Warehouse receipt systems: Making grain hubs more attractive
Grain Hubs are collectives of supportive businesses and services owned by farmer organisations that help member farmers manage the collection, distribution and marketing of their products. While Grain Hubs can help farmers bring their products to competitive markets, the Hubs often do not have enough capital to provide an immediate payment for products on delivery - a necessity for small farmers who generally sell crops when they are in need of cash. Currently, there are 15 Grain Hubs associated with the PG-HGSF project in Kenya. In order to incentivise more local farmers to sell their products to Grain Hubs, the PG-HGSF project is piloting warehouse receipt systems.
A warehouse receipts system (WRS) is a process where farmers deposit their products in certified warehouses. After weighing the amount of product brought into the warehouse, the farmer is then issued with a warehouse receipt as proof of ownership. The warehouse receipt system can then facilitate credit from local banks for the products held in storage. These receipts, when backed by legal provisions that guarantee quality, provide a secure system whereby stored agricultural products can serve as collateral, be sold, traded or used for delivery against financial instruments. Warehouse receipts are documents that state the ownership of a specific quantity of products with specific characteristics stored in a specific warehouse.
In Kenya, PG-HGSF is partnering with the Eastern Africa Grain Council (EAGC), a member-based organisation for grain value chain stakeholders, to promote WRS services. EAGC first certifies a warehouse for WRS service - ensuring that certain critical minimum standards of operations are implemented and maintained, including insuring the products in the warehouse. The EAGC then signs a tripartite agreement between the Warehouse operator (e.g. a Grain Hub), a financial institution and themselves. This agreement states that the depositors of grain in the warehouse (farmers) can access up to 60-70% of the market value of their product as credit from a bank upon delivery of their products to the warehouse. When the farmer’s product is sold, the bank will recover the money it advanced as credit, plus additional interest. The remaining amount of money is then given to the farmer. Six of the project’s 15 grain hubs in Kenya are, at the moment, getting certified by EAGC to participate in the warehouse receipt system.
EAGC is also the primary promoter of WRS. Once a warehouse is earmarked for certification for WRS service, awareness campaigns of the WRS service are launched to target farmers via events and over the radio. The campaigns involve the Ministry of Agriculture extension officers, local administrators and development partners.
Through WRS, smallholder farmers can access professional storage services from certified grain warehouses at a minimum cost. The collected products can then be used by the Grain Hub to participate in school feeding tenders. The certified warehouses also attract large volume buyers such as the World Food Programme, who often offer better prices than buyers at local markets due to the quality and quantity of products guaranteed by certified warehouses. In Kenya, the resulting systems will resolve cash flow issues for farmers and Hubs, enable smallholder farmers to access the business services of Grain Hubs and provide farmers with a reliable way to participate in competitive markets.