warehouse receipt model in punjab
TRANSCRIPT
This report is made possible by the support of the American people through the United States Agency for International Development (USAID). The contents are the sole responsibility of the author and do not necessarily reflect the views of USAID, the United States Government or Chemonics International
Warehouse Receipt Model in Punjab Consolidating Earlier Work and Setting Future Direction
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Warehouse Receipt Model in Punjab Consolidating Earlier Work and Setting Future Direction
Table of Contents
1. INTRODUCTION 3
2. BACKGROUND 4
3. EARLIER WORK COMMISSIONED BY PEEP 5
4. INTERNATIONAL EXAMPLES 9
4.1. UGANDA 9 4.2. KENYA 10 4.3. GHANA 10 4.4. ETHIOPIA 11 4.5. INDIA 11 4.6. MALAWAI 12 4.7. TANZANIA 12 4.8. ZAMBIA 13 4.9. INDONESIA 13 4.10. BULGARIA 14
5. PUNJAB AGRICULTURE SECTOR PLAN & WRS 14
5.1. GRAIN COLLATERALIZATION & WAREHOUSE RECEIPT MODEL 15
6. NEED/RATIONALE FOR WRS IN PUNJAB 16
7. STAKEHOLDERS PERSPECTIVE 18
7.1. FARMERS 18 7.2. MIDDLEMEN 19 7.3. PROCESSORS 19 7.4. GOVERNMENT 20 7.5. COMMERCIAL BANKS 21 7.6. STATE BANK OF PAKISTAN 21
8. ROADMAP FOR ESTABLISHMENT OF WRS IN PUNJAB 22
8.1. CROP SELECTION FOR WRS 22 8.2. CONTRACT/INSTRUMENT CHOICE FOR WRS 23 8.3. DESIRED STRUCTURE OF WRS MODEL FOR PUNJAB 24
9. PAC MODEL AS PILOT PROJECT 26
10. WAY FORWARD 30
REFERENCES 32
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Warehouse Receipt Model in Punjab Consolidating Earlier Work and Setting Future Direction
1. Introduction
Warehouse receipt system is not a new concept and many countries have
developed warehouse receipt systems (WRS) to facilitate farmers, processors and
banks. While on one hand, WRS enables the farmers to hold off the sales of their
produce in expectation of better prices, on the other, it also facilitates the banks
to extend credit to farmers based on secured collateral. Furthermore, the receipts
issued are tradable and can be sold or purchased through any electronic exchange
multiple times before the final settlement of the produce, at which stage the
delivery will take place. The receipts are generally recognized as legal documents
with formal ownership of a specific quantity and standard of a commodity stored
at a particular location, with specified quality parameters. Because of these
features, warehouse receipts provide efficient means to farmers for accessing
postharvest finance for working capital needs, especially those who are often
unable to secure credit owing to lack of easily available collateral.
The Punjab Enabling Environment Project (PEEP) funded by USAID has been
providing technical assistance to Agriculture Department Punjab on various
policy related interventions. One of the areas, where PEEP has previously assisted
the Agriculture Department, is technical advice for setting up a warehouse receipt
model for various crops. Followed by this technical support provided through an
international expert, various discussions have taken place and the government
has taken on board perspective of other stakeholders. The government has also
deliberated on strategic options such as choice of crops to focus on and whether
to set up a Punjab-specific commodity exchange. Pakistan Agriculture Coalition
(PAC), a non-profit organization established by Pakistan’s leading business groups
for the development of agriculture sector in the country, has also made a few
recommendations based on its own learning from Kunri (Sindh), where a small
WRS pilot for red chilies was undertaken. There was a need to consolidate these
various perspectives and approaches, validate viability of WRS financing system
in Punjab, propose a business model and devise a roll out plan. This report
presents these consolidated findings along with an implementation plan taking
into account the perspectives and roles of various value chain players including
farmers, private sector and government. This report aims at providing the future
direction to the Agriculture Department for kick starting establishment of WRS in
Punjab.
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Warehouse Receipt Model in Punjab Consolidating Earlier Work and Setting Future Direction
2. Background
Agriculture sector provides the foundation for Pakistan’s economy, contributing
20.9% in national GDP and providing employment to 43.5% of country’s
workforce. Every year, Pakistan produces approximately 45 million tons of wheat,
rice, maize and other major and minor crops for domestic consumption as well as
export. Punjab is the largest producer of agriculture commodities in Pakistan. The
agriculture value chain involves multiple intermediaries, whose involvement
along with other prevalent market inefficiencies; often impact the market
participants adversely. In particular farmers are worst affected by any such
market distortions. During harvesting season of major crops, a huge mismatch of
supply and demand is seen in every agriculture market, which results in decrease
in trading prices due to supply glut. Small farmers have to sell their produce on
unfavorable prices due to inadequate warehousing capacity, weak financial
muscle as well as looming cash requirements for the next crop. Inadequate
warehousing facility also leads to significant postharvest losses, worth billions of
rupees by some estimates. Besides absence of warehousing facilities, the
traditional sales platforms provide limited choice to famers for selling their
produce.
In recent past, State Bank of Pakistan introduced the concessional refinance
scheme 1 to encourage construction of silos, warehouses and cold storages,
however so far the scheme has failed to produce any significant results on the
ground. Moreover, reportedly Securities and Exchange Commission of Pakistan
(SECP) is also in the process of developing a regulatory regime for warehouse
receipt financing in the country.
Realizing the plight of farmers in accessing finance, getting a better price for their
produce and to have more robust sales platform as well as to ensure stabilization
of prices for consumers, Agriculture Department Punjab has planned to support
establishment of a functioning warehouse receipt financing system in the
province. There is a clear understanding in the government that any such model
should be private sector led and the government involvement should be minimal
and should only include providing support to make such a model functional.
1 http://www.sbp.org.pk/acd/Guidelines/2014/Draft-Frmwork-Warehouse-Receipt-Financing.pdf
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Warehouse Receipt Model in Punjab Consolidating Earlier Work and Setting Future Direction
3. Earlier Work Commissioned by PEEP
As mentioned earlier, the USAID-funded PEEP has provided detailed technical
assistance on this subject to Agriculture Department. The study, commissioned by
PEEP, highlighted that any warehouse receipt system (WRS) in the province
should be aimed at promoting grain storage in the private sector; developing
future agricultural commodity markets and promoting pledge lending; inviting
and encouraging private investment in identified areas; developing efficient
market models and encouraging private-public partnership in establishing these
markets. According to the study, these objectives can be met by creating and
operating a WRS network of silo complexes in Punjab, linked to a commodity
exchange.
The study noted that the Punjab agriculture sector is characterized by numerous
small, inefficient, financially weak farmers, as depicted through a comparison of
number of small landowners with less than 10 Ha, with the large farmers with
landholdings of 60 Ha and above.
Size of Land Ownership Number of Owners Percentage of Total
Above 60 Ha 5,339 0.10
Under 60 but above 20Ha 7,273 0.1
Under 20 but above 10Ha 91,548 1.7
Under 10 but above 5Ha 315,553 5.8
Under 5 but above 3Ha 569,024 10.5
Under 3 but above 2Ha 772,828 14.2
Under 2 above 1Ha 1,180,659 21.7
Under 1 Ha 2,490,316 45.8
TOTAL of below 60Ha 5,432,540
Source: Warehouse Receipt Financing in Punjab; Kennedy, J. 2015; USAID PEEP
About 98% of landholders have less than 10 Ha, placing them in small famer
category, where major economies of scale at farm level are not possible. The
study noted that wherever the famers in developed countries have much larger
sized holdings, significant investment in modern, efficient machinery can be
justified, but this is clearly not the case in Punjab, despite the fact that the overall
land area available for cultivation is capable of huge strides in output if
cooperation, amalgamation, inputs and machinery were employed on an
aggregate basis. The only potential for efficiency at farm level could therefore be
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Warehouse Receipt Model in Punjab Consolidating Earlier Work and Setting Future Direction
achieved either through farmers’ cooperation with each other or amalgamation
through the sale of holdings or probably a combination of both.
Based on this premise, the study suggested that the government should arrange
warehouses each with 50,000 MT of capacity, possibly through 300+ strategically
situated facilities, to service the needs of farmers across Punjab. Moreover, since
at individual level the volume of crops produced by each small farmer would be
too small and managing the sheer number of depositors at each warehouse during
the course of harvesting would be impossible, these 300+ warehouses should be
supplemented through grouping together of farmers to coordinate their cropping
cycle and aggregate their produce. These efforts, according to the report, would
result in a homogenous harvested crop, which can safely be mixed with each
other´s for the sake of transporting to the nearest warehouse. Each group should
then be supported through a weigher / tester at the point where they could safely
aggregate deliveries from the field. The weigher / tester can test for moisture
content with a simple hand held moisture meter and weigh bagged consignments
on a platform scale. The income from collective depositing can be shared equitably
among the group members. Through this coordination and aggregation, the
farmers could potentially deposit at warehouses directly, without the need for
‘arhtis’ (middlemen) to act as assemblers / aggregators, who under present
arrangements may claim a significant profit for their involvement in the
transaction.
Furthermore, being able to deposit collectively means that the farmers could
also collectively approach banks for a working capital loan directly, using their
harvested and deposited crop, verified through warehouse receipt receipts as
collateral, pledged to the participating bank in exchange for a loan.
In the proposed model, the farmers would have to sell their warehouse
receipts collectively in order to pay back capital and interest and to pay for
warehouse charges. Deduction of these invoiced expenses would be handled
by the commodity exchange (or WRS combined central depositary or clearing
house) before final disbursement of sale proceeds. The remaining balance
could be deposited in a nominated ‘group’ bank account from where they could
divide income amongst their grouping, in proportion to their shares.
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Warehouse Receipt Model in Punjab Consolidating Earlier Work and Setting Future Direction
The study suggests that adoption of such a model would reduce the losses
due to inadequate storage and hence spoilage to zero, provided the deliveries
to respective warehouses are made on time. Furthermore working capital
loans will be available at competitive interest rates using the warehouse
receipt as collateral; prices will be higher through more efficient trading via
commodity exchanges; and farm level efficiencies will be higher through
some form of cooperative farming.
The study does not exclude middlemen altogether and maintains that much of
these benefits (with probably the exception of the last one) could also accrue
through existing ‘arhtis’, who should also be actively encouraged to use the WRS
to make it work. The study further states that how existing farmer-arhti
relationship would develop in the WRS environment is difficult to predict, but it
is suggested that improved returns can be witnessed if both parties decide to take
advantage of WRS. The report also suggests a regulatory and monitoring role for
the government to closely examine this relationship after the creation of a WRS
network to ensure that farmers’ interests are well protected.
The study recognizes that development of a Punjab-wide WRS network would be
a very large project by any standards. As mentioned earlier, there is a need for at
least 300 major warehouses, each with 50,000 MT capacity, however any future
work in this direction may begin with smaller facilities of 10,000 or 20,000 MT
capacity. The study also provides some broad estimate for constructing a well-
designed and well-equipped 20,000MT silo facility2 at about US$2.34 million (Per
MT stored = US$117 or US$4.68 per MT annually over a 25 year depreciation
period)3.
2 Technical specifications given in the study: 20,000 MT silo with six hopper – bottomed pre-storage silos of 90MT capacity each; six individual intake pits, drive over grids and conveyors; six rotary grain cleaners, to include aspiration & cyclones for dust and light particle removal; eight x 2,500 MT capacity long term storage silos; eight silo unloaders; sixteen – 2 per silo - low volume ventilation units; temperature monitoring equipment - 4 per silo; phosphine pellet applicator for the purpose protect grain ¡n store from insect attack; two weighbridges and controls; system control panel; necessary 120tph elevators, conveyors, walkways; and initial basic set of laboratory equipment 3 In addition other costs incurred should include transport from port, bagging off lines and of
course land purchase, site preparation and civil engineering works, utility supply, office and
laboratory. The consultant further suggests some increase in these estimates since the estimate is
based on a 2-year old quote.
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Warehouse Receipt Model in Punjab Consolidating Earlier Work and Setting Future Direction
According to the study, the total cost (based on the above-mentioned estimate)
should be little less than this estimate due to the sheer scale of the overall 300+
units but should include other factors such as financing costs, inflation and other
less tangible expenses. Therefore, the total financial commitment required by
individual investors (banks, companies and individuals) / Government of Punjab
(depending on the preferred ownership and funding model decided upon) will
exceed US$6 million per 50,000 MT site for machinery hardware, land, civil
engineering and utility supply alone (using a cautious total budget figure of
US$120 per MT of storage capacity). The study also notes that in relation to all
capital investment expenditure, the capital cost would be spread from an
accounting perspective over the effective ‘useful life’ of the asset. This could
reasonably be expected to be 25 years for (silos, civil engineering and other
building works) and 10 years for moving-part machinery.
The study also recommends that any effort to develop WRS in Punjab should be
accompanied with establishment of a government warehouse receipts authority
to oversee the function of both the system itself and its individual warehouse
operators.
It seems that the study is based on learning from a number of other countries and
provides a sound model. However, based on a review of local situation and
discussions with stakeholders, following features in the proposed model need to
be re-looked at:
• The study does present a sound functioning model of how WRS work,
including details of processes as well as relationship amongst various
stakeholders and essential institutional linkages.
• The proposed model for cooperative farming is very important to make the
system work for small farmers, however it is an ambitious task and may
take many years before it can be successfully implemented at a larger scale.
• Establishing a Greenfield warehouse with USD 6 million+ per location
would result in approximately USD 2 billion cost for 300 locations. With an
expected life of 25 years, it may be very expensive and would need an
extensive cost benefit analysis.
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Warehouse Receipt Model in Punjab Consolidating Earlier Work and Setting Future Direction
• The model should make use of existing storage spaces within the public
and private sectors to propose a low-cost model that may be better suited
for Punjab.
• The report makes recommendations to address the undue margins claimed
by middlemen but also suggests integrating them in the model. This dual
approach causes some confusion because if middlemen are integrated into
such a solution and keep on claiming significant margins, it would be
unclear how farmers would take benefit from this solution.
4. International Examples
Before providing a policy advice, it is important to look at international examples
and review how other countries have managed to introduce WRS. Some of the
examples are discussed below, however, these are in no way meant to provide an
exhaustive secondary review and rather a few illustrations of WRS models in
other countries4:
4.1. Uganda
Uganda is located in East Africa and is the second most populous land locked
country after Ethiopia. Agriculture is the most important sector, which
contributes around 20% to the national GDP, 50% to exports and employs 70% of
the country's active population. Major crops of Uganda include plantains, cassava
and potatoes. Farmers in Uganda had been facing problems such as limited access
to credit and provision of poor storage facilities. Furthermore, low returns to
farmers made life difficult for the predominant rural population, which was
relying solely on agriculture income. To improve this situation, legislation on
warehouse receipt was enacted in 2006 and it took almost four years for the first
Ugandan bank to offer finance agreements by accepting warehouse receipt. The
Act established Uganda Warehouse Development Authority as a regulatory and
oversight body for managing warehouse receipt system. The overall objectives of
the Authority included: promoting financial inclusion through regulated inventory
credit; improving grades, quality and standards of agriculture commodities;
enhancing and improving storage infrastructure; developing a real time market
information system for supporting stakeholders in taking informed decisions; and
4 Extensive input on these international examples has been provided by Mr. Ali Tahawer, PEEP Consultant for Agriculture Department.
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Warehouse Receipt Model in Punjab Consolidating Earlier Work and Setting Future Direction
encouraging value addition of produce through efficient marketing system. Under
this Act, no person in Uganda can operate the warehouse and there is an elaborate
licensing regime operative in the country. The acceptance of electronic
warehouse receipt system was identified as a greatest challenge. To overcome this
issue a central registry was developed within the Authority in which issuance and
negotiation of warehouse receipts were to be registered. The primary users of
warehouse receipt system in Uganda are farmer cooperatives that receive loans
of USD 7000 against collaterals on average.
4.2. Kenya
The agriculture sector contributes to around 65% of Kenya's export earnings with
maize, potatoes and wheat constituting as the country's major food crops. The
Government of Kenya took a paradigm shift from direct management to adopting
regulatory policies with regards to agriculture commodities. A major component
of this transition encompassed warehouse receipt management. The WRS was
particularly beneficial for farmers with larger holdings but to allow small-scale
farmers to also benefit from the financing system, they were organized into
associations and their capacities were built to engage in collective management of
grain collection. The Warehouse receipt system in Kenya is focused on maize
which is primarily grown by small landholders. Two warehouse approaches were
undertaken by Kenyan Government - Certified Warehouse Receipt System and
Uncertified Warehouse Receipt System. Under certified WRS two different pilots
were initiated - one by East Africa Grain Council (EAGC) in 2008 and the second
by National Cereal and Produce Board (NCPB) in Sep 2010. The uncertified
warehouses consist of numerous small-scale grain storage initiatives taken in
rural areas. NCPB now has nationwide network of silos and warehouses in 110
sites with a combined capacity of 1.8 million metric tonnes. In addition Kenya is
focused on enhancing rural storage and local bulking of surplus grain called cereal
banking. The storage charges in WRS through cereal banking are negotiable,
variable across time and depend on prevailing market conditions.
4.3. Ghana
Ghana's economy is one of the strongest and most diversified in West Africa, given
its relative stability and good governance. The government established the Ghana
Commodity Exchange (GCX) to support WRS model for providing market access
and high returns to farmers in possession of small land holdings. In 2009, a
feasibility study was carried out for the establishment of commodity exchange,
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Warehouse Receipt Model in Punjab Consolidating Earlier Work and Setting Future Direction
which highlighted gaps in warehousing capacity. The Ghana Commodity Exchange
was designed as a public private partnership (PPP), with minimum government
share. The GCX project was launched in 2015 and brought key stakeholders in the
agricultural value chain together. The initiative allowed warehouses to be
constructed within short time spans in anticipation of high project volumes
expected from GCX commodity trading. The project was supported by the Bank of
Ghana.
4.4. Ethiopia
The agriculture sector in Ethiopia contributes 40-50% of the country's GDP and
60% of its exports. Agriculture sector is also the largest employer as it provides
employment to 70-80% of the active rural population. Agriculture markets in the
country were poorly structured and transaction costs were quite high for both
buyers and sellers. The WRS model in Ethiopia was established to enable any
person to store standardized agricultural products in warehouses; to establish a
legal contract between commodity growers and warehouse operators; and to
create an organized and efficient market system for agriculture products for
assuring sustainable income to small landholders. With the initial enactment of
new legislation, the Trade Ministry launched a project to establish a WRS model
in collaboration with Common Fund for Commodities (CFC). In 2007, the pilot
project was at an advance stage and before its completion, the Ethiopian
Commodity Exchange (ECX) was established in 2008. The establishment of the
Ethiopia Commodity Exchange (ECX) created a parallel regulatory platform for
Warehouse Receipt System. As compared to the earlier Proclamation, the ECX had
a broader scope as it covered a larger variety of commodities with different types.
The ECX was established in order to support producers to get market prices and
to allow agricultural producers and traders to get short-term loans from
accredited banks against warehouse receipts issued by the ECX. Furthermore,
policy makers in Ethiopia made efforts to link the ECX with the warehouse receipt
financing system. Presently, ECX is operating and managing warehouses to carry
out weightage and inventory management of agriculture commodities and issue
warehouse receipt.
4.5. India
In India, the agriculture sector contributes around 17.4% to the GDP and employs
around 50% of the country's active population. Major commodities of India are
sugarcane, rice, wheat, maize, potatoes, fruits and vegetables. It was estimated
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Warehouse Receipt Model in Punjab Consolidating Earlier Work and Setting Future Direction
that around 20-25% of food grains cultivated and produced in India wasted due
to poor storage capacity and the percentage was double for perishable
commodities. Warehousing was long established in India through the Agriculture
Produce Act 1956 and the Warehouse Cooperation Act 1962. However due to
anomalies in laws, stakeholders had no confidence in Warehouse Receipt System.
Later in 2010, the Indian Parliament enacted Warehouse Development and
Regulation Act, which introduced a negotiable warehouse receipt system with an
aim to improve storage capacity, increase farmer access to credit and allow high
return for farmers. Legislations in the Act supported financial institutions by
mitigating the risks accompanied by farmers’ lending. The Act was considered
crucial for Indian warehouse sector because it standardized and shaped
transactions and enhanced interest of lending institutions, logistics and
warehousing industry, buyers and sellers etc. WRS in India started with
expectations of high economic pay offs however it could not excel due to various
regulatory constraints in place. The Warehouse Development and Regulatory
Authority was mandated to regulate only negotiable warehouse receipts of the
commodity ecosystem and was not authorized to regulate entire warehousing
system. Due to this inherent flaw in the Act, the Authority was neither able to
handle dealings with banks nor convince them to use negotiable instruments for
agricultural funding of any significant scale.
4.6. Malawai
Malawi is one of the least developed African countries, with high dependence on
agriculture sector and majority of its population living in rural areas. The
warehouse receipt system was initiated in the country in 2005. The first
warehouse storage facility became functional in 2011 and was open to deposits
from any interested third party. Opportunity Investment Bank Malawi (OIBM) is
an active partner for WRS initiative and the model was promoted as a secure
investment, with high returns, in order to attract buyers, sellers and agriculture
investors. Through the WRS model, agriculture markets in Malawi have been
strengthened, benefitting farmers.
4.7. Tanzania
Tanzania is an agriculture-based country where the agriculture economy
contributes around 25% of the GDP and employs approximately 85% of the
workforce with a share of 85% in exports. Need for capital clubbed with poor
storage infrastructure forced small-scale farmers to sell their produce at prices
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Warehouse Receipt Model in Punjab Consolidating Earlier Work and Setting Future Direction
lower than prevailing market rates. To address these issues, the Tanzanian
Government with support from International Fund for Agricultural Development
(IFAD) and the Common Fund for Commodities (CFC), undertook numerous
warehouse receipt pilot initiatives. In 2002, the Agricultural Marketing Systems
Development Programme (AMSDP) was piloted as an inventory credit scheme
through a warehouse receipt system in 11 districts. Savings and Credit
Cooperative Societies (SACCOs) were introduced which helped farmers to get
loans from commercial banks if their produce was not sold at market price.
SACCOs are leading microfinance institutions in rural areas and are strongly
supported by the government. The first law governing warehouse receipt in
Tanzania, Warehouse Receipt Act (WRA) was enacted and promulgated in 2005
to provide a legal cover for the warehouse receipt program replication across
country, which combines provisions for the regulation and operation of
warehouses, as well as for warehouse receipts. Given these changes in the
government support, legal and regulatory provisions, the introduction of
warehouse receipt system (WRS) has resulted in visible success in addressing
poor storage and credit access issues of poor farmers.
4.8. Zambia
Zambia developed a warehouse receipt financing system in the year 2000 and also
established the Zambia Agriculture Commodity Agency (ZACA) with capacity of
26,000 tonnes. Due to operational issues however, ZACA ceased operation in
2006. A modified WRS was introduced again by USAID in 2010 to improve
livelihood of farmers through access to credit and adequate storage facilities. The
new model is available to depositors of different sizes and the project was initially
started from urban areas and later on scaled up in remote areas with surplus
produce. A robust certification and grading system is also a part of the WRS model
and warehouse operators either own or lease silos on commercial terms or are
free to charge commodity wise storage rates.
4.9. Indonesia
Agriculture sector plays an important role in Indonesia and contributes 15% to
national GDP, claims 21% of export earnings and provides approximately 38% of
total employment. The government initiated and formalized a system for
warehouse receipt finance and its implementation was supported through
technical assistance provided by International Finance Corporation (IFC). In
addition to issues pertaining to small and medium businesses lacking fixed asset
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Warehouse Receipt Model in Punjab Consolidating Earlier Work and Setting Future Direction
collateral to secure credit, the WRS also aimed at addressing issues of credit access
for farmers. To formalize warehouse receipt system (WRS), a legislation was
enacted by Indonesian Parliament in 2006. The law further strengthened the
system by stating roles and responsibilities of the warehouse managers. To bring
transparency in the system via paper or electronic forms of warehouse receipts, a
centralized registration center was established to register these receipts.
4.10. Bulgaria
The warehouse receipt system in Bulgaria is one of the few success stories
operative since the last nine years. Due to smooth operations, it has attracted key
stakeholders such as buyers, sellers and financial institutions. The Warehouse
Receipt System Development was initiated in 1997 in Bulgaria with the help of
USAID and the Bulgarian Government. Bulgaria also enacted laws for grain
marketing and storage to formalize the warehouse receipt system, laying out
regulations for marketing and storage of grain and rights and responsibilities of
individuals and legal entities involved in the process. Grain law was enacted for
two types of business entities - public warehouses and grain storage facilities.
Only public warehouses, licensed for storage grain, were authorized to issue
warehouse receipts. Licensing requirements for public warehouses were clearly
defined both for technological and financial standards. Bulgarian grain law also
includes provisions for indemnity fund, guaranteeing WRS' performance. The
Bulgarian indemnity fund is the first performance guarantee mechanism of its
kind developed outside the United States.
5. Punjab Agriculture Sector Plan & WRS
Agriculture Department Punjab has set a vision for re-positioning itself to
transform the agriculture sector in the province of Punjab to increase the crop
productivity, bring additional uncultivated area under cultivation and improve the
crop mix to create maximum value addition in the province to contribute towards
inclusive economic growth. This vision of the Department is clearly set out in its
sector plan. As per the sector plan, the focus of the Department is on transforming
the farmers of Punjab into progressive farmers, by equipping them with state-of-
the-art support and knowledge and providing them with quality and timely inputs
as well as through creating an enabling environment.
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Warehouse Receipt Model in Punjab Consolidating Earlier Work and Setting Future Direction
Under the sector plan, agricultural credit has been identified as a vital input for
leveraging the financial growth. According to the plan, at present 31 commercial,
microfinance banks and Islamic banks, with around 3,950 agriculture designated
branches, are facilitating farmers by extending agriculture credit throughout the
country. Additionally the agriculture lending banks including 19 commercial
banks, 2 specialized banks, 7 microfinance banks and 3 Islamic banks are engaged
in providing development loans to farming community for agriculture activities
including growing of crops, livestock, poultry, fisheries, orchards, forestry,
nurseries, apiculture and sericulture.
Despite the presence of this vast network however, farmers on ground still face
challenges and have limited access to finance, especially without collateral.
Therefore, poor subsistence farmers have to rely on expensive informal credit
sources and face numerous challenges such as higher loan servicing costs due to
limited volumes and high information costs and limited specialized products
offered by the financial intermediaries to better meet their financing needs. The
financial institutions on the other hand suffer from poor, insufficient collateral and
non-enforceability of security; low affordability for expensive financial products;
and non-alignment between farers’ return patterns and repayment schedules.
The Government has identified five key enablers to stimulate agriculture sector
growth, with efficient access for farmers to downstream infrastructure such as
markets and value addition apparatus as a key enabler. This would also mean
timely access to market information helping farmers in efficient decision-making
and claiming greater value from the value chain.
5.1. Grain Collateralization & Warehouse Receipt Model
The provincial government in Punjab realizes that warehouse receipt financing
and other related collateralized lending mechanisms can provide an alternative to
traditional lending requirements of banks and other financiers and are
particularly relevant in the context of Punjab. Agriculture Department believes
that warehouse receipts financing has the potential to improve the supply of rural
finance by easing collateral constraints and provide an avenue for working capital
provision to the farmers. The sector plan envisages that the model will be piloted
in 1-2 areas for selected crops and would then be scaled up.
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Warehouse Receipt Model in Punjab Consolidating Earlier Work and Setting Future Direction
Warehouse Receipt Model5 In warehouse receipt financing in the agricultural sector, the underlying collateral is a soft commodity such as grain or cotton. After harvest, the commodities are stored in a licensed warehouse that issues a receipt proving that the commodities are received and physically in the warehouse. This receipt forms the basis of the financing. Ideally, the warehouse receipt consists of two parts: a certificate of pledge and a certificate of title. When issuing the certificate of pledge to a lender, the farmer, trader, or agricultural company is able to take out a loan: he borrows against the collateral, hence the commodities and hereby covers his working capital needs. Lenders usually advance funds as a specified percentage of the value of the underlying commodities. This percentage needs to account for the costs that lenders have to incur when selling the commodities in case of a loan default, as well as the potential value decrease caused by price volatility in the respective commodity market. Subsequently the farmer sells his commodities either to a trader or a primary processor; to validate this sale he transfers the certificate of title. The buyer eventually pays back the loan plus interest directly to the lender and receives in exchange the certificate of pledge that had been deposited with the lender when the loan was issued. Once the buyer has both, the certificate of title and the certificate of pledge, he can release the commodities from the warehouse. Because of the easy recourse and the ability to sell a liquid collateral asset in case of default, warehouse receipts-based lending lowers the risk and reduces typical transaction costs of commodity transactions, such as high loan servicing costs due to limited volumes, high information costs, and high supervision costs.
6. Need/Rationale for WRS in Punjab
Punjab has two cropping seasons including Kharif, which starts from April-June
and is harvested during October-December; and Rabi that begins in October-
December and is harvested in April-May. Important kharif crops include rice,
sugarcane, cotton and maize, whereas key rabi crops include wheat, gram, lentil
and tobacco. Overall, important crops such as wheat, rice, sugarcane maize and
cotton account for 25.6% of the value added in overall agriculture and 5.4% to
GDP, while the other crops account for 11.6% of the value added in overall
agriculture.
Wheat Wheat is the staple diet for the country and is the most important crop, contributing 10% to the value added in agriculture and 2.1% in GDP at the national level, while the wheat produced in Punjab contributes 1.62% to the national GDP and 7.7% to the national value-added. During the last financial year, the wheat production in Punjab was estimated at 19.1 million tons, showing a decline of 3.16% over the previous year’s production6.
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Warehouse Receipt Model in Punjab Consolidating Earlier Work and Setting Future Direction
Table: Selected Major Crops of Punjab (Agriculture Sector Plan 2015)
Production volumes of major crops along with their contribution to GDP is given
below:
Crop Production
(Million Bales/Tons) Value Addition Overall GDP%
Value Addition Agriculture %
Punjab Pakistan Punjab Share Pakistan Punjab Pakistan Punjab
Wheat 19.116 25.037 77% 2.1 1.62 10 7.70 Cotton 10.277 14.026 73% 1.5 1.1 7.1 5.18 Sugarcane 41.074 65.28 63% 0.7 0.44 3.1 1.95 Rice (Basmati)
3.65 6.999 52% 0.7 0.36 3.2 1.66
Maize 3.881 5.044 78% 0.4 0.31 2.1 1.63 Table: Share of Punjab in GDP and Value Addition in Agriculture 2014-159
Despite this large agriculture base and high production volumes, the farmers are
unable to get decent prices for their produce, owing to involvement of a number
of intermediaries and middlemen.
According to business case developed by
Pakistan Agriculture Coalition (PAC), rice
farmers on an average pay 13% more to
middlemen because of insufficient cash to
sow the next crop with rice cultivation cost
per acre amounting to PK 34,050 on
5 Rural Finance Innovations – Topics and Case Studies; The World Bank 2005 6 Economic Survey of Pakistan 2014-15; Estimates 7 Economic Survey of Pakistan 2014-15; Estimates 8 Economic Survey of Pakistan 2014-15; Estimates 9 Agriculture Sector Plan 2015
Rice Rice is an important food and cash crop; second staple food grain crop for the country after wheat and a major source of foreign exchange earnings. Rice accounts for 3.2% of the value added in agriculture and 0.7% of GDP at the national level, while the rice produced in Punjab contributes 0.36% to the national GDP and 1.66% to the national value-added. During last financial year, basmati rice production in Punjab stood at 2.3 million tons, depicting a staggering increase of 13.6% over previous year’s production, however the irri rice production was estimated at 1.3 million tons, showing a decline of 7.93%7.
Maize Maize is considered an enriched food grain and has become extremely popular for farmers over the last few years. It contributes 2.1% of the value added in agriculture and 0.4% to GDP at the national level, while the maize produced in Punjab contributes 0.31% to the national GDP and 1.63% to the national value-added. During the last financial year, maize production stood at 3.68 million tons, depicting a slight decline of 0.82% over previous year8.
Source: Pakistan Agriculture Coalition (PAC)
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Warehouse Receipt Model in Punjab Consolidating Earlier Work and Setting Future Direction
deferred payment, as compared to PKR 30,000 on cash payment. This difference
is accrued solely because of limited access to credit. The example of rice has been
given just to illustrate the case and situation is not much different for other crops.
Such mismatch of supply and demand is seen in every agriculture market,
exploiting small farmers, who are often forced to sell their produce on unfavorable
prices due to inadequate warehousing capacity, weak financial muscle and cash
requirements for the next crop cycle. An effective and functioning WRS model can
address such challenges through providing adequate warehousing capacity,
reduced postharvest losses, robust sales platforms leading to higher prices for
farmers and easy access to credit.
7. Stakeholders Perspective
7.1. Farmers
Farmers are expected to be main beneficiaries of the proposed WRS, as any such
system would result in reducing the losses due to inadequate storage and hence
spoilage, provided there are no delays in delivery to warehouses after harvesting.
Moreover working capital loans are expected to be available at competitive
interest rates using the warehouse receipt as collateral, while the commodity
prices settled through the commodity exchange should be better than the prices
set in traditional markets. Additionally, any such model is also expected to lead to
farmer cooperation and synergy.
According to the earlier PEEP study, the greatest dividends from the proposed warehouse receipt system could accrue in terms of farmers’ collaboration and coordination. At individual level the volume of crop produced by each individual holding is simply too small and managing the sheer number of depositors at each warehouse during the course of harvesting would be impossible. However by grouping together to grow one or two wheat, rice or maize hybrids and ensuring that they apply inputs and protect their crop at the same time and in the same way this strategy will ensure that they collectively generate a homogenous harvested crop, which can safely be mixed with each other´s for the sake of transporting to their nearest WRS warehouse. By this method farmers could deposit at warehouses directly, without the need for an arthi (trader) to act as the assembler / aggregator, who would under current circumstances understandably expect a profit for their involvement as a principal in the transaction. Being able to deposit collectively means that (subject to sampling, analysis and final grade), that they could collectively approach banks for a working capital loan directly, using their harvested
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Warehouse Receipt Model in Punjab Consolidating Earlier Work and Setting Future Direction
and deposited crop (the warehouse receipt / receipts) as collateral, pledged to the participating bank in exchange for a loan.
In summary, following benefits are expected to be accrued to farmers from the
proposed model:
• Ease of finding buyers through the commodity exchange system
• Efficient price discovery model
• Minimum spoilage of crop due to securely and professionally managed
storage
• Guaranteed quality and quantity of the crop validated through
warehouse´s analytical laboratory
• Competitive interest rates due to warehouse receipts used as collateral (
• Efficient system for payments
• Deferred sales decision by farmers to fetch better prices
• Availability of up to the minute reliable market information and price
offers
• Competitive storage, possibly also chargeable fumigation, drying and
cleaning services if and when required
7.2. Middlemen
Although WRS traditionally connects the farmers directly with buyers, they do
not necessarily exclude the middlemen, who can also integrate their operations
within such a system. For instance, for a number of small farmers there might not
be much incentive in accessing WRS, due to conditions on packing and grading. In
such cases, middlemen can still play the role of aggregators and providing
services to link them to WRS. Their margins however are likely to shrink, with
farmers claiming greater profits. How existing farmer-middlemen (arhti)
relationships evolve in a WRS environment is difficult to predict, but broadly such
systems have known to result in greater empowerment of farmers, with
increasingly competitive interest rates for finance.
7.3. Processors
Processors are also expected to benefit tremendously from WRS. In particular,
they will accrue the following benefits:
• Ease of finding a variety of sellers through the electronic trading platform
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Warehouse Receipt Model in Punjab Consolidating Earlier Work and Setting Future Direction
• Assurance of specified quality (grades/standards) validated by the
warehouses
• Assurance of quantity specified through electronic weighing measures
• Quick turnaround of commodities due to professionally managed
warehousing facilities
• Ability to buy substantial quantities via the commodity exchange
• Ability to store after purchase if required (buyer pays storage daily after
purchase)
• Ability to resell if required without having to move the commodity (easy to
liquidate stock if judgment is that market is going to fall)
• Availability of reliable market information and prices as everybody (
• Stocks can be assembled for periods of late season shortfall and price
increase (without having to invest in own expensive storage and handling
capacity)
7.4. Government
The provincial government in Punjab is fully committed to promote WRS and
establish a functional model. This commitment is also articulated in the
Agriculture Sector Vision 2025. However, discussions have taken place at
various fora regarding various aspects of such a model and it is important to take
note of the following:
• Government is a major buyer for wheat, the most significant crop in the
province and if the WRS has to include wheat, it wouldn’t be possible until
the government decides to purchase it through such a system. However,
considering the political sensitivity of the issue, such a decision is unlikely
in near future.
• Agriculture Department is fully committed to wellbeing of small farmers
and the proposed system should be designed in a way to promote interest
of these farmers.
• There have been preliminary proposals within the government to
establish a provincial commodity exchange. However, there already
exists a national commodity exchange - Pakistan Mercantile Exchange
(PMEX) – that has taken almost a decade to become fully operational.
Therefore, there is an understanding that initially any WRS efforts in
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Warehouse Receipt Model in Punjab Consolidating Earlier Work and Setting Future Direction
Punjab should be linked with PMEX, however, at a later stage if need be,
such a proposal can be examined.
• Government is a firm believer in a private sector-led strategy for WRS and
is only envisioning its involvement, where it’s absolutely necessary. The
sheer scale of agriculture production in Punjab is so huge that without
private sector investment, catering to this base wouldn’t be possible.
Therefore, government is in favor of promoting localized cost-effective
solutions offering higher rate of return to private investors.
• Government is willing to take on the role of a regulator, wherever
necessary, however any such regulation should be to protect farmers
interest as well as for price stabilization, without discouraging private
sector to invest in the sector.
7.5. Commercial Banks
Commercial banks are another key beneficiary of WRS. Under present
arrangements, despite availability of credit, the banks are unable to lend to
farmers without any collateral. Only a handful of farmers are able to pledge their
properties or agriculture land, against which they can get credit, through
elaborate procedures. However, through WRS, farmers can get tradable receipts
against their crops stored in designated warehouses, which can be deposited in
the bank to get credit. Since these are tradable on electronic exchange, they can be
easily monetized and give comfort to the banks to provide agriculture credit
easily.
7.6. State Bank of Pakistan
State Bank of Pakistan is quite supportive of establishing WRS. In fact SBP has
already made positive moves by offering 5-year loans at a discounted interest
rate to encourage the building of silo complexes that would successfully be able
to implement a WRS and has published a supportive document ‘Framework for
Warehouse Receipt Financing in Pakistan’, detailing options, identifying possible
scenarios and explaining the system of lending against receipts. SBP has also
covered accreditation of warehouses, in its publication, suggesting that
warehouses would be selected together with partner banks.
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Warehouse Receipt Model in Punjab Consolidating Earlier Work and Setting Future Direction
8. Roadmap for Establishment of WRS in Punjab
Before proposing a way forward for Punjab to follow, it is important to consolidate
the earlier discussion, look at perspectives of various stakeholders, take benefit of
earlier work done in this regard and consider and review strategic choices. These
choices are available on many frontiers, including choice of crops, the scale of
project, extent of regulation, types of contract, etc. Following is a brief discussion
on some of these strategic choices for the proposed WRS model in Punjab:
8.1. Crop Selection for WRS
The PEEP study10 identified a number of crops, which can form part of the WRS
initiative. These are summarized in the table below (extracted from original
study):
Crop Marketing
Volume (2014 / 2015 Provisional)
Comments
Wheat 19,541,000 Unless there is a significant change in Govt. policy (recommended) state off-take in any given year could be 5– 6 million MT which would be directly exported if not required for emergency food purposes – of which Punjab would supply a substantial proportion.
Maize 3,600,000 100% available minus seed and locally sold to animal feed manufacturers and own consumption
Rice 3,648,000 100% available minus seed local procurement by rice mills and own consumption
Gram (Chick Peas)
330,000 Another crop that can be grown for import replacement and structured selling via the PMEX and grading at WRS warehouses could substantially increase famer’s returns.
Bajra (Millet)
267,000 200MT was imported by container shipment via Karachi in September 2015 alone = at least 2400 MT annually of import replacement available
Canola 200,000 With around 200,000 MT produced annually in Punjab and additional quantities imported also, this valuable oilseed should be a profitable crop to grow and store.
Sesame
(Sesamum)
25,775 Bahawalpur, DG Khan, Sahiwal, Lahore, Faisalabad and
Sargodha districts most important each producing 2000+ Source: Warehouse Receipt Financing in Punjab; Kennedy, J. 2015; USAID PEEP (Data source given in report is Punjab Department of Agriculture. AMIS (Agricultural Market Information Service)
The report noted that ‘volumes of other combinable crops produced fall under a
category which could be described as “minor” e.g. less than the 273,000MT
10 Warehouse Receipt Financing in Punjab; Kennedy, J. 2015; USAID PEEP
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Warehouse Receipt Model in Punjab Consolidating Earlier Work and Setting Future Direction
production and therefore are likely not to be viable in the sense that handling,
analysis and to maintain separation at warehouse level would be problematic.
Trading warehouse receipts for those commodities via PMEX would depend upon
what could be “captured” at warehouse level. However if one of the minor crops
were produced only or largely in one district of Punjab, the dynamic changes
somewhat as the crop would represent a significant proportion of a districts crop
output and therefore storing and marketing a reasonable proportion of the crop
could be economically feasible’.
Crop Choice for Pilot Project
Based on the report findings as well as consultations with many stakeholders, it is
proposed that while the pilot can be initiated with many crops, it is important that
the choice of crops is in line with government priorities. In order to create
maximum value and impact, the pilot should be undertaken with a major crop so
that further scale up is smooth. Wheat is the most significant major crop of Punjab,
however in this case the government (including provincial and federal) is the
largest single buyer to support the wheat subsidy initiative. Perhaps the most
significant way to move towards WRS could be a policy decision by the
government to do all its procurement through such a system, virtually forcing all
farmers to start using this model. However, such a proposal may be too ambitious
giving the political sensitivities around the wheat crop, its pricing and
procurement. Alternatively rice is another major crop, with significant exports.
Undertaking a pilot on rice could facilitate international buyers to switch to the
electronic platform and get better prices. Similarly the farmers can also fetch
better prices. Additionally, rice cultivation is concentrated in a few areas, which
may be easy to cater through a network of warehouses.
8.2. Contract/Instrument Choice for WRS
There could be multiple options in terms of choice of contract for the WRS model,
ranging from simple spot contracts to more complex forward, future contracts or
derivatives. The following matrix presents some of these options. The proposed option
for Punjab should cover both warehouse receipt repos to ensure financing for farmers
against their crops as well as standardized spot contracts with delivery through
warehouse receipts. The only pre-requisite for such warehouse receipts is to have some
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Warehouse Receipt Model in Punjab Consolidating Earlier Work and Setting Future Direction
regulation in place for the warehouses. Future contracts are already being traded in
Pakistan.
Table: Matrix of Contracts/Instruments and Regulatory Implications
Contracts Offered Use Regulatory implications
No standardized contracts – all contracts agreed on bilaterally
The exchange provides a meeting place for buyers and sellers
No need for government regulation. Exchange may handle contract performance guarantees and operate arbitration procedures.
Standardized spot contracts, with delivery through warehouse receipts
The exchange offers a liquid, safe environment for spot trading.
No need for government regulation. The warehouse system can be regulated by the exchange.
Standardized forward contracts
The exchange permits buyers and sellers to make commitments for future delivery.
No government regulation needed as long as these are genuine forward contracts. The exchange has to actively manage the risk of counterparty default.
Warehouse receipt repos The exchange enables those with stocks of physical commodities to use them as collateral for short-term loans.
Warehouse regulation required. Capital market regulations have to permit an exchange to have this function.
Commodity futures and option contracts
Risk management tools. It is advisable that there is a government department with the explicit responsibility of overseeing the market. Separate regulator for warehouses desirable.
Currency and interest rate futures and options
Risk management tools. Government regulation necessary, with good coordination with Central Bank.
Securities derivatives Offer leveraged alternative to cash securities, and can also be used to manage the risk on a securities portfolio.
Securities derivatives need to be regulated by the securities regulator.
Source: Guidebook on African Commodity and Derivatives Exchanges
8.3. Desired Structure of WRS Model for Punjab
The following matrix presents a number of parameters, where the government
can choose from various choices. These parameters include type of trading
platform, speed of trading, choice of instruments (as discussed above), brokerage
structure, clearing and settlement, extent of use of warehouse receipts, standard
setting and grading, price information availability and governance of trade. The
preferred suggested options are highlighted in underlined italics.
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Warehouse Receipt Model in Punjab Consolidating Earlier Work and Setting Future Direction
Table: Matrix of Parameters and Choices
Trading platform
Bringing people together in one location
Bulletin Board Auction Open outcry ring
Electronic platform, compatible with global standards
Speed of trading
Hours Minutes to days
Minutes Seconds Milli- or micro-seconds
Traded instruments
No standard products, trade on basis of reputation
Trade on the basis of samples
Trade on the basis of description/ grading certificates
Standardized spot contracts, warehouse receipts
Futures, options, repos
Brokerage structure
No brokers Clients leave their commodities with brokers for their later sale
Clients give brokers instructions by phone
Electronic order flow from clients to brokers
Brokers approve clients who then trade directly
Clearing and settlement
Pre-selection of participants
Fixed guarantee deposits
Payments handled by exchange
All trades guaranteed by the exchange. Global risk management standards.
Clearing by unrelated third party clearinghouse. Linked to global clearing firms
Use of warehouse receipts
None Warehouse receipts act as the instrument for the buyer’s sale
Active trade in warehouse receipts, which change hands more than once
Warehouse receipts act as delivery mechanism for the futures market
Trade of repos backed by receipts
Standard setting and grading
None Exchange offers simple grading services.
Exchange keeps samples of commodities traded, to help settle contractual conflicts
Exchange sets grading criteria, licenses graders and arbitrates quality conflicts.
Trade is in a narrow range of standard commodities. Exchange has strict grades and standards.
Price information
Prices sampled from market participants
Systematic collection of prices from representative pool of market participants
Contracted prices are registered at the exchange premises
Contracted prices are broadcast, with a delay (e.g., endof-day)
Real-time price information distributed in many ways
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Warehouse Receipt Model in Punjab Consolidating Earlier Work and Setting Future Direction
Governance of trade
Committee of market participants control access
No government regulation. Arbitrage rules, enforced by exchange committee
Government regulator alongside self-regulatory exchange
Exchange or regulator also given powers to regulate warehouse receipts
Four separate regulatory structures for overall regulation, exchange operations, brokerage and warehouse receipts
Source: Guidebook on African Commodity and Derivatives Exchanges
9. PAC Model as Pilot Project
Considering the objectives of the government for facilitating a private sector-led strategy for establishment of warehouse receipt system in Punjab and keeping in view Pakistan Agriculture Coalition’s experience in the area and its pilot in Kunri, it is proposed that government lends full support to PAC pilot for Punjab. The following section describes the concept proposed by PAC.
PAC’s model is built around the very important premise of inadequacy of the
agriculture marketing system to reward quality crops. Lack of requisite
technology and information support to the growers for producing quality produce
as well as absence of direct linkages with premium paying buyers also deprive
them earning their due share. Furthermore, oversupply situation in markets at the
time of crop harvest depresses price to the lowest level that starts rebounding
once bulk of the produce is transacted. Consequently, farmers have the most
significant disadvantage, especially those with high quality products. As explained
earlier, many a times they are forced to sell their produce at the time of depressed
prices due to lack of storage facilities as well as much needed cash to settle
outstanding loans invested in harvested crop, buy inputs for next cropping season
and meet other deferred financial needs.
PAC’s earlier pilot at Kunri was designed in partnership with SGS - one of the
world’s leading inspection, verification, and certification companies; Agility - one of
the world’s leading providers of integrated logistics and Pakistan Mercantile
Exchange (PMEX). The consortium led the development of an electronic trading
platform for quality-conscious buyers for agricultural commodities during 2015.
Besides, the growers were provided technical support in producing quality
produce. Main aim of the initiative was to incentivize quality production of
27
Warehouse Receipt Model in Punjab Consolidating Earlier Work and Setting Future Direction
agricultural products and increase farmers’ earnings. The concept was piloted in
Sindh with the red chilli crop, which proved highly successful.
The newly proposed initiative by PAC is being undertaken with the objective to
setup a functional electronic trading platform in public-private partnership mode
that enables the growers to get fair price of their produce without unfair
deductions and digitize value chain payments. It also aims to support the farmers
to improve quality of their products and to provide them access to high-end
markets (particularly processors and exporters).
The proposed e-trading platform will involve marketing of produce of the quality
certified by an independent expert certifier in the quantity verified by a third party
verifier, where price would be determined through electronically open auction by
multiple buyers and transaction would be guaranteed by an authorized mercantile
exchange. The implementation of process for agricultural commodities generally
will involve following procedure/ stages.
• Comprehensive mapping of complete value chain of the crop to work out
the costs and margins at every transactional stage. This forms the basis for
pricing the solution i.e. determining the transaction charge.
• Quality specifications determination in consultation with all
stakeholders e.g. buyers, producers (farmers), traders etc.
• Sampling and quality testing of commodity at seller’s location/ trading
platform location by designated testing service provider.
• Certification of weight/ measurement by a designated warehousing and
logistics service provider.
• Electronically price negotiations based on test results, between buyers
and sellers.
• Loading, transport and delivery of auctioned lots by designated
warehousing and logistics provider.
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Warehouse Receipt Model in Punjab Consolidating Earlier Work and Setting Future Direction
• Settlement of payment on a commodity exchange (PMEX) within specified
time (24 hours) directly into the seller’s account.
• Structured training programs in required best agricultural practices at
each critical crop growth stage.
• Commodity financing for farmers based on agri-produce
collateralization, stored in warehouses managed by designated warehouse
service provider.
The following schematic presents the design of pilot proposed by PAC.
Source: Pakistan Agriculture Coalition
The main objective of this initiative would be to improve terms of trade for the
farmers, particularly smallholders. The intended outcomes of the proposed
initiative, inter alia, would include the followings:
• Higher net income for farmers without a net increase in processor’s cost.
• Greater prospects for producers (growers/ processors) to export directly
from the production source (farm gate/ processing unit).
• Transparent transactions in agriculture sector leading to clear price
signals to farmers to incentivize them in adopting better farm practices.
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Warehouse Receipt Model in Punjab Consolidating Earlier Work and Setting Future Direction
• Digitization of value chain payments (minimizing role of value-
destroying middlemen and reducing inefficiencies in value chain).
• Commercial sustainability of the trading platform, which will allow
much greater trading and impact with clarity about the roles of the public
sector and the private sector in the business model.
PAC has proposed to taken the following approach for the project:
A. Value Chain Mapping: Conduct value chain mapping of selected crops
B. Buyer Identification: Identify prospective buyers (processors and
exporters), estimate trading volumes for pilot commodities and compute
transaction costs for the trade facilitation.
C. Piloting Selected Crops: Pilot the selected crops on the trading platform
during first year. The PAC has already developed the sample legal
agreement, process flow, and Standard Operating Procedures for
implementation partners. Technical manuals and training programs will be
developed for each crop for growers’ guidance.
D. Marketing: Conduct active marketing of the trading platform to buyers
and sellers in pilot crops to achieve adequate volumes for cost recovery.
E. PPP Business Model: Achieve year-round trading and cost recovery
through a PPP business model that allows the private sector to recover its
investment cost while using public funds for overall project development
and for directly benefit farmers.
Below is a process flow diagram of the above-proposed model.
30
Warehouse Receipt Model in Punjab Consolidating Earlier Work and Setting Future Direction
Source: Pakistan Agriculture Coalition
10. Way Forward
The following matrix, developed by PAC, presents proposed future actions and
responsible parties for undertaking the WRS pilot.
In order to advance efforts the following activities and allocation of
responsibilities are proposed (this will be applicable to each crop):
Subgroups for each crop to be formed such that relevant Director of Agriculture
Department will lead each subgroup. The subgroup will include key stakeholders and
relevant specialists of that crop and will conduct value chain mapping and identify
both timelines for pilot project and specifications for tradable produce using the
trading platform for that crop.
Task Responsibility
1. Development of survey questionnaires for value chain mapping [PAC has already developed the survey for wheat]
PAC
2. Identification of technical/commercial expert for each crop Relevant Sub-Group 3. Execution of surveys to map each crop’s value chain
[PAC has already executed the survey for wheat] Government of Punjab (GoPb)
4. Design of trading pattern for each crop (pricing, quality ranges, transaction charge, etc.) based on analysis of survey
PAC
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Warehouse Receipt Model in Punjab Consolidating Earlier Work and Setting Future Direction
data. This will also include any direct financial support required from GoPb
5. Marketing to each crop’s buyers and sellers Sub-Group/PAC/GoPb 6. Determination of quality specifications in consultation with
all stakeholders for each crop Sub-Group
7. Designation of service providers for testing/sampling and warehousing/logistics
Committee
8. Development of contract(s) for each crop to be traded on PMEX
PMEX
9. Approval of each crop’s contract(s) for trading SECP 10. Registration of buyers and sellers on PMEX to start trading Sub-Group 11. Coordination of trading in each crop PAC 12. Supervision of trading in each crop Sub-Group 13. Design of extension plan for each crop aimed at maximizing
participation of farmers on trading platform PAC
14. Extension services and crop assessments for each crop GoPb
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Warehouse Receipt Model in Punjab Consolidating Earlier Work and Setting Future Direction
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