Warehouse Receipt Systems - FAO 2015

Designing warehouse receipt legislation: Regulatory options and recent trends.

Food and Agriculture Organization of the United Nations. Rome, 2015.

Warehouse receipt systems allow agricultural producers to access credit by borrowing against receipts issued for goods stored in independently controlled warehouses. These systems enable producers to delay the sale of their products until after harvest, to a moment when prices are generally more favourable. Warehouse receipt systems can therefore mobilize credit for the agricultural sector and improve agricultural trade. Warehouse receipt systems bring other benefits to the agricultural sector. For example, the provision of good handling and storage by warehouses licenced and controlled according to mandatory standards can help reduce postharvest losses and improve product quality. The increased storage of agricultural commodities after the harvest season may in turn contribute to stabilizing commodity price volatility. With respect to the management of national food security and strategic reserves, an effective warehouse system provides government authorities with timely and accurate information about the aggregate stock of stored agricultural commodities in the country. Although warehouse receipt systems for agricultural commodities are used worldwide, their benefits and use depend on the design of the system and prevailing local conditions. International experience shows that benefits are maximized when the receipt system is based on a well-designed and enabling legal framework that ensures integrity and transparency. Legislation is important to provide clarity and predictability to the rules governing the warehouse receipt system and to the rights and obligations of participants. However, it is often found in practice that the necessary legislation is not in place or does not accommodate the specific needs of the sector. In recent years, many countries around the world have begun to introduce or reform legislation of their warehouse receipt system. Various objectives motivated the reforms, from mobilizing credit for the agricultural sector after market liberalization to adapting an existing system to the requirements of electronic commerce, or enhancing the income of smallholder producers. This publication is aimed at filling this gap and provides countries with guidance and evidence-based examples on how to develop enabling legislation. Based on a review of legislation worldwide, this study identifies different regulatory approaches and good practices for the design of

warehouse receipt legislation.

Part I sets the stage by explaining the basic concept of warehouse receipt financing, the benefits of a functioning warehouse receipt system and the importance of legislation for warehouse receipt systems as well as its core elements and variable attributes. Warehouse receipts are documents issued by warehouse operators that state the ownership of a specified good or commodity, its quantity and characteristics and in what warehouse it is stored. The basic concept for warehouse receipt financing for agriculture is largely the same in all countries. A farmer or other agricultural producer deposits a quantity of agricultural products in a warehouse. The warehouse issues a receipt to the producer, who can then use this receipt as collateral to obtain a loan from a creditor such as a bank or an agricultural inputs supplier. The producer sells the stored goods underlying the warehouse receipt when they are mature or market conditions are favourable. Depending on the agreement, the buyer pays either the creditor or the producer who in turn pays the creditor. After the loan is repaid, the creditor returns the warehouse receipt that the buyer takes to the warehouse to retrieve the bought goods. A well-designed warehouse receipt system can provide various benefits for all parties involved. The extent of the benefits varies from one country to another depending on a country’s conditions. Major benefits include the following: access to credit for farmers and other agricultural producers while enabling them to strategically delay the sale of agricultural products until after the harvest season; enhanced participation of smallholder farmers in the commodity market by allowing them to consolidate their crops in a warehouse and sell them jointly; reduced postharvest losses for smallholder farmers who use the system’s warehouses that have mandatory storage and handling standards; reduced risks for creditors who lend to farmers and other agricultural producers through secure collateral; mobilized credit for the overall agricultural sector; improved quality of agricultural commodities by determining mandatory quality standards for those commodities; enhanced agricultural trade through facilitated market transactions4 and, if warehouses are linked to a commodity exchange, improved exchange trading;5 moderated high-season price fluctuations when agricultural commodities are stored until after the harvest season; information provided to government authorities about agricultural commodities stored in the country that can aid in forecasting food shortages. International experience shows that, to achieve these benefits, the receipt system should be based on a well-designed and enabling legal framework that ensures its integrity and transparency.7 Legislation is important as it provides clarity and predictability of the warehouse receipt system’s rules and of the rights and obligations of the participants. Generally, all core elements of a warehouse receipt system need to be determined in legislation. The core elements of warehouse receipt legislation are as follows: scope of its application and the goods or commodities that can be covered by warehouse receipts; institutional structure for the administration of the warehouse receipt system; licensing and oversight of warehouses; performance guarantees for warehouses; contractual rights and obligations of the parties; warehouse receipts, which include their legal status, content, form and registration; negotiation and transfer of receipts; settlement and release of stored goods; execution and priority of obligation; offences and penalties. 

Part II provides guidance for countries wishing to introduce new, or reform existing, warehouse receipt legislation. This part highlights the necessary preliminary considerations when introducing or reforming the legal provisions of warehouse receipts. These considerations include identifying the relevant policy objectives of the agribusiness sector; identifying and assessing all existing legislation for its possible impact on a warehouse receipt system; and conducting a feasibility study of the contextual conditions and analysing its results. Part II then presents, compares and analyses different options for designing the core elements of warehouse receipt legislation. This analysis is based on a review of the existing legislation on warehouse receipt financing worldwide and, in particular, the country case studies in Part III. The analysis resulted in the following key observations: The most common objective of a reform or introduction of warehouse receipt legislation is to enhance access to credit in the agricultural sector. Beyond this, objectives vary widely. They range from facilitating farmers’ access to adequate postharvest handling and storage facilities in sub-Saharan countries to fostering the use of grain warehouse receipts to attract private-sector investments in the grain sector in Kazakhstan. Effective and enabling legislation should protect the rights and obligations of depositors, creditors and warehouses to strengthen confidence among participants and ensure the wide use of warehouse receipts. The form of legislation on warehouse receipts and its details differ depending on the legal tradition of a country and the time of its initial introduction. These forms of legislation include a comprehensive specific law governing the overall warehouse receipt system or basic general provisions contained in the commercial or civil code. The majority of the countries reviewed in this study tend towards the first. The core elements of warehouse receipt legislation are commonly recognized by legislators. Yet, a variety of regulatory approaches exist to address each of them. These different approaches are shaped by the contextual factors and policy objectives of each country. Some core elements are similarly regulated in most of the reviewed countries: The traditional approach for the institutional set-up is to designate a primary competent public authority to manage the warehouse receipt system. Every country with legislation on a warehouse receipt system provides for a warehouse licensing and oversight system. Legislators in many countries have paid special attention to the provision of performance guarantees, and it is a widespread regulatory approach to provide for mandatory insurance and bonding requirements. Country experience has shown that performance guarantees directly influence the confidence in and consequently the use of warehouse receipts by creditors and other participants. While the legal format of warehouse receipts differs according to the legal tradition of the country, the required minimum details included on the receipts are largely similar in most countries. Other regulatory approaches are shared by a smaller number of countries: A recent trend in some countries is the creation of a guarantee fund as an additional warehouse performance guarantee; it is based on voluntary or mandatory contributions of warehouses. Another relatively new trend is the introduction of electronic warehouse receipts. In some countries where the general legal framework allows for it and court procedures are considered very time consuming, a good regulatory practice has proved to be the provision of out-of-court enforcement, whereby a lender may recover on a defaulted loan based on the warehouse receipt. The analysis of the core elements of warehouse receipt legislation in this publication shows the reader the spectrum of options for their regulation and a description of their potential benefits, weaknesses and relevant considerations. It points to guidance on good practices for developing enabling legislation for effective warehouse receipt financing according to country needs. However, there are no general recommendations or is no single model design for warehouse receipt legislation. Rules for effective organization and operation depend on country-specific legal, agricultural and economic conditions, and a legal framework should be tailored accordingly. The analysis allows a country that wishes to introduce or reform warehouse receipt legislation to compare the contextual factors with its own and to assess the available options for the system’s legal design in light of its own specific conditions.

Part III contains country case studies selected from a review of warehouse receipt legislation worldwide. In many countries around the world, warehouse receipt financing has been common practice in the agricultural sector for decades, even centuries. The United States of America and many countries in Latin America and Western Europe have long-established warehouse receipt financing systems based on legislation introduced around the beginning of the 20th century or earlier. Some Asian countries such as China, Viet Nam and the Philippines also have long-established legal systems for warehousing. Other countries have instituted such systems more recently. For example, in Eastern Europe and Central Asia, numerous countries have introduced or reformed legislation on warehouse receipts since the 1990s, such as Bulgaria, Kazakhstan, Hungary and Turkey. In Eastern and Southern Africa over the last two decades, there have been numerous initiatives to promote warehouse receipts.9 Supporting legislation has been enacted in Tanzania, Uganda, Zambia and Ethiopia, amongst others. However, in many developing and transition countries, the use of warehouse receipts remains limited; one of the main constraints is the lack of an appropriate supporting legal framework.10 For example, several countries in the Balkans, Central Asia and the Caucasus do not have modern warehousing legislation in place.11 The countries studied were selected to cover a broad geographical range and to include developing, transitioning and developed countries with different legal, agricultural and economic contexts. The following 12 countries are examined in detail: Argentina, Brazil, France, India, Indonesia, Kazakhstan, the Philippines, Tanzania, Turkey, Uganda, Ukraine and the United States of America. For each country, the regulation of the key elements of warehouse receipt legislation – identified in Part I and analysed in Part II – illustrates the different approaches for addressing the specific needs and challenges of the country. This publication also briefly introduces the countries’ general legal, agricultural and economic contexts, and touches upon the legislation in practice, including circumstantial advantages and constraints.