting warehouses and ensuring their compliance to defined standards. The first significant deposits were in the 2003/2004 season, and by the following season, there were four certified warehouse operators with a capacity of more than 100,000 tonnes. There were 65,038 tonnes of maize and 70 tonnes of groundnuts deposited, and the repayment rate was a reported 100%. Although the vast majority of deposited commodities (more than 90%) came from large-scale, commercial farmers, the operators of the nascent system were optimistic that it would continue to expand and grow to include smaller-scale farmers.
By 2006, however, the ZACA was forced to cease its operations. There were a number of factors responsible for its failure. First, the financial sector did not feel as though it had been sufficiently consulted in the establishment of the WRS, and thus did not entirely trust the system. Additionally, Zambia did not have any warehouse-related legislation, which meant that would-be participants were hesitant to trust in the system’s reliability. Additionally, the foreign donors funding the project were strongly focused on smallholder participation, while neglecting other important aspects of the system. Lastly, there were serious management and reputational issues (particularly around misappropriation of funds) that forced an early end to donor support.
Upon ZACA’s failure, its assets were transferred in 2007 to its replacement, a private institution funded by USAID, the Zambian Agricultural Commodity Exchange (ZAMACE), which now had the task of managing the new and improved receipt system. ZAMACE has focused its initial efforts on improving the country’s warehouse infrastructure while also building up a sense of trust amongst the relevant actors. Although it has successfully avoided some of the issues that led to ZACA’s downfall (like reputational issues and misguided donor funding), there is still some uncertainty surrounding the institution. In 2011, for example, the Zambian Federal Reserve Agency bought an enormous amount of maize at above-market prices, in what was widely regarded as a strategic pre-election move. This proved to be massively distorting for the Zambian maize market, proving detrimental to ZAMACE’s operations as both a commodity exchange and as a warehouse receipt system manager. That same year, ZAMACE was forced to suspend its operations—at the time of writing, the organization had not yet returned to operating. Currently, ZAMACE is hoping to attract more shareholders and persuade government to pass supportive legislation.
Zambia has a number of factors that could be conducive to the successful establishment of a robust warehouse receipt system: its past experiences and failures provide valuable lessons, and the fact that the country has a number of large-scale farmers involved in the production of wheat, maize and soybeans is also a good thing, as commercial farmers are very often the first and earliest adopters of a WRS. However, the policy environment needs to improve in order for the system to succeed, the government must commit to a stance of non-intervention in crop markets, and all relevant buyers need to play a role in the WRS in order for there to be adequate buy-in.
Like Zambia, Tanzania also had a Collateral Management Agreements (CMAs) system in place before the introduction of a wider warehouse receipt system.
Tanzania launched its first warehouse receipt system, which focused on major export crops coffee and cotton, in 1999. Five warehouses, three banks and a number of farmer cooperatives across the Kilimanjaro, Mbeya, Ruvuma, Kigoma, Shinyanga, and Arusha regions participated in the system. The Tanzanian government also supported the system legislatively, passing the Warehouse Receipts Act of 2005 (which established the Warehouse Licensing Board) and the Warehouse Regulations of 2006.
According to USAID, producer prices of export crops have risen as a result of the growing, successful system. The WRS gradually expanded to include more crops, including Tanzania’s most important good—maize. Despite the crop’s importance, the success of the WRS in maize was very much limited—largely due to the fact that the Tanzanian government tends to intervene in that market, frequently instituting measures to control prices, like export bans. Although such measures are often well meaning and intended to protect domestic consumers from paying too much for staple goods, these interventions have historically limited farmers’ abilities to market their products and depressed the prices that they receive for their goods.
Tanzania’s success in building a warehouse receipt system for export cash crops, but failure for maize illustrates a very important lesson. The markets and value chains for export crops are oftentimes more organized than those for other goods—and their relative irrelevance to the quest for domestic food security means that they are ‘apolitical’. However, ‘political’ crops like maize, which are essential for domestic food security and for which an increase in prices would be socially and politically disastrous are often the subject of government intervention. Such interventions distort markets and remove the necessary framework and incentives for a warehouse receipt system to be successful. Therefore, countries building their first iteration of a WRS should consider starting with export cash crops, and ensure that a crop is sufficiently ‘apolitical’ before including it in the system. This sort of phasing also allows for governments to ease into and get comfortable with the idea of a WRS and develop a coherent and effective system before taking the risk of implementing something entirely new on crops important to food security.
Currently, the Tanzanian government is implementing the program ‘Strengthening Warehouse Receipts Systems (SWRS)’, which was initiated in 2013 and is set to be completed by 2015. The initiative is sponsored by the Alliance for a Green Revolution in Africa (AGRA) and designed to promote warehousing systems, carry out an inventory of warehousing infrastructure, adopt criteria for the licensing of warehouses and its operators, facilitate the adoption of supportive warehouse protocols, shift from a paper-based WRS to an electronic one, develop the quality assurance and certification system, and build the capacity of smallholders.
Although Brazil has a long history of warehousing, this history was fraught with failures for the first several decades. However, the country has in recent years managed to learn from these failures and build a stable, robust system.
The country began offering organized warehousing services—which included a receipt system—in 1903 when the country’s first warehouse-related legislation was passed. Through the system, depositors received two receipts for their commodities, one being a title document and the other a pledge certificate that could be used to raise financing.
The law gave the Ministry of Industry, Trade and Tourism the power to oversee and regulate the system. Throughout the decades, however, the quality of these warehouses deteriorated as government oversight slipped, and the growing political influence of the warehouse owners meant that the regulations were never tightened or even properly implemented. The lack of oversight also helped to encourage the growth of fraud in the warehouse receipt space.
Brazilian warehouses, unlike their American counterparts, were not legally allowed to trade commodities in their own right. Some analysts have pointed to this as a significant factor as to why this system was less successful than the American one. However, it is more likely that the shaky start of the Brazilian warehouse receipt system was due to failures in policy. The legal environment was inadequate to meet the demands of participants in the system—particularly lacking were laws adequately addressing issues including property rights, collateral laws and liquidation procedures. Additionally, agriculture in 1970s Brazil was dominated by price minimum guarantees and subsidized credit—market distortions that, as has been discussed, are disastrous for the implementation of a successful WRS system.
Another factor that contributed to the failures of the early warehouse receipt system was the fact that the Brazilian government, which was a major buyer of maize, decided in the 1970s that it would stop respecting the maize grading system, and stop paying different prices for different grades of maize. This quickly led to the collapse of the Brazilian maize grading system, removing incentives for farmers to produce quality grain, and proved to be a major disruption to the country’s maize value chain.
In the 1990s, however, the situation improved. This was the result of the Brazilian government playing a reduced role as a buyer (meaning warehouses had to look for private buyers), the government scaling back on market interventionism, the privatization of agricultural finance and marketing, and the decentralization of the states. Reformers sought to repair and revitalize the broken warehouse receipt system, and one of their major—and very successful—moves in their attempt to do so was the introduction of the Cedulo de Produto Rural (CPR) in 1994. There are: physical CPRs, in which the producer receives cash or inputs upon the issuing of the bond and agrees to deliver produce at a future date; a financial CPR in which the producer receives cash or inputs upon the issuing of the bond but agrees to repay it with cash rather than products; and CPR indexed to futures, in which the producer receives cash or inputs upon the issuing of the bond, but the settlement is dependent upon the amount produced (with a reference price being agreed upon). The CPR system guarantees repayment in case of non-performance, reducing the perceived risk and encouraging participation. It has been a celebrated success, due to an increase in transparency as well as improvements in the legal and political soundness of the system.
Warehouse receipt systems are promising and exciting—policymakers have every right to be optimistic about their potential. Such systems help tackle a number of issues within the African agricultural space simultaneously: post-harvest losses, smallholder access to capital, inefficient trade markets, and seasonally erratic agricultural commodity prices.
However, such systems can and do fail easily. But the aforementioned examples offer deeply valuable lessons from which any African market striving to establish its own system can draw: avoiding political crops, prioritizing export cash crops, minimizing government intervention, and establishing legal guarantees which encourage confidence and participation in the system.