By Dr Kadri ALFAH and Adam SULLEY
Agriculture in most African countries, to a great extent, is the key driver of the social and economic well-being of the people. Despite being subjected to food distribution margins and seasonal price variability Badiane et al., (1997), it is the primary source of food supply and household income. The sector contributes 24% of Ghana’s GDP, 80% of the rural household income, 80% of the National Food requirement, and more than 10% of total exports ( World Bank, 2022 ).
Despite the remarkable contributions of this sector to the Ghanaian economy, the agricultural marketing system is still disorganized, uncoordinated, unpredictable, and uninspiring due to poor enforcement mechanisms, poor marketing institutions, lack of business knowledge, and lack of regulatory systems. To overcome these challenges and to ensure the existence of formal and well-functioning structured commodity marketing, establishing a Warehouse receipt system in Ghana became a national priority. Since the early 1980s, the government of Ghana has perceived warehouse receipts as key to minimizing the problems of food price volatility in Ghana’s agricultural markets.
The Warehouse Receipts System is mainly established for storing goods, protecting, risk-bearing, financing, and stocking raw materials. The warehouse receipts system has a long history as it was first adopted in Mesopotamia in 2400 BC. In Africa, the system was practiced by Port Warehousing Companies and Freight Forwarders, and it was officially inaugurated in the 1980s. The system was recognized in the US in 1916 after enacting the US Warehousing Act of 1916.
Currently, the system is implemented in various developing countries such as Romania, Hungary, South Africa, Zambia, Russia, Slovakia, Bulgaria, Chechnya, Poland, Kazakhstan, Turkey, Mexico, Bulgaria, Kazakhstan, Hungary, Slovakia, Lithuania, Moldova, Uganda and Tanzania. Nevertheless, the system still encountered various challenges like lack of awareness among the public, limited warehouse facilities, lack of human resources, lack of storage facilities, legal and regulatory environmental issues, a scarcity of basic skill practitioners, weak market institutions, and smallholder farmers’ access to finance Katunze, (2017).
In November 2018, the Ghanaian authorities launched the Ghana Commodity Exchange, GCX, under the supervision of the Minister for Finance and Economic Planning and regulated by the Security and Exchange Commission ( SEC ).
What is a Ghana Commodity Exchange?
The GCX was set up as an orderly marketing system coordinating transactions between buyers and sellers or producers. A Warehouse Receipt (representing the quality, weight, and delivery location of the stored commodity) is the basis of trade. Warehouse receipts issued at the warehouse operated through the exchange are kept in a Central Depository, where title transfers are done. Trading is done by bringing all buyers and sellers together in an electronic price bidding session with standard commodity grades, standard price quotation terms, and standard delivery and payment terms.
To ensure the reliability and orderly conduct of the market actors, trading is done exclusively by registered and certified exchange members who can either trade for themselves or be represented by licensed Brokers.
Once trades are concluded between buyers and sellers, market information of graded prices and volumes are transmitted to all market participants and other stakeholders through the Market Data dissemination portal or sent directly to buyers through SMS messaging.
A financial institution partner bank undertakes the automatic settlement and transfers of commodities and cash to buyer and seller, respectively. Sellers are guaranteed payment in the correct amount and timeframe through the Exchange, and buyers are guaranteed delivery in the correct quality, quantity, and location. With all these combined functions, the GCX offers an outstanding Value Proposition to all market actors: a market that is reliable, orderly, transparent, and efficient.
The expected benefits of the Ghana Commodity Exchange were as follows:
- Productivity and Quality Incentives: As farmers and producers gain access to a more transparent and fair pricing system with greater reach to more buyers, producers are encouraged to invest in more productive technology and post-harvest quality enhancing technology, and improved labor practices,
- Enhanced Food Security: Better coordination between buyers and sellers means that commodities flow faster and more cheaply from production areas to consumption centers;
- Export Competitiveness: As the domestic supply chain becomes more orderly and efficient, the increased reliability and cost-effectiveness boost export performance and enable commodity exporters to expand the scope and scale of their activities and
- Agro-processing Boost: As the domestic supply chain becomes more orderly and efficient, agro-processing industries will be an essential opportunity to expand and develop, relying on access to steady and transparently priced supply.
African Commodity Exchanges
| Name | Abbreviation | Location | Commodity Class Traded |
| Ghana Commodity Exchange | GCX | Accra, Ghana | Agricultural |
| Africa Mercantile Exchange | AfMX | Nairobi, Kenya | Agricultural, Energy |
| Egyptian Commodities Exchange | EGYCOMEX | Cairo, Egypt | Agricultural, Energy |
| Nairobi Coffee Exchange | NCE | Nairobi, Kenya | Coffee |
| Ethiopia Commodity Exchange | ECX | Addis Ababa, Ethiopia | Agricultural |
| Mercantile Exchange of Madagascar | MEX | Antananarivo, Madagascar | Agricultural, Metals, Energy |
| East Africa Exchange | EAX | Kigali, Rwanda | Agricultural |
| Agricultural Commodity Exchange for Africa | ACE | Lilongwe, Malawi | Agricultural |
| Auction Holding Commodity Exchange | AHCX | Lilongwe, Malawi | Agricultural |
| Bourse Africa (previously GBOT) | Ebene City, Mauritius | Metals, Forex | |
| South African Futures Exchange (part of JSE Limited) | JSE | Sandton, South Africa | Agricultural |
| Nigeria Commodity Exchange | NCX | Abuja, Nigeria | Agricultural products |
| Lagos Commodities and Futures Exchange | LCFE | Lagos, Nigeria | Agricultural products, Oil and Gas, Currency, Solid Minerals |
| AFEX Commodities Exchange Limited | AFEX Nigeria | Abuja, Nigeria | Agricultural products |
| Zimbabwe Mercantile Exchange | ZMX | Harare, Zimbabwe | Agricultural commodities |
The warehouse receipt system (WRS) may be defined as “a platform that enables farmers, traders, processors, and exporters to obtain finance secured by agricultural commodities deposited in a warehouse” (FRMA 2020). The underlying warehouse receipts (WRs) may be either negotiable or non-negotiable, which means that ownership of the receipt can be transferred, giving the prevailing holder of the receipt claim to the commodities in their warehouse (Coulter and Onumah 2002).
The warehouse receipts system facilitates professional storage and access to commodity-based loans and inputs, and, in the end, it presents a centralized electronic trading platform that makes it easier for sellers to locate buyers, reducing their marketing and transaction costs and facilitating price discovery.
Warehouse Receipts can only become a sustainable way to finance working capital if three key elements are in place:
- a) A warehouse receipts-specific law. Specific legislation is needed to ensure the easy enforceability of the security (i.e. a few days after the default, without court intervention) and, thereby, make WHR good collateral. The law should clearly define the rights and obligations of all parties, including producers, creditors and warehouses, and establish a mechanism to register the financing secured by the receipts. The creditor should be able to unequivocally claim its right to the collateral, as it will automatically have a first-ranking lien on the collateral.
- b) Adequate licensing, inspection, and insurance of the warehouses. The government must ensure that the licensed warehouses meet specific minimum standards and are inspected regularly. This would ultimately enable the participants to treat all WHR equally, regardless of the warehouse that has issued them. Competent insurers must ensure the accepted standards for warehousing and commodities storage.
- c) A performance guarantee system. An indemnity fund is needed to cover the risk of potential fraud or negligent behavior by the licensed warehouse. As the indemnity fund will only be funded over some time by fees collected from the depositors, public funds are needed to provide a minimum initial capital.
GCX was expected to facilitate the linkages of soft commodity producers and small-scale farmers’ access to the local, national and international markets. Among other measures instituted to enable the GCX to meet its mandate was the establishment of farm-gate and community-level commodity aggregation centers, build-up of logistics and transportation companies, certification and equipment of public warehouses and silos at strategic surplus producing areas to mob up excess supply, certification and grading of commodities based on industry standards to conform commodities to market needs.
Together with local insurance companies, the GCX developed a risk management program to indemnify stored commodities against quantity and quality degradations and loss in market value, as well as the institution of local collateral management services to see to the management, audit and delivery of commodities from GCX approved warehouses and silo facilities.
The GCX also provided commodity testing, cleaning, sorting, and drying services in all its warehouses to enhance its storage and preserve its commercial value while it is in storage. The exchange guaranteed the depositors’ and buyers’ quantity and quality through various insurance schemes while their grains were in GCX care. In the first year alone, farmers, farmer groups, brokers, and intermediaries responded positively to the GCX innovations, evidenced by significant membership drive and participation in trading.
Some key financial institutions such as Ecobank, Fidelity Bank, and GCB provided the much-needed trade clearance and settlement at T+1, meaning farmers could sell their commodity at the GCX within 24 hours instead of sometimes being paid by buyers after more than 30 days. According to some farmer groups during the first year of the GCX market evaluation, this was a ‘’game changer’’.
Before the launch of the GCX and during the pilot phase to test market readiness, there were several national stakeholder consultations with industry key players. Key players consulted included the following:
Commodity traders, depositors, farmers, licensed warehouse operators, licensed Warehouses. Processors, government agencies, private sector players, NGOs, financial institutions, insurance companies, regulators, legislators, lenders/financial institutions.
The role of key stakeholders
A successful warehouse receipts scheme relies on a clear division of responsibility and coordination between the public and private sectors.
Role of government and public authorities:
The role of public authorities will be mainly to create the necessary institutional framework needed to bring a credible WRS into being. The key steps to be undertaken by the government in this respect are:
- to pass and implement legislation on warehouse receipt law and the standard conditions for licensed warehouses
- to set up a licensing and inspection system for the licensed warehouses
- to set up a performance guarantee system
- to work with the private sector to establish viable quality standards
Role of farmers and processors:
Farmers and processors are critical to the successful implementation of a credible WRS. Thus, the scheme is being planned through a bottom-up consultative process.
Consultations with farmers and processors are essential to ensure that the planned system suits their needs and constraints and that they understand and support the new legislation. Ongoing feedback once the scheme has started is also essential to help fine-tune its operation. Farmers should be encouraged to form cooperative groups to facilitate the storage of their crops and maximize the benefits of the WRS.
Role of local banks:
The role of the local banks is critical to ensure that the WRS is operable when the scheme has been set up; this requires training bank staff and establishing clear internal procedures, including a system for weekly monitoring of commodities prices being used as collateral. Warehouses with an established relationship with financial institutions are most likely to be seen as credible scheme participants at the outset.
Role of international institutions:
These can significantly accelerate the establishment of warehouse receipt systems by supporting institutional development by providing technical assistance in establishing quality standards, training warehouse operators and inspectors, advising on draft legislation, helping set up performance guarantee schemes, and drawing on best practices in other countries.
Licensed Warehouse Operator
A licensed Warehouse Operator is the legal person licensed to undertake activities of a Licensed Warehouse; the person is responsible for checking, receiving, storing and delivering commodities. They are responsible for the quality and quantity of stored commodities. Consequently, the Licensed Warehouse is liable for acquired and stored goods.
In 2019, just one year after the GCX and its faculties launch, the exchange launched its credit scheme with some local commercial banks, including the ARB APEX Bank. The warehouse receipt finance scheme enabled the long-suffering Ghanaian farmers, mainly from rural areas, who have suffered from low prices and profitability, to mitigate distress selling at the time of harvest when prices are generally depressed and unprofitable for them to sell.
A notable trend in the decline of prices of two key crops, maize and soya bean, means most small-scale farmers and processors struggle to gather sufficient working capital for necessary inputs for the next production cycle. The fall in prices also often leads to price wars between intermediaries and processors, affecting the industry as a whole and making farming unattractive. Some experts say when two elephants fight, it’s the grass that suffers.
To find a lasting solution, Economists and Structured trade specialists have suggested a value-added supply chain to address a more profound market failure and consider the warehouse receipts financing system a crucial temporary relief for these suffering farmers. Farmers are seriously impacted as the market faces challenges. A significant drop in commodity prices usually creates dilemmas for farmers selling or taking commodity-based value loans for mechanization, seeds, fertilizers, labor, preservative chemicals, and other working capital requirements.
The warehouse receipts have unique benefits; the key is helping small-scale farmers who produce nearly 80% of developing countries’ food and nutritional needs, including Ghana, address working capital gaps and transform agriculture. In countries like Ethiopia, South Africa and India, warehouse receipts have been critical in transforming economies. Producers, particularly rural producers, can delay sales at harvest when prices are generally depressed due to oversupply until it’s profitable for them to sell. As a result, small-scale farmers, whose primary market is at the farm gate, can now negotiate prices with buyers outside the farm gate, empowering them to be ‘’price setters‘’ instead of ‘’ price takers’’.
In the first year of the launch of the GCX warehouse receipt system, a brief consultation was conducted by some users, mostly smallholder farmers. Generally, the uptake was deficient; the following factors were attributed:
Farmers explained that they did not have access to WRF or did not require financing. They highlighted the critical reasons for their lack of involvement in storing products in warehouses and receiving WRF loans as lack of awareness of WRF, lack of WRF facilities in the vicinity, the costs associated with WRF (insurance, transport, etc.), and immediate need of liquidity so that farmers sell crops at the time of harvest;
Limited Technical Knowledge of WRF: The farmers revealed that while the Smallholder farmers were already storing some crops in their homes, they were unaware of WRF and required training on the WRF model, as well as crop standardization;
High use of Informal Financing: There is an overall reluctance by the farmers to move from the Susu model of financing to more formalized financing channels
They were unaware of the financial products, meaning the Smallholder farmers stayed rooted in other financing schemes.
Some said their banks and financial institutions have not formally launched WRF; consequently, warehouse receipts are not accepted as collateral.
Risk Profile: The risk profile of the Smallholder farmers is such that the likelihood of default is high. It was found that in case the value of the stored crop drops, borrowers are better off defaulting rather than making payments;
Some measures undertaken to improve the update included :
Increase Technical Assistance Offerings to Smallholder farmers, which included training for farmers to increase awareness about warehouse receipt finance and how loans are used.
Improve Financial Inclusion for improved access to WRF by employing less stringent requirements and less complex application procedures for taking out a loan and customized loan products, such as WRF for Smallholder farmers.
Specialized loan products were introduced for smallholder farmers, given their loan uses. WRF loans should be complemented with farmer education regarding resource utilization, latest farming practices and training to allow farmers to invest in preferred inputs which improve quality and yield;
Develop Warehouses with Affordable Pricing Schemes: More warehouses in target districts with affordable pricing schemes will positively affect the uptake of WRF with Smallholder farmers. For WRF to benefit Smallholder farmers, the price received for the commodity stored in the warehouse must earn a premium over grain stored on the farm or sold after harvest to offset the costs associated with storage and processing the grain to meet the established high standards required for the issue of a warehouse receipt;
Conduct Advocacy Campaigns: With advocacy campaigns against exploitative roles of informal creditors and the benefits of microfinancing, WRF can be a viable option for farmers complemented with initial training on WRF usage. Value-added services should be introduced alongside WRF, for example, crop insurance, farmer-to-farmer learning, commodity tests, evaluations, and advisory services;
- Improved Access to Market: Consider more training for farmers to increase crop yields and awareness about eco-agriculture farming practices to help combat risks associated with climate change. This can be addressed through focused interventions by relevant government departments to create opportunities for Smallholder farmers, enhance the availability of warehousing infrastructure, and utilize financing for improving crop yields through mechanization, which will further strengthen the structure and value chain of major crops and improve access to the market.
For the GCX, the jury is still out on the impact of the warehouse receipts system and how it has helped address some deep-rooted market-related frailties faced by Ghanaian farmers, especially small-scale producers. Has it particularly attracted the requisite private sector investment, which is badly needed by the industry to scale up productivity, improve yield, and enhance access to markets?
Longer term implications
WHR implementation has far-reaching implications for modernizing trade and related financing mechanisms. Providing a reliable delivery point and negotiable title documents lays the foundation for futures markets in the commodities and regions concerned. As a recognized and easily enforceable security, it will benefit from favorable treatment under Basel II and, therefore, banks can improve their returns on regulatory capital through lending against WHR.
The potential for a grain and legume futures market in Ghana illustrates this and by recent decisions of the Basel II committee regarding WHR.
- a) Futures in the Ghana Market: This calls for developing a marketing tool for the grain sector that will lessen price risks through tools such as futures contracts. The certification of warehouses as delivery points and issuing recognized receipts is crucial to developing this future market. Other conditions, such as WHR legislation and implementation, must be fulfilled to contribute significantly to creating a futures market. This would be a step forward, and it would further facilitate the financing of agricultural commodities by providing banks with market hedging, which is, so far, only available through one-to-one transactions with credit-worthy international traders.
- b) BIS II implications: Under the proposed new Capital Adequacy requirements of the Bank for International Settlements (BIS) II committee, banks opting for the Internal Rating Based (IRB) Advanced approach will have greater flexibility to compensate the high probability of default (PD) inherent in transactions with typically highly leveraged traders with a self-assessed low loss given default (LGD) based on the quality of the security. This is an exception, specific to commodity and trade financing, to rules that generally apply to specialized lending.
The implication is that those banks which qualify will be able to finance commodities and trade with more attractive conditions without jeopardizing their risk-adjusted return on capital as they can demonstrate that WHR represents adequate security, which is under their control and easily enforceable.
On the other hand, handling heavy documentation will increase operational risks, a new feature in the BIS II capital adequacy rules. Properly implemented WHR legislation, therefore, has the potential to make lending against agricultural commodities more attractive to specialized banks and more competitive, thereby increasing available funds at improved pricing conditions.
The combination of political risk mitigation through insurance or bank loan structures and the lower regulatory capital required when lending against WHR should attract significant interest from the largest commercial banks in financing agricultural commodities in Ghana, where such investments yield too low a return on their capital.
Conclusions
Warehouse Receipt Financing can become a viable product in Ghana as the crop yields for grains, legumes, pulses, fruits, and vegetables increase. This opens a substantial space for improving the quantity and quality of Ghana’s farm products. The review of the agriculture and financial sectors regarding warehouses and related WRF reveals significant opportunities for Smallholder farmers to improve their crop yields, increase earnings, and enter new markets, particularly opportunities offered by the African Free Continental Trade Area (AfCFTA).
However, there is a need to assess the entire warehouse receipts ecosystem and expose the limited existence of required warehouse infrastructure, government regulations, and quality assurance measures, as well as limited collaboration among crucial sector actors to decrease the role of other commodity-based financing schemes and find profitable solutions for replacing it. A more structured system that underwrites the risks borne by the farmers and provides financing and value-added services on feasible terms is required. To diminish these barriers to entry, the following potential steps should be taken by appropriate stakeholders:
Create Advocacy Campaigns: With advocacy campaigns against exploitative roles of informal creditors as well as the benefits of warehousing, including awareness raising, concept promotion, and advocacy among the various stakeholders (such as banks, the bank regulator, the government, producer organizations, and agribusinesses) in favor of WRF can improve uptake, complemented with initial training on WRF usage.
Develop and Provide Government Incentives for WRF: Multiple organizations, such as MOFA, SEC, GSA, and FDA, need to be incentivized for the provision of managed warehousing and making it suitable for target crops: legumes, grains, pulses, fruits, and vegetables.
- Review the current warehouse licensing and inspection regulations to include financial and physical standards. Consider the private sector performing the inspection of warehouses and stored commodities through licenses provided by the government.
- Establish Value-Added Services: Additional services should be introduced alongside WRF, for example, crop Insurance, farmer-to-farmer learning, evaluations, and advisory services. These would further enhance the grading and assessment of crops stored at warehouses and assure banks and MFIs of the quality of collateral provided for obtaining Smallholder farmers’ financing.
Dr Alfah, a structured trade and rural finance expert and first CEO of the GCX. [email protected]
Mr Sulley, Lead Business Strategist and Access to Markets Expert [email protected]
