The Hindu Business Line : Setting store by Warehouse Receipts

Warehousing is an integral part of commodity production and trading. For a country such as India that produces and consumes large quantities of agricultural and other goods, adequate and scientific warehouse facilities are absolutely necessary.

Be it farm goods or commodities such as metals and energy products, producers, processors and traders all build inventory.

Since this involves costs such as warehouse rent and interest charges, funds get locked for a period of time.

There is also the risk of quality deterioration and price fluctuation. The owner will have to take appropriate measures to protect the quality by fumigation and store the goods in a scientific manner.

What is a Warehouse Receipt?

A Warehouse Receipts system obviates the storage problems faced by commodity owners. It can also help improve the marketability of commodities. What is a Warehouse Receipt (WR)?

It is an instrument issued by a warehouse keeper that shows proof of ownership of an asset, often a commodity left at a warehouse for commercial storage purposes.

The instrument indicates the quantity and quality of the produce, nature of packing, and details of the warehouse. In the case of farm goods, the season of production too is mentioned.

The WR is issued by an approved warehouse after certification of goods by approved surveyors.

Reducing risks

The warehouse receipt helps reduce certain risks. For the owner, it reduces the physical risk associated with preserving the quantity and quality of the produce.

A grower can leave the harvested produce with the warehouse and obtain a WR as proof of ownership. His concerns of storage are, thus, addressed.

The receipt reduces the financial risk too. For instance, instead of having to sell the produce immediately upon harvest (when the price usually falls), the farmer can store the goods in an accredited warehouse and wait for prices to improve. This extends his sales period beyond the harvest time. It should, thus, be beneficial to growers.

WR as collateral

The warehouse receipt converts inventory into a tradable instrument. By surrendering it, the owner can convert the WR into produce. Importantly, a WR is a negotiable instrument and therefore builds flexibility in commodity trading.

A WR can be traded, sold and swapped. It can be used in cash and forward markets and tendered in futures market too. Additionally, it can be used as a collateral for inventory financing by banks. It is a fungible document.

As goods can be converted into WR which, in turn, can be reconverted into goods, the receipt actually acts as functional fungible equivalent of stored goods. Having a WR is equivalent to carrying physical goods.

For the WR system to succeed, a sound legal system that appreciates property rights is imperative. As the WR is a document of title, the rights and interests of the owner cannot be compromised.

In addition to being fungible, to be able to deliver real benefit, a WR must be invested with transferability and negotiability. It can then improve the marketability of goods by enabling the owner to take a trading call at the time of his choice. The role of the warehouse keeper is critical. We need scientifically-built and managed warehouses. Easy movement of goods and storage and retrieval are essential elements of good warehousing.

Integrity, the key

Warehousing is a service based on trust; therefore, the integrity of the keeper is a key element of success.

Also, the heterogeneous or non-standard nature of commodities, especially farm goods, can create problems in storage and retrieval. Therefore, standardisation of quality and packaging is necessary. There are also certain inherent risks in the WR system.

As WR is a document of title or ownership of goods, it is of utmost importance to protect its integrity. Counterfeit WRs can damage the credibility of the system. Also, storage and preservation costs need to be reasonable.

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