To make more of warehouse receipts: what can exchanges do?

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To make more of warehouse receipts what can
exchanges do?

• By Lamon Rutten Coordinator, commodity
  marketing, risk management and finance
  United Nations Conference on Trade and Development

Forward Markets Commission/UNCTAD/ associated
commodity exchanges
Workshop Commodity
financing and building a warehouse receipt system
for India Mumbai, 11-12 June 1999
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• Overview
• What do the actors in commodity trade need?
• Are warehouse receipts useful?
• When are warehouse receipts really useful?
• Different models for the exchange to provide a
  warehouse receipt system
• Conclusions

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What do actors in commodity trade need?
GOODS
Flexibility Efficiency
MONEY
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What do actors in commodity trade need?
GOODS
Flexibilityin the timing of sales in the place
of sales. Efficiency in storage in quality
maintenance in moving goods from place of
production to place of consumption in using
processing capacity.
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What do actors in commodity trade need?
Flexibility getting money in time to the place
where it is most needed Efficiency low financing
costs
MONEY
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Warehouse receipts can provide what actors in
commodity trade need

• Efficiency
• in storage and in quality maintenance
  specialized companies take over
• in transport no more need to ship goods around
  until a buyer is found
• in using processing capacity easy to build up
  enough stocks
• low financing costs, because warehouse receipt
  credit is safe.

• Flexibility
• in the timing of sales more freedom to choose
  between storage and sale
• in the place of sales warehouse receipts are
  easy to transmit
• in financial management credit availability
  linked to credit needs.

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When are warehouse receipts really useful?
deposit
Warehouse
Borrower
w.r.
Borrower
w.r., after individual negotiations
CLOSED SYSTEM
Sale or pledging of w.r.
OPEN SYSTEM
Bank
Open market
Warehouse receipts provide larger economic
benefits if they can be more easily and more
flexibly used, through a network rather than
through bilateral contacts.
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The possibility of trading warehouse receipts
through a public network provides additional
benefits in terms of - location the physical
market place is enlarged - market accessability -
market liquidity instruments become useful for
new groups
Exchanges can provide the basis for such a public
network
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The results of an efficient integration of
exchanges and warehouses through a modern
information/communication system

• No unnecessary movement of goods
• Storage is at lowest possible cost
• A market is always readily available
• Easy adaptation to new market conditions
• low likelihood of price distortions

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Is this a pipedream?If not, how do you get
there?

• Exchanges already have part
  of the system in place
• a mechanism to vet warehouses
• the possibility, through their clearing houses,
  to guarantee warehouse receipts
• clear and enforceable quality standards
• presence of major market players
• a (primitive) info/communications network.

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What can an exchange do to enhance their business
through the use of warehouse receipts a few
models
Warehouses
Exchanges
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Using commodity exchanges to enlarge effective
marketing areas
Farmer
Exchange warehouse
1. Deposits products
Commodity exchange
3. The highest bidder gets the products, and the
farmer is paid
2. The warehouse receipt is (electronically)
transferred to the exchange and auctioned off.
Conditions - standardization of quality
descriptions into specific grades, and -
standardization of the documentation used.
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The exchange as underwriter of the warehouse
receipt system
Note farmers can also use the scheme
6. Provides credit
5.Lodges receipts with bank
Small traders
Banks
3. Deposits products
2.Guarantees warehouse
Warehouse company
7a.Sign sales contract
4.Issues receipts
Clearing house
1. Approves warehouse
9. Delivers receipt warehouse makes delivery
Large traders
Commodity exchange
7b. Delivery through exchange
8a. Reimburses credit in return, bank transfers
receipts
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Trading warrants as credit instruments
Investor/bank
5. Open outcry bids on the interest rate for
loans secured by the warrant
Recognized warehouse
2. Issuance of warehouse warrants
National Agricultural Exchange
6. Credit
1. Deposit of goods
4. Warrant is given in custody of Exchange
Agricultural or agro-industrial firm
Broker
3. Transfer of warrant, with the agreement to buy
it back after a certain period
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Even more flexibility the Brazilian model
Exchange- approved warehouse
1. Deposits products
Farmers
2. Issues receipts
3. The warehouse receipt is transferred to the
bank, which gives a credit.
4. The bank gives its aval, which makes trade
of the receipts on the secondary market possible.
Bank
Commodity exchange
Secondary market
5. Farmers observe commodity exchange prices, and
can sell whenever they want, through an
electronic network linking the countries
exchanges.
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Conclusion the way forward
The synergy of exchanges, warehouses and a modern
information/communication system will make it
possible to cross over into a new era for
agriculture.
conclusion
exchanges
communications
warehouses
Bridging the efficiency gap
Being slow and uncompetitive
Being flexible and profitable
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UNCTADs work in the area of commodity risk
management and finance - organizing
international policy meetings on commodity risk
management and finance. - reports, advice,
training materials, training seminars and
conferences on structured commodity finance,
including warehouse receipt finance - reports,
advice, training materials, and training seminars
on commodity price risk management - advice to
emerging commodity exchanges - advice to
Governments on price risk management practices
use of modern financial instruments to support
policy liberalization and legal and regulatory
structures affecting the use of risk management
and structured finance markets.
For further information please contact Lamon
Rutten Coordinator, commodity marketing, risk
management and finance United Nations Conference
on Trade and Development 1211 Geneva 10,
Switzerland Tel. [phone] / 5755 /
5014 Fax [phone] email
Lamon.Rutten_at_UNCTAD.org