Warehouse Receipt Finance for Farmers â A Glimpse - MCX in Marathi

Warehouse Receipt 

Finance for Farmers – 

A Glimpse 

By Mr. Nachiket Mor and Dr. Kshama Fernandes 

While warehouse receipt (WR) finance has been in existence in India for a long time, and 

traders and large farmers do benefit by availing of the mechanism, small and marginal 

farmers have been virtually left out of it. This paper discusses the advantages and 

disadvantages of WR financing in India from small farmers’ point of view, while citing 

examples of how this mechanism has been used globally. It also lays stress on some key 

requirements for implementing a successful WR finance programme, concluding with a 

brief on IFMR Trust’s agricultural commodity pilot in Gujarat. 

Agricultural production, processing and trade are often 

considered low-margin, high-uncertainty operations, 

and are perceived as risky investments by financiers. 

Physical collateral, such as land and real estate or 

machinery and agriculture implements, is often of little 

use in mitigating financiers’ risks as such collateral 

tends to either be very difficult to enforce or of very 

little resale value. No wonder, to obtain finance for 

agriculture can be really difficult and often expensive, 

given the risk premium charged by financiers. In light of 

this, warehouse receipt finance has emerged as an 

attractive alternative for farmers and processors in the 

developed world. 

Under a warehouse receipts financing scheme, goods 

stored in a warehouse are used as collateral against a 

loan. These goods could be agricultural or nonagricultural 

in nature. This has become a fairly 

mainstream method of financing in most industrialised 

countries, and there is evidence that the overall 

efficiency of markets, particularly in the agribusiness 

sector, is greatly enhanced when producers and 

commercial entities can convert inventories of 

agricultural raw materials or finished products into a 

readily tradable device. Producers deposit goods of a 

certain quality, quantity, and grade in accredited 

warehouses and receive a receipt for it. Being 

negotiable instruments, these receipts can be traded, 

sold, swapped, used as collateral to support borrowing, 

or accepted for delivery against a derivative instrument 

such as a futures contract. 

According to a report by the Reserve Bank of India 

Working Group on Warehouse Receipts & Commodity 

Futures (2005), the overall efficiency of markets, 

particularly in the agribusiness sector, immensely 

improves when producers and commercial outfits are 

able to convert inventories of agricultural raw materials 

or finished products into a readily tradable instrument. 

Producers receive a receipt against goods of a given 

quality, quantity and grade deposited in accredited 

warehouses. It also says that being negotiable 

instruments, these receipts can be traded, sold, 

swapped, used as collateral to enable borrowing, or 

accepted for delivery against a derivative instrument 

such as a futures contract. 

Warehouse Receipt Finance for Farmers 

Despite growth projections, what remains the reality of 

the agriculture-related business is its high dependence 

upon seasonality. Broadly speaking, farmers face two 

major problems — lumpy cash flows and nonavailability 

of intermediate finance. Warehouse 

receipts finance can play an important role in 

smoothening income for farmers by providing liquidity 

at times when cash flows dry out. 

WR financing as a means of extending the sales 

period beyond the harvest season: As the harvest 

season approaches, small and marginal farmers find 

themselves in dire need of liquidity. The simple 

demand and supply equation results in prices falling to 

their lowest during harvest and gradually rising during 

42 | A PUBLICATION BY MCX AND PRICEWATERHOUSECOOPERS

1 

the lean season . Although farmers are aware of this 

seasonal trend, they cannot take advantage of this and 

benefit from it as they are hard put to organise 

immediate cash. A typical small farmer sells his crop 

when its prices are at their lowest. This crop is often 

bought by traders or village-level aggregators who 

hold the stock through the harvest season till prices 

pick up and then sell it at a profit. To cite some numbers, 

the seasonal variation in castor seed prices during 2008 

was almost Rs.200 per 20kg which translates into a 

profit of Rs.750 a bag of castor seed (which translates 

into an annualised return of 88.9 %). If farmers are 

enabled to hold on to their crop beyond harvest, a part 

of the price benefit could accrue to them. So, by 

providing farmers with a mechanism to store and hold 

on to their produce, warehouse receipts finance 

enables the extension of the sales period beyond the 

harvest season. 

WRs as secure collateral for obtaining finance: Most 

banks are uncomfortable in extending pre-harvest 

loans to farmers. Warehouse receipts form sound 

collateral whose market value can be easily estimated 

and whose liquidity is much higher than conventional 

collateral such as land and machinery. In the event of 

default, the holder of the warehouse receipt has the 

first call on the underlying goods or its value. This 

provides banks and financiers with the comfort to lend 

to the farmer without lengthy documentation and long 

processing delays. Farmers, on their part, can avail of 

loans either to overcome immediate liquidity 

requirements or to finance future crop/investments on 

farm equipment or alternative businesses. According 

to the RBI Working Group report, on notion of reduced 

risk premia, collateralisation of agricultural inventories 

using warehouse receipts will lead to increased credit 

availability and reduced cost of credit. Besides, it will 

lead to mobilisation of mainstream financial resources 

into the agricultural sector. 

In their study on the use and impact of warehouse 

receipts in developing and transition economics, 

Lacroix and Varangis (1996) concluded that warehouse 

receipts are an important addition to the store of 

negotiable instruments in a country’s financial sector. 

According to them, they not only provide important 

long-term economic benefits but also have immediate 

positive impact on the farmer’s life. 

Is There a Downside for the Farmer 

While availing of finance against warehouse receipts 

appears to be an attractive option for the farmer, there 

are concerns about its inherent speculative nature. One 

must seriously look into a likely adverse outcome: this 

financing avenue may encourage farmers to take 

speculative positions having the potential of resulting 

in losses beyond their risk-taking ability. Warehouse 

receipt financing is profitable only when the expected 

rise in the value of the stored product is actually more 

than the cost of storage plus that of the borrowed 

funds (i.e., loan principal plus interest payments, bank 

fees, etc). 

Many would argue that farmers ought to confine their 

activity to the area of their core competence — farming 

— and not indulge in speculation. However, in the 

absence of a readily accessible hedging mechanism, 

the Indian farmer is a speculator in any case. From the 

point of time he sows the seed till the point of time he 

sells the crop in the market the farmer is long on the 

commodity, unless he hedges his long spot exposure 

by selling his produce in a forwards, futures or options 

market, which he has no access to in India. Most 

farmers who sell their standing crop to traders and 

other local financiers before harvest do so at suboptimal 

rates under tremendous liquidity pressure and 

not from the point of view of hedging their exposure. 

So, the contention that farmers should not engage in 

speculative activity because it is not their core 

competence is something that must be looked into in 

the light of alternatives available. Warehouse receipt 

financing is in essence a speculative activity. Availing of 

the facility simply extends farmers’ already existing 

price exposure beyond the harvest, providing him with 

a readily available cash flow and a potential upside. 

And, in general, even if the farmer wishes to sell in the 

spot market, it allows him to do price averaging (thus 

reducing his exposure to “impact” cost) by selling his 

harvest gradually instead of being forced to sell the 

entire quantity on a single day. 

1 The persistence of this arbitrage is a conundrum. If indeed this pattern was risk-less and the large traders or buyers were not credit constrained then, at least for 

non-perishables, the return from this arbitrage should have been lower than the cost of financing and storage costs. In perishables, wherever possible, it should 

have led to more aggressive “calendaring” (more distributed production throughout the year). However, in almost all commodities this arbitrage persists. It is 

possible that the existence of the “peso problem” (the risk of a sudden, completely unexpected precipitous fall in value that is rationally anticipated by the market 

– first pointed out by Rogoff (1980)) makes this arbitrage both persistent and highly risky. If indeed that is the case, then one wonders if availability of warehouse 

receipt finance for the small farmer is a boon or a curse (discussed later in the note). Two alternate directions however look promising: commodity forward 

contracts to be offered to farmers at the time of sowing (so that they may “square off” the “long” position that they create as soon as they commit themselves to 

planting a particular crop and thereby lock in their profit margins) and an options contract or least a delta hedge (since options contracts on commodities are not 

legal in India) which allows the farmer to buy protection against a further drop in commodity prices but retain the right to benefit from a rise in prices. 

EXPERTS’ VIEWS | 43

Warehouse Receipt Financing – International 

Experience 

Experiences around the world suggest that warehouse 

receipt financing can be a profitable avenue for both 

the farmer and the financier. TechnoServe in Ghana has 

achieved considerable success in its inventory credit 

programme over the past two decades. According to 

TechnoServe’s Inventory Credit Programme in Ghana 

by Frank Hicks, the firm believes that only the 

confidence of being able to sell the produce at a 

reasonable profit to buyers can be the incentive for 

small and marginal producers, constituting 60% of 

Ghana’s farming population, to augment both 

production and productivity, and supply to local 

industries and exporters. As in most agricultural 

markets including India, small farmers remain the 

classic “price takers”, cut off from information flowing 

into and out of the market and profitable market 

opportunities. To improve their conditions, Hicks says, 

TechnoServe ushered in the concept of inventory 

credit in Ghana in 1989. The idea was to create an 

opportunity for these farmers to take advantage of 

seasonal price swings (used smartly by local traders) to 

mitigate risks for banks that were hesitant about 

lending in the rural belt and to increase food security 

for farmers who can buy back (or “redeem”) their 

produce rather than sell it. 

Participating farmers usually form groups of 20-50 

members to store their produce and carry it into the 

lean season when prices are at their peak — much 

higher than harvest time price levels. At the same time, 

they have the flexibility to exercise one of the following 

options: 

• can decide to sell the produce through the group, 

using the proceeds to repay the bank for its credit 

and the group for the use of storage facilities, 

earning a net profit of 40 to 100%; 

• They can take back the produce from the group to 

consume as food, repaying the bank loan and the 

group’s storage costs, and still saving a substantial 

amount by avoiding high lean season food prices. 

TechnoServe has refined the model of inventory credit 

and expanded its application to other areas in Ghana. 

At preset, it is offering facilitating over 100 farmers’ 

groups access inventory credit. For nearly two decades 

now the participating farmers have maintained a cent 

per cent on-time loan repayment record, significantly 

improved their incomes and agricultural production, 

cut down post-harvest losses and accumulated capital 

to invest in other agricultural activities. 

In a similar effort, the RBI Working Group report says, 

PTA Bank in Kenya finances coffee exporting farmers by 

accepting warehouse receipts as collateral. It also offers 

them a put option, purchased at the London 

Commodity Exchange, which guarantees sellers a 

minimum price for the coffee in storage. By assuring a 

floor price for the stored coffee, PTA Bank can provide 

finance for a higher percentage of the value of coffee 

than it could justify in the absence of the floor price. 

According to Lamon Rutten (then Coordinator – 

commodity marketing, risk management and finance 

at United Nations Conference on Trade and 

Development), in Venezuela, under a system 

developed by private firm Induservices, provided 

capital enhancement to warehouse receipts on 

seasonal maize stocks. And this enabled the firm to 

attract huge investment to finance maize stocks. 

Again in Colombia, Rutten said, a more complex 

structure, introduced in mid-2000, made it possible for 

cattlemen to receive strong financing support to feed 

their cattle – at rates determined through the 

competition among institutional investors on the 

country’s stock and commodity markets. 

Keys to Successful Implementation of a Warehouse 

Receipts Programme 

According to the RBI Working Group report, to work 

effectively, warehouse receipts require a recognised 

foundation in law ensuring that the ownership 

established by the receipts is not challenged. 

Warehouse receipts must be functionally equivalent to 

stored commodities with well-defined rights, liabilities, 

and duties of each party to a warehouse receipt (for 

example a farmer, a bank, or a warehouseman). They 

must be freely transferable by delivery and 

endorsement and the holder of a warehouse receipt 

must be first in line to receive the stored goods or their 

fungible equivalent on liquidation or default of the 

warehouse. A robust legal framework is a prerequisite 

to warehouse receipts being treated as secure 

collateral. 

Also essential is a warehouse infrastructure, grading 

and collateral management system that provides 

guarantees on quality, quantity and storage of 

commodities, thus assuring that the quantities of 

goods stored match those specified by the warehouse 

receipt and also their quality is the same as stated on 

the receipt. This will give farmers the confidence to 

store their produce and banks the comfort to accept 

warehouse receipts as secure collateral for financing 

agricultural inventories. 


And finally what is required is a combination of fair and 

transparent spot and futures markets that provide 

liquidity and price discovery, enabling both farmers 

and banks to value and sell warehouse receipts at short 

notice if need be. 

In the Indian context, the proposed Warehousing 

(Development and Regulation) Act, 2007 incorporates 

almost all the aforesaid legal and warehouse 

infrastructure related requirements. Once approved 

and implemented, it should provide a sound basis for 

developing and promoting warehouse receipt-backed 

trade and finance activity in the country. 

IFMR Trust’s Pilot in Kadi Taluka (Gujarat) 

In pursuit of its mission for financial inclusion, IFMR 

Holdings has ventured into the agricultural space. 

Dealing exclusively with small and marginal farmers in 

the Kadi Taluka of Mehasana in Gujarat, three of its 

entities, Agricultural Terminal Markets Network 

Enterprise (ATMNE), IFMR Holdings, and IFMR Capital 

are working together on a pilot with the following 

objectives: 

• To provide price discovery to farmers for their crops 

in a fair and transparent manner (ATMNE); 

• To explore other services required but not available 

to small farmers currently such as transportation 

from the village to the market/buyer, village level 

warehousing capability, and agricultural extension 

services (ATMNE and IFMR Holdings); 

• To provide commodity-backed finance to farmers 

who would like to avail of finance against the 

commodity as collateral (IFMR Holdings); 

• To explore other financial products and services 

required but not available to small farmers currently 

such as commodity forward contracts and deltahedging 

(IFMR Holdings and ATMNE); 

• To develop tradable Asset-Backed Warehouse 

Finance Receipts (ABWFRs) so that they may be sold 

to mutual funds and other financial institutions 

(IFMR Capital). 

As part of this pilot, the three IFMR Trust entities are 

working with the National Spot Exchange Ltd. (NSEL) to 

help farmers realise the best possible price for their 

agricultural commodities. ATMNE is an institutional 

trading and clearing member and provides trading 

access to small and marginal farmers. IFMR Holdings 

provides warehouse receipt finance, helping farmers 

wait out the low price realisation period during harvest. 

This is in line with IFMR Trust's mission of ensuring 

complete access of financial services to every 

individual and every enterprise. Towards this, after 

extensive survey, Dharampur, a village 20 km from Kadi 

town, with 1,000 acres under castor production and a 

population of 3,000, has been identified as an ideal 

village to operate the pilot from. 

Trading operations: The trading facility is located at 

Kadi in the exchange-managed warehouse premises. 

As part of the servicer agreement, the exchange 

provides guarantee on quality, quantity, and storage of 

commodities in the warehouses managed by it. The 

electronic exchange market provides nationwide 

access to buyers and sellers. The first crop to be traded 

was castor seed. While the market is still at its nascent 

stage, its volumes have been encouragingly large. The 

market caters to farmers from around 125 villages 

around Kadi. Farmers come to the warehouse with their 

commodities which are then put through a standard 

weighing and quality testing process. Depending upon 

the quality, weight adjustments are made and the 

commodity is packed in 75 kg bags and stacked away. 

The collateral manager issues a receipt of weight and 

quality, following which the farmer places a sell trade 

through the ATMNE agri-broker sitting at the trading 

terminal at the warehouse. Once the trade goes 

through, the farmer is handed over the cash and receipt 

for the same. 

So far castor seed worth Rs. 2.5 crore has been traded 

by over 500 farmers based in 25 different villages 

surrounding Kadi, the smallest trade being one bag 

and the largest 70 bags. Over the last four months, price 

differentials between the mandi and the electronic 

exchange have dropped from Rs. 75 to Rs. 18 a bag 

possibly in response to a credible price discovery 

mechanism being provided to small farmers through 

the exchange. 

Financing operations: Warehouse receipt finance in 

India is typically used by traders and affluent farmers. It is 

largely perceived to be non-applicable to or non-viable 

for the small and marginal farmer. Barriers to 

participation from the financiers’ side include reluctance 

on their part to deal with small-size transactions due to 

operational reasons. From the farmer’s end, there are 

issues concerning non-availability of reliable price 

information, lack of storage space, inefficient quality 

testing procedures, existence of multiple layers of 

intermediaries, hidden charges, documentation 

challenges, and high transportation costs. 


In our experience, the biggest challenge in terms of 

giving farmers access to warehouse receipt finance has 

been awareness creation. IFMR Trust has been putting 

in a lot of efforts at farmer education. By interacting 

with farmers in their local settings, it is explaining to 

them the concept of an electronic exchange that 

provides a transparent price discovery process, as well 

as the documentation, process, risks and returns from 

availing commodity-backed finance through IFMR 

Holdings. 

IFMR Holdings provides loan against commodities as 

collateral. The purpose of the loan product is to provide 

short-term finance to farmers collateralised by 

commodities for which warehouse receipts are issued 

by a collateral management company. The exchanges 

arrange for collateral management services and act as a 

service provider. 

The branch through which the IFMR Holdings finances 

farmers against commodities is located at Dharampur 

village such that it would serve a cluster of villages that 

cultivate in large quantities crop such as castor seed, 

mustard seed, and wheat, among others. Currently, 

loans are being given to farmers coming from five 

villages. Farmers can avail of finance against a single 

bag of castor seed placed in a warehouse. The 

maximum loan amount they can avail of against a 

particular commodity is Rs. 10 lakh (Rs.1 million). It 

goes like this: a farmer visits the branch and registers 

himself, which involves fulfilling the KYC (Know Your 

Client) process that includes biometric identification 

and physical verification of address proof. On 

completion of the process, the farmer is given a smart 

card which henceforth is used as a single source of 

identification and data capture for all transactions 

done by the farmer. After charging appropriate 

margins to cover price fluctuations, loan is given 

against the warehouse receipt for the commodity 

stored by the farmer in the NSEL-managed warehouse. 

While farmers’ response to the warehouse receipt 

finance mechanism has so far been a cautious one, they 

are definitely gradually becoming aware of this facility 

and coming forward to avail of loans through this 

route. Reasons for their initial inhibitions could be: 

Lack of awareness - For farmers used to centuries of 

trading through adhathiyas on the mandi and availing 

of loans from them, trading on an electronic exchange 

and availing of finance against the stored commodities 

has been a new experience. 

Rigour of the quality testing process - The exchange 

follows a rigorous quality-testing procedure unlike 

regular mandis where quality is gauged simply by 

picking up a handful of commodity. A value reduction 

is applied if the commodity does not meet the set 

parameters. Farmers who initially took a while to 

understand the quality testing process now feel the 

process is more fair and transparent than the one they 

were used to. 

Reluctance to store commodity in warehouse - 

Perishability of castor seed is almost negligible. Instead 

of storing it in a warehouse and incurring storage costs, 

farmers prefer to store it in their backyards. 

Prior advances taken from traders - Almost 30-40% 

of farmers around Kadi have already taken loans from 

traders against commitments to sell their existing 

commodities to these traders. 

Conclusions 

The contribution of warehouse receipt systems in 

developing agricultural markets has been well 

recognised across the world. The Ghana experience 

shows that these schemes can dramatically reduce 

inter-seasonal price fluctuations, benefiting small and 

marginal farmers who otherwise have no choice but to 

resort to distress sales (sell immediately after harvest). 

Warehouse receipt finance can offer farmers a 

marketing and credit option that spurs productivity 

and thus increases their incomes. Farmers can also sell 

some of their stored products to finance future crop, 

thereby obviating or reducing the need for borrowing 

from moneylenders and traders. Financial institutions 

benefit from reduced risks and from liquidity due to 

ready collateral to guarantee or reimburse defaulted 

loans. Farmers, on their part, benefit from higher 

profitability being able to delay sales; from improved 

price transparency, and from increased bargaining 

capacity through working in farmers’ groups. 


However, warehouse receipt finance is essentially a 

speculative activity and requires serious monitoring of 

grain quality as well as market price trends and 

fluctuations. When properly designed and managed, a 

warehouse receipt finance programme can allow small 

farmers to graduate from the status of “price takers” to 

that of “price negotiators” in the local market economy. 

The mechanism can also provide rural entrepreneurs 

with a route to capital accumulation that can be 

invested in more diversified and sustainable ventures 

capable of stimulating long-term rural economic 

growth and development, which in turn can contribute 

significantly to the overall economic growth in line 

with national aspirations. 

References: 

1. Bamako (Technical Note No. 5). 2000. “Warehouse 

receipts: financing agricultural producers” 

2. Evans, Martin D.D., and Karen K. Lewis. 1992. NBER 

Working Paper Series, No.4003 

3. Hicks, Frank. 1998. “TechnoServe inventory credit 

programme in Ghana”. United Nations Conference 

on Trade and Development 

4. Lacroix, Richard, and Varangis, Panos. 1996. “Using 

warehouse receipts in developing and transition 

economies”, Finance & Development 

5. “Report of the Working Group on Warehouse 

Receipts & Commodity Futures”. 2005. The Reserve 

Bank of India 

6. Rutten, Lamon. 2001. “Local market opportunities 

with respect to warehouse receipt finance - 

tapping into the local capital market”, ESCAP-ADB 

Joint Workshop 

7. Rutten, Lamon. 2001. “Financial engineering 

techniques for directly linking domestic capital 

markets and the agricultural sector – a short note”, 

ESCAP-ADB Joint Workshop 

8. The World Bank (Agricultural Investment 

sourcebook series). 2004. “Ghana: Inventory Credit 

for Small-Scale Farmers” 

Mr. Nachiket Mor is President, ICICI Foundation, and Dr. Kshama Fernandes is Vice-President, IFMR Trust. Views are personal.

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