Western and Central Africa
Eastern and Southern Africa
Eastern Europe and Central Asia
Under a WRS, a warehouse receipt (WR) is issued to a named
depositor (who may be a farmer, farmer group, processor or trader)
as evidence that he or she has deposited a specified commodity, of
stated quantity and quality, at a specified location. The holder of
the receipt may pledge it to a lender (with the stored commodity
being the collateral for a loan) or transfer it to a buyer (by way
of a sale). The warehouse operator or collateral manager, who has
custody of the stocks, guarantees delivery against the receipt, and
should be able to make good any value lost through theft, fire or
other catastrophes. The key players in the WRS are depositors, the
warehouse operator or collateral manager, and lenders. Their roles,
responsibilities and benefits may differ depending on whether the
WRS is regulated or not as discussed below.
An unregulated WRS is a legal or formal system of inventory
collateralization, in that the provision of services as well as the
rights and obligations of parties are based on existing contract
law. Aggrieved parties can therefore seek redress through the
courts. However, unlike the regulated WRS, neither the collateral
managers (who take custody of stored commodities) nor the issuing
of receipts are regulated by an independent regulatory agency.
Contractual obligations and rights under the system are usually
defined in tripartite collateral management agreements
between three key players shown in figure 3.2: borrower, collateral
manager and the lender (usually a bank). In the cotton sector,
borrowers tend to be medium-scale to large-scale ginning or export
companies, handling large enough volumes of seed cotton or lint to
justify the cost of this service, and who either own or can lease
suitable storage space. Very large traders, especially the
vertically integrated multinational companies, often do not use WRS
because of relatively easier access to cheaper offshore finance.
For reasons of scale, it is often difficult for smaller-scale
traders and groups of smallholder farmers to use it.
Figure 3.2: Key players in the unregulated
The collateral managers usually issue non-negotiable,
non-transferable warehouse receipts and guarantee of delivery of
the stored commodity. Most of them are local subsidiaries of
international inspection companies, which obtain international
insurance and performance bonds to back their guarantee of
delivery. They also tend to have a track record in quality and
quantity certification for various commodities. Société Générale de
Surveillance (SGS) is the best-known example of such companies.
Others include Audit, Control and Expertise (ACE), Cotecna, Baltic
International, Bureau Veritas and Socotec/ITS.
The cycle is typically as follows:
Quite often the banks will, in addition to the CMA, require the
following as additional security:
The main drawbacks of the system include lack of access,
especially by relatively small ginners for whom the cost of
collateral management and insurance may be too high. Financing
decisions can be slow and the requirement for fixed-price off-take
contracts often denies borrowers the opportunity to benefit from
favourable price movements. Since the receipts issued are
non-transferable, they can not be used as delivery instruments
against contracts, hence limiting their role in facilitating
Collateral managers, like other operators, sometimes experience
losses through theft and fraud. Their liabilities, when they occur,
are often limited by indemnity and 'limitation of liability'
clauses in the CMA. Hence, it is essential for lenders to carry out
effective due diligence in the selection of collateral managers and
closely monitor their operations.
The involvement of an independent regulatory agency is what
distinguishes the regulated WRS from the unregulated model. The
regulatory agency may be government-based, as is the case in the
United States (where USDA is the main regulator) and the United
Republic of Tanzania, which opted for this model following
promulgation of enabling legislation in 2005. A
private-sector-based agency, for instance a strong commodity
exchange as is the case in South Africa, can also regulate
warehouse operators issuing negotiable receipts which are traded.
In Zambia and Uganda, another model is being promoted, in which an
arm's-length private-sector-controlled agency is authorized by the
government to enforce appropriate laws and industry standards
regulating the WRS.
The independent regulator is responsible for licensing or
certifying warehouse operators as custodians of collateralized
stocks (ensuring that they comply with criteria set in relevant
laws and regulations); regulating the issue of standardized
warehouse receipts to minimise the risk of fraud; and overseeing
the operations of warehouse operators (including carrying out
unannounced stock and quality verifications).
Licensed operators offer 'public' warehousing services, implying
that they can store commodities on behalf of multiple depositors
(of all sizes) in a single warehouse or site. The receipts issued
may be transferable and negotiable, depending on the enabling
legislation. Licensed warehouse operators may include international
as well as local inspection companies, and processing companies
such as ginneries.
Depositors requiring financing for initial procurement of seed
cotton apply for credit prior to the opening of the marketing
season. The application is usually appraised on the basis of
traditional criteria and procedures, including:
As in the case of lending under the unregulated WRS,
decision-making is slow and bureaucratic, involving recommendations
by credit officers, credit committees and management.
Once seed cotton is procured or assembled by farmer groups, it
is delivered to designated ginneries for storage and processing.
The independent regulatory agency is responsible for licensing or
certification of the designated ginneries. Deposits can be made by
any party but must meet the following criteria:
The designated ginners issue WRs to depositors, after weighing
and grading the seed cotton deposited. The WR states the quantity
and quality of the seed cotton deposited; the name of the
depositor; and the obligation of the ginner to deliver the seed
cotton described or its lint equivalent to the depositor or a bona
fide party to whom the receipt has been transferred. The WR also
contains the terms and conditions under which the stocks are being
Where the depositor intends to borrow against the collateralized
stocks, the process involved includes the following steps:
Prior to sale, a system of monitoring the collateralized stocks
is enforced to safeguard the interests of depositors and lenders,
When the crop is sold, payment is required to be made through to
the financing bank. This is often included in the off-take
The financing bank will, after being satisfied that the loan
obligations have been satisfied, release the WR to the bona fide
buyer, who can take delivery of the lint or seed cotton, after
presentation of the WR to the designated ginner. When the WR and
instructions from the bank are presented, the ginner will allow
delivery of the lint or seed cotton to the buyer and cancel the WR
to complete the transaction.
The regulated WRS has the added benefit of being accessible by
small-scale operators, such as farmer groups, as illustrated in the
cases from the United Republic of Tanzania and Uganda. However,
establishing such a system requires painstaking work on creating
and maintaining a supportive regulatory and policy environment.
WRS pilots for cotton in the United Republic of
Tanzania and Uganda
The regulated WRS has been successfully piloted in the
United Republic of Tanzania and in Uganda. One farmer group, the
Oridoyi Rural Cooperative Society in the United Republic of
Tanzania, which has used the system, was able to raise seed cotton
output by its members almost 10-fold over a period of four years.
Financing was provided by a local bank, CRDB Bank Ltd, which also
lends about $10 million per year against collateralized coffee. The
cooperative was also able to market its lint direct to a United
Kingdom-based cotton merchant in the 2005/06 season. The rise in
output was primarily financed by the cooperative society from
retained profits accumulated through marketing cotton on behalf of
its members, through the WRS.
In Uganda, the Nyakatonzi Cooperative Union offered storage
and toll-ginning services to its member primary cooperative
societies, making it possible for them to use the WRS. The primary
societies did not obtain inventory finance, as members were
prepared to wait for payment until after the lint was sold.
Participating farmers earned incremental income of over 40% because
they sold lint and cottonseed, instead of seed cotton. The
cooperative union also benefited from increased throughput without
having to raise additional financing for procuring seed
Source: Natural Resources Institute reports.