Credit from stored grain

Credit from stored grain Cue: Farmers are often forced to sell their crops when prices are low, because they need money quickly. One way to get better prices is known as the warehouse receipt system. Under this system, farmers are able to deposit their harvested maize in a warehouse and be given a receipt which states the amount and the quality of the grain they have stored. The farmer can then, if they wish, give this receipt to a bank in order to obtain a loan, enabling them to buy inputs for the new season or pay for other items. Later in the season when grain prices should have risen, the farmer can sell the stored maize, repay the loan and hopefully have some money left over. So in Zambia, a few years ago the Zambia Agricultural Commodity Agency tried to set up a warehouse receipt system. But it failed. So why did a system that sounded so good for commercial farmers not deliver better profits? To find out, Chris Kakunta spoke to Rob Munro, a marketing adviser for USAID, which helped to set up the pilot project. IN: ?Essentially it was a very donor-driven ? OUT: ?a commercial commodities market.? DUR?N: 3?00? BACK ANNOUNCEMENT: Rob Munro of USAID in Zambia, on some of the challenges connected with the warehouse receipt system, in providing credit to smallholder farmers. The interview comes from a resource pack produced by CTA. Transcript Munro Essentially it was a very donor-driven entity, in that the commodity traders and the banks never really bought into the concept of warehouse receipts. Kakunta And that led to it failing? Munro Essentially yes. But I think one of the key problems here, and this will bring us on to lessons which we?ve learnt from that experience, is that a warehouse receipt system depends on the existence of a functioning, high volume commodities market. If you look at this year in particular, there is very little maize stored in warehouses. There is very little maize in total, from this particular harvest and there is no incentive for farmers to be depositing crop into a warehouse, looking for higher prices further into the year. Kakunta If we have to really look at the system itself, does it really work? Munro I think the answer to that is yes. It requires the presence of a very strong commodities market where there is plenty of supply, ample demand, multiple buyers and also, critically, a credible pricing system. Kakunta What is the way forward in terms of warehouse receipt system here in Zambia? Munro I think it?s important to realise that from a smallholder?s point of view, a warehouse receipt is not the answer to all his or her marketing problems. I think where the primary value of it lies is that by putting commodity into a secure storage at grades and standards in terms of quality and quantity which are recognised by the industry, that warehouse receipt becomes a very valuable trading tool. So I think that?s its primary use as a trading tool, allowing small, relatively small parcels of crop to be aggregated into a large parcel which is then accessible by commercial markets. Secondary to that is a financing option. And I think it?s important to realise that the cost of finance is very high. You need to be very sure, if you are looking for finance from a warehouse receipt, you need to be very sure that the gains in price which you are hoping to take advantage of later on in the season are significantly more than your costs of finance. There have been examples in Zambia, one in particular I?m thinking of, where a crop was deposited at the beginning of the marketing season, held onto until later on in the year, and by the time that crop was released from the warehouse it was actually worth less than the combination of its underlying price and the price of storage and finance. So it?s a risky? like any financing, like any market speculation, it?s a risky business. And therefore it?s not the answer for all smallholders. But I think, like I said, more importantly it?s a valuable tool for bringing your crop into a commercial commodities market. End of track.Zambia?s experience with the warehouse receipt system, whereby farmers can borrow money using stored grain as collateral