Fe-Indicus policy series
One of the tragedies of unreformed agriculture is that the producer, the trader and the end buyer are all at a disadvantage during transactions. Farmers are at the mercy of the local trading cartel. Traders are forced to deal with undifferentiated products (undifferentiated by quality) and have no incentive to add value. Buyers are left with a wide variety of undifferentiated products. The whole process adds to costs and wastage that everyone in the chain ends up paying for. One solution is a system of scientific warehousing, tradeable warehouse receipts (WR) and markets dealing with WRs.
In order to understand the role of the WR, let us first look at issues from the perspective of a small producer. What would you want if you were a small farmer with 6-7 acres of land?
Remember, you have taken credit to buy seeds, fertilisers, pay for irrigation, etc, but you can pay this back only after the produce is sold. Your main problem is to sell in a market that is some distance away. Having carried the produce to the market, you are in no position to take it back and so you are forced to sell at whatever price the trading cartel is giving at that point in time. This is even more the case while selling perishables.
What you would like is to have a warehouse within 10-15 km of your farm. You get the produce graded and certified and stored there and get a warehouse receipt, which clearly specifies what you delivered. With the WR, a transferable, tradeable and fully-negotiable instrument, you have the option of holding the WR, selling it or pledging it for loan. By increasing your stock holding capacity, you can wait for a better price or sell instantly—in short you have more choice. No longer are you at the mercy of a local cartel.
Current markets involve physical trading of agricultural goods with no system of grading. Being dependent on visual inspection, this can be easily manipulated by local cartels. Further, without grading and sorting, there is a loss of value as all grades get clubbed into a uniform ‘fair average quality’.
A critical component of such a system is accredited warehousing that stakeholders trust, that provides storage and assaying services. Obviously, this requires regulatory measures.
While considerable capacity augmentation is needed, this must involve change in warehousing standards. Current storage is unscientific, individual owned and mostly unlicensed; the quality of commodities stored and preservation techniques are abysmally poor. For small farmers to benefit, we estimate a requirement of 10,000 to 40,000 warehouses depending on the desired radius of operation (10 km or 5 km). While existing warehouses can be upgraded, and government figures suggest that nearly 4,000 private warehouses exist, in reality very few have scientific storage systems. Majority of warehousing receipts do not enjoy the fiduciary trust of depositors and banks.
There are two key issues here—accredited bankable chains of warehouses need to be created and warehouse receipts need to be fully negotiable instruments. This is necessary to create a marketplace that is fair to all. Trading with WRs in the markets (with the faith that the specifications will be delivered) makes trade highly liquid and allows wider participation. One can imagine buyers from far away participating in trade, without a direct transaction with the producer. WRs can take the demat form, injecting further liquidity into the system.
This would be a paradigm shift in marketing. Organisations like National Spot Exchange and NCDEX Spot exchange are already working towards this change. Note these spot markets are qualitatively different from the existing Agricultural Produce Marketing Committee (APMC) markets since they separate grading and storing from pure price transactions. They need to be supported by regulatory measures and incentives and the APMC markets need to be reformed so that they enable similar WR-based trading.
The Warehousing Development and Regulation Act, passed in 2007, was scheduled for notification in March, but no regulator has been appointed yet. This Act provides the legal backing for WRs. Meanwhile, despite the delay, the National Bulk Holding Corporation has reportedly tied up with more than 30 banks to offer loans to about 45,000 farmers against its warehouse receipts. Clearly, the forces for change cannot be held back any longer.
Amit Sinha is president at Indicus Analytics. Email: amit.sinha@indicus.net
source: The Financial Express
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