Q. What measures are required to be instituted to minimise storage losses, through for example, deterioration of the quality of the commodity stored, theft or destruction by fire and allied perils?

 A. To minimise storage losses, warehouse operator will be authorised to receipt commodities under the pilot only if they comply with the following requirements:

• Meet minimum physical standards;
• Have warehouse personnel who have been trained and certified by the relevant commodity body;
• Warehouse operator has capacity to enforce commodity standards – having required grading equipment and skilled personnel; and
• has risk insurance cover required.

Q. What measures have been instituted to ensure effective inspection and monitoring of warehouses and receipted stocks under the project?

A. To ensure effective inspection and monitoring of warehouses and receipted stocks under the project, the following measures have been instituted:

• Well defined responsibilities of the warehouses as well as collateral managers appointed to monitor and inspect the operations of the warehouses;
• Consultation with the banks when appointing collateral managers as inspectors to ensure that the banking community has confidence in the company appointed; and
• Depositors (farmer groups and traders) are trained to be able to deliver commodities with quality that stores well.

Q. How is the risk of fraudulent issue of warehouse receipts minimised?

A. To minimise the risk of warehouse receipts being issued that do not represent commodities delivered and/or situations where depositors are cheated on weight or quality in receipting their crop, the following measures are instituted:

• The Warehouse Receipts issued under the programme are standardised, containing standard terms and conditions, and with security features to reduce the risk of fraud;
• Scales and grading equipment are assized or calibrated regularly;
• Systems for issuing receipts that allow a clear audit trail are established to avoid access by unauthorised parties; and
• A system for verification of Warehouse Receipts is instituted, especially by the financing banks.

Q. How can depositors and holders of warehouse receipts minimise price risk?

A. Without price risk management instruments in place, both depositors and lenders are exposed to this risk. For this reason the following is advised:

• Maintain a market information system which will keep key players well informed about price movements and other significant market developments;
• Bankers can adopt margining or “hair cutting”, where credit provided represents a pre-determined proportion of the market value of the crop. Currently, the advance rate is between 70% and 80% of the market value.
• Banks are encouraged to institute systems to monitor the link between market value and book value of the advances provided; and
• Banks are advised to include in financing contracts, exit clauses allowing for the bank to arrange sale of the underlying commodity if they are overly exposed.

Q. How can depositors and warehouse receipt holders mitigate marketing risks?

 A. Where auction markets exist, they minimise the risk that a collateralised commodity can not be sold and make it unnecessary for off-take contracts to be a requirement for financing. Banks can be further protected against default risk by a system under which exchanges or auctions route payments for collateralised stocks through the accounts of the financing bank. Banks, however, need to be encouraged to constantly monitor developments on the auction market and to advise their clients as appropriate. This forms part of the training for bankers.

Q. How is fraudulent release risk mitigated?

A. To avoid unauthorised release of collateralised stocks, it is required that:

• All financed Warehouse Receipts are lodged with the lenders and released on the basis of the payment versus delivery principle (where without full settlement of the loan advanced the WR is not released by the lender).
• The warehouses will deliver the collateralised crop only upon presentation of the original WR and release instructions from the lender.

Q. What happens if the right of a third party (lender or buyer) to take delivery of the receipted commodity is contested because of pre-existing financial obligations on which the depositor has defaulted?

A. When Warehouse Receipts are not recognised as documents of title, the rights of parties to whom the Warehouse Receipt is transferred to take delivery of the underlying commodity can be contested if there are any prior encumbrances. It is to mitigate this problem that legislation supporting the development of negotiable WRS has been promoted under the Project.