review of warehouse receipt system and inventory credit initiatives in ...

negotiable warehouse receipt 4 , which can be used to raise finance or trade the commodity.
Of at least equal significance were the steps taken by American monetary authorities, which
eventually became the Federal Reserve Bank (created in 1913). These established a special
discount window for ‘eligible bankers’ acceptances’ backed by warehouse receipts, making
them a very liquid instrument (see Box 1).
BOX 1: THE FED’S DISCOUNT WINDOW FOR ELIGIBLE BANKERS’
ACCEPTANCES
(contribution by Nick Budd, retired lawyer specialised in commodity financing)
The Federal Reserve Bank (‘the Fed’) announced that it would rediscount, at very fine rates (the rate also
serving as an important instrument of monetary policy) bankers’ acceptances issued by US banks (no matter
how small and rural) so long as they were "eligible." To qualify, they had to: (a) be of limited duration (270
days or less), (b) have a maturity approximating the normal period of liquidation of the underlying asset (i.e.
match the anticipated storage and resale period), (c) be backed by a warehouse receipt (negotiable or nonnegotiable)
issued to the bank (but only at the time of acceptance), (d) cover regularly marketable staple
commodities (to insure some kind of market valuation and liquidity), and (e) be insured against fire, theft, flood,
etc. The small rural banker would gather up these documents, get the farmer to sign a draft payable in, say, 270
days, write "accepted" on the back, and send it to a money center bank, which would discount it and send the
funds to the local bank which would use the funds to discount the farmer's draft. When the goods were sold, the
farmer repaid the local bank, and the local bank repaid the money center bank.
The money center bank could do this because it was able at any time to sell (rediscount) these drafts at any time
with the Fed at very fine rates, without limitation, or to sell them into the active money market to short term
investors. In addition, the Fed offered the further inducement that banks creating or discounting eligible
banker's acceptances were exempt from the usual reserve requirements attached to such liabilities (in those days,
up to 20%), and were also exempt from regulations limiting loans based upon capital and per-customer
limitations. Federal regulations also authorized banks to accept field warehouse 5 receipts as security for eligible
acceptances where local (State) law recognized the validity of these receipts. By 1900 there were over 200
field warehousing companies and many thousands of separate field warehouses. This in turn induced farmers
and merchants to invest in local storage without the need to become licensed warehousemen.
The eligible bankers’ acceptance market, based largely upon rural warehouse receipts and drafts signed by small
farmers, rapidly became the key short term financing mechanism in the United States and offered a direct cash
pipeline from the money centers to the smallest local banks. One could argue that this refinancing facility
provided the oxygen which fuelled the rapid creation of agricultural credit, warehouse development, marketing
systems, transport systems, insurance products, and warehouse law reform in the United States.
Licensed warehouses have to meet and maintain key criteria in terms of physical facilities,
capital adequacy, liquidity, managerial qualities, insurance and bonding cover (the latter
protects depositors against fraud and mismanagement). Some States have set up Indemnity
Funds to which licensed warehouse operators must contribute, and this takes the place of the
bond. Grain handling staff at the warehouses (weighers, samplers and graders) must also be
licensed to carry on their activities, and commodities are graded to US standards.
Warehouses are subject to unannounced visits by ‘examiners’ who are responsible for
enforcing the law and who can literally suspend or revoke a warehouse license overnight. The
4
As of 1998, there were almost 12,000 elevators in the US with a fixed storage capacity of 230 million tonnes;
cooperatives owned about one third of them.
5
A warehousing service provided in the clients’ premises, normally to enable the client to obtain financing
against stock held there
12