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To make more of warehouse receipts: what can exchanges do?

To make more of warehouse receipts: what can exchanges do?. By: Lamon Rutten Coordinator, commodity marketing, risk management and finance United Nations Conference on Trade and Development. Forward Markets Commission/UNCTAD/ associated commodity exchanges

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To make more of warehouse receipts: what can exchanges do?

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  1. To make more of warehouse receipts: what can exchanges do? By: Lamon Rutten Coordinator, commodity marketing, risk management and finance United Nations Conference on Trade and Development Forward Markets Commission/UNCTAD/ associated commodity exchanges Workshop: Commodity financing and building a warehouse receipt system for India Mumbai, 11-12 June 1999

  2. Overview • What do the actors in commodity trade need? • Are warehouse receipts useful? • When are warehouse receipts really useful? • Different models for the exchange to provide a warehouse receipt system • Conclusions

  3. What do actors in commodity trade need? GOODS Flexibility Efficiency MONEY

  4. What do actors in commodity trade need? GOODS Flexibility:in the timing of sales; in the place of sales. Efficiency: in storage; in quality maintenance; in moving goods from place of production to place of consumption; in using processing capacity.

  5. What do actors in commodity trade need? Flexibility: getting money in time to the place where it is most needed Efficiency: low financing costs MONEY

  6. Warehouse receipts can provide what actors in commodity trade need: • Efficiency: • in storage and in quality maintenance: specialized companies take over • in transport: no more need to ship goods around until a buyer is found • in using processing capacity: easy to build up enough stocks • low financing costs, because warehouse receipt credit is safe. • Flexibility: • in the timing of sales: more freedom to choose between storage and sale • in the place of sales: warehouse receipts are easy to transmit • in financial management: credit availability linked to credit needs.

  7. When are warehouse receipts really useful? deposit Borrower Warehouse w.r. Borrower w.r., after individual negotiations CLOSED SYSTEM Sale or pledging of w.r. OPEN SYSTEM Bank Open market Warehouse receipts provide larger economic benefits if they can be more easily and more flexibly used, through a network rather than through bilateral contacts.

  8. The possibility of trading warehouse receipts through a public network provides additional benefits in terms of: - location: the physical market place is enlarged - market accessability - market liquidity: instruments become useful for new groups Exchanges can provide the basis for such a public network

  9. The results of an efficient integration of exchanges and warehouses through a modern information/communication system: • No unnecessary movement of goods • Storage is at lowest possible cost • A market is always readily available • Easy adaptation to new market conditions • low likelihood of price distortions

  10. Is this a pipedream?If not, how do you get there? • Exchanges already have part of the system in place: • a mechanism to vet warehouses • the possibility, through their clearing houses, to guarantee warehouse receipts • clear and enforceable quality standards • presence of major market players • a (primitive) info/communications network.

  11. What can an exchange do to enhance their business through the use of warehouse receipts: a few models Warehouses Exchanges

  12. Using commodity exchanges to enlarge effective marketing areas Farmer Exchange warehouse 1. Deposits products Commodity exchange 3. The highest bidder gets the products, and the farmer is paid 2. The warehouse receipt is (electronically) transferred to the exchange and auctioned off. Conditions: - standardization of quality descriptions into specific grades, and - standardization of the documentation used.

  13. The exchange as “underwriter” of the warehouse receipt system Note: farmers can also use the scheme 6. Provides credit 5.Lodges receipts with bank Small traders Banks 3. Deposits products 2.Guarantees warehouse Warehouse company 7a.Sign sales contract 4.Issues receipts Clearing house 1. Approves warehouse 9. Delivers receipt; warehouse makes delivery Large traders Commodity exchange 7b. Delivery through exchange 8a. Reimburses credit; in return, bank transfers receipts

  14. Trading warrants as credit instruments Investor/bank 5. Open outcry bids on the interest rate for loans secured by the warrant Recognized warehouse 2. Issuance of warehouse warrants National Agricultural Exchange 6. Credit 1. Deposit of goods 4. Warrant is given in custody of Exchange Agricultural or agro-industrial firm Broker 3. Transfer of warrant, with the agreement to buy it back after a certain period

  15. Even more flexibility: the Brazilian model Exchange- approved warehouse 1. Deposits products Farmers 2. Issues receipts 3. The warehouse receipt is transferred to the bank, which gives a credit. 4. The bank gives its “aval”, which makes trade of the receipts on the secondary market possible. Bank Commodity exchange Secondary market 5. Farmers observe commodity exchange prices, and can sell whenever they want, through an electronic network linking the countries’ exchanges.

  16. The synergy of exchanges, warehouses and a modern information/communication system will make it possible to cross over into a new era for agriculture. conclusion Conclusion: the way forward exchanges communications warehouses Bridging the efficiency gap Being slow and uncompetitive Being flexible and profitable

  17. UNCTAD’s work in the area of commodity risk management and finance: - organizing international policy meetings on commodity risk management and finance. - reports, advice, training materials, training seminars and conferences on structured commodity finance, including warehouse receipt finance - reports, advice, training materials, and training seminars on commodity price risk management - advice to emerging commodity exchanges - advice to Governments on price risk management practices; use of modern financial instruments to support policy liberalization; and legal and regulatory structures affecting the use of risk management and structured finance markets. For further information please contact: Lamon Rutten Coordinator, commodity marketing, risk management and finance United Nations Conference on Trade and Development 1211 Geneva 10, Switzerland Tel. (41 22) 9075770 / 5755 / 5014 Fax (41 22) 917 0509 email Lamon.Rutten@UNCTAD.org

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