The role of a warehouse receipt system : a case study of the Malawian Agricultural Commodity Exchange

Abstract

In many Western countries and elsewhere, agriculture commodity exchanges have been in existence for centuries. However, Africa did not follow the same route for various reasons. The main reason is that commercial production of basic agricultural commodities considerably lagged that of its counter parts in the Western world. By the time commercial production became a significant factor, the philosophy of government controlled marketing was already entrenched in many of these countries. It was only in the mid-1990’s after the demise of communism and the abolishment of the South African controlled marketing system (not related), that farmers and stakeholders suddenly asked, how should we now go about to market our products, what are the alternatives? Western models were revisited, with commodity exchanges as a possible solution revisited. An urgent need aroused regarding the requirements for the establishment and management of a successful Warehouse Receipt System (WRS). Malawi, is one country that that has a history of government controlled marketing followed by (partial) deregulation in 2006. Despite this, the Agricultural Commodity Exchange for Africa (ACE) was established in 2005, survived and continued to grow. It has now reached a point where it is on the verge of commercially implementing and rolling out a WRS. This has obviously brought forward a number of questions. The most prominent of these are: how do you define a WRS, what are the components of a successful WRS, what are the similarities or differences between the requirements of a successful commodity exchange and that of a WRS? The objective of this study is to determine the importance of a WRS in the success of an agricultural commodity exchange. ACE has advocated for a WRS as an integral part of agricultural trade and financing since its incorporation in 2006. However, Malawi does not have a regulatory framework for warehouse receipts (WRs) so the system has to be built on contractual relationships between grain depositors, storage operators, financial institutions and ACE. Given that various commodity exchanges have been in operation throughout Africa for more than a decade with various degrees of success, sufficient literature is available on the subject matter. Much effort was made to obtain all relevant documentation, trusting that some valuable lessons are to be gleaned from these documents. This study briefly looked at the recent history on the establishment of commodity exchanges in Eastern and Southern Africa and the importance of a WRS and the role that warehouse receipt financing has played in their development. The objective was to learn from their experience and/or mistakes and to benefit from their success. Over recent years, the role, benefits and in some cases, the reasons for the failure of commodity exchanges in Africa, have extensively been researched. The study captures some of the invaluable observations made by many experts in this subject field. Aspects dealt with include, inter alia, the benefits of a successful WRS and a commodity exchange. This study deals with the requirements of a WRS, followed by the rules. The latter have been revisited and evaluated for Malawi, given its unique circumstances and the ever changing environment. Many of the processes have been visually depicted in a set of flow charts. This is followed by an analysis of the bank credit policies and procedures required for financing the WRs. As elaborated and included in the annexures, a draft product proposal has been compiled for bank product managers to submit to their respective credit policy committees seeking approval for the product. The process of financing a warehouse certificate and its redemption is dealt with in detail. In the latter part, this study looked at the role of the insurance companies and best practices followed in other countries. Other aspects highlighted are the corporate structure of ACE, government intervention, the Reserve Bank of Malawi (RBM), the IT structure, marketing, price information and arbitration. The study concludes that a well-designed and custom made WRS (for ACE) depends on various components. They are an online trading system, warehouse receipt (WR) financing, insurance, generic grading regulations and registered warehouses. ACE would struggle to grow and functions properly without a successful WRS. ACE could overcome many other obstacles such as inappropriate government interference, export restrictions, etc. However, ACE needs to be operationally competent and for ACE this is tied to a successful WRS. If ACE could succeed, it will serve as a case study for other countries and exchanges in the region to learn from. Lastly, a series of recommendations are made. The recommendations deal with findings from the study that needs to be addressed. Some issues are urgent and others may be dealt with over the longer term. Certain issues fell outside the scope of this study but still deserve attention.