Warehousing Problems: Insufficient Pre-requisite

Commodities exchanges in Nepal are handicapped by the lack of warehouse receipt system to help the country’s agriculture development. Nepali media recently launched a tirade of criticisms against the commodity exchanges in Nepal. One of the main points of that criticism was for not introducing local agro-products (or any local product for that matter) in the list of commodities traded on their system and rather just making the investors trade in foreign commodities.  In this process the media also questioned how the prices of those foreign commodities quoted in these exchanges were derived. But unfortunately not even once did anybody try to know why the local products are not introduced in the trading systems of these exchanges.

 
The answer is simple. These exchanges are not able to introduce the local commodities in their trading system because the necessary legal provision for this to happen is simply absent in the country. Yes, the Secured Transaction Act 2063 lists “Warehouse Receipt” as one of the tradable instruments. But just listing the name “Warehouse Receipt” in the law is not sufficient to hope that such receipts will be actually traded in the market. 

Source: Gideon Onumah, 2010 (http://www.aec.msu.edu/fs2/aamp/sept_2010/aamp_lilongwe-onumah-warehouse_receipt_systems.pdf)

The flowchart given here gives an ideal system that is required for making the warehouse receipt tradable. There are many infrastructural lags we face in this regard. A commodity exchange is essential for this system but not sufficient.  What is primarily required here are the buyers and sellers for the products. Then we need financial institutions like commercial banks. And we need a policy from the central bank that allows the banks treat the warehouse receipts as tradable (negotiable) instruments.

The issue with the commercial banks now is that they talk about the hypothecation issue, i.e. they want to know who will take the responsibility if the products in the warehouse are not sold. So, we need the Insurance Board to come up with a policy that makes the insurance companies insure the agro-products stored in the warehouse. They do not want to insure agro-products in the warehouse as the risk is much higher.

 

Next we need a public authority assigned with the task of licensing and regulating the warehouses that store the agro-products and issue the warehouse receipts. We also need a proper market channel; a proper Supply Chain Management System. This requires competent transport companies that can deliver the goods to the buyers. Also required is a strong rule of law so that the transport companies are not obstructed anywhere on the roads while they are carrying the goods to deliver on the destination.  Thus, for the local agro-products to be traded on the systems of these commodities exchanges, the basic pre-requisites area proper warehouse receipt issuing mechanism and a warehouse receipt financing mechanism. Agriculture, a less valued occupation at present, will be valued higher only when these systems are in place. A culture of commercial farming has actually started in the country but we still need a proper supply chain for this trend of commercial farming to thrive. A commodity exchange can help in this and eliminate the current system in which the number of intermediaries in the supply chain is unnecessarily high. 

Reduction in the number of intermediaries will bring the prices of agro-commodities up or down to a reasonable level. And this is definitely possible once the general public and the policy makers think about it seriously.

Note: This article was published in New Business Age (Monthly Corporate Magazine)