ATA and USAID AGP-AMDe Jointly Developed Policy Proposal to Strengthen Ministry of Trades involvement in Regulating Ethiopias Warehouse

Receipt System
March 2013

Introduction
This proposal, developed by the Ethiopian Agricultural Transformation Agency (ATA) and the Agricultural Growth Program-Agribusiness and Market Development (AGP-AMDe) Project, is intended to urge the Government of Ethiopia to reactivate the Ministry of Trades mandate to regulate Ethiopias warehouse receipt system. The ATA and the AGP-AMDe Project recommend that the government take immediate action on developing and supporting a regulatory framework that 1) enables the implementation of a community warehouse receipt system pilot (to better serve smallholder farmers) and 2) strengthens broader nationwide warehouse receipt initiatives under the WRS Proclamation No. 372/2003.

The importance of a national warehouse receipt system

The Ethiopian agricultural market faces a number of challenges including high transaction costs, volatile markets prices and insufficient demand sinks for some coarse grains. The absence of standardized grain trading, adequate storage facilities, a reliable market information system, and access to finance create inefficiencies and difficulties for players across the entire value chain. In particular, smallholder farmers face higher cash needs at time of harvest, and due to lack of output marketing finance, they often sell their produce at a lower price than they could get by waiting longer after harvest time. As such, they are unable to capture the full value of their output. A warehouse receipt system has significant potential to resolve these challenges in the output market. A warehouse receipt system (WRS) is a system of financing and trading agricultural outputs based on a warehouse receipt, a document guaranteeing the existence and availability of a given quality and quantity of commodity in storage for safekeeping. The system finances agricultural commodity owners by using their commodity as collateral. A well-designed warehouse receipt system can provide many benefits to smallholder farmers, cooperatives, traders and other players across the agricultural value chain. The first and most immediate benefit to smallholder farmers is that it enables smallholder farmers to access credit by using their output as collateral. This satisfies farmers cash needs at harvest time and allows them to wait for a better offer or price at which to sell their commodities, which as a result gives them better bargaining power. The second benefit relates to reducing post-harvest losses. A warehouse receipt system can enable standard storage service provision on a credit basis (so farmers can pay for the service after their 1

product is sold), which can reduce the incidence of post-harvest losses. Finally, the system allows farmers to create a financial identity. In a warehouse receipt system, the opening of individual accounts is mandatory hence, the account records farmers financial history and can demonstrate their creditworthiness to financial institutions should farmers require further financial support in the future. The systems benefits also extend beyond farmers: Cooperatives can benefit by storing product in the system and by accessing finance using this product as collateral. They can also rent or operate warehouses as part of the system to generate additional revenue. Financial institutions, meanwhile, can increase their provision of financial services to the agricultural sector with minimum risk. Finally, processors and end-markets can reduce transaction costs by having access to a continuous source of commodities with reliable standards. In sum, a robust warehouse receipt system is an important element in a well-functioning agricultural output market and can improve outcomes for actors across the value chain.

Assessment of Ethiopias enabling environment for a national warehouse receipt system

For a warehouse receipt system to be successful, past experience indicates that governments must take an active role in creating an appropriate enabling environment. Specifically, the government must: (a) Develop policies / legislations favorable to the emergence of warehouse receipting systems and related market institutions; (b) Develop regulatory systems where conditions are favorable, i.e. where the regulatory service can be highly focused and professional, and the economics are favorable. (Coulter, 2009) In 2003, before the inauguration of Ethiopian Commodity Exchange (ECX), the Government of Ethiopia enacted a proclamation that supports a warehouse receipt system (Proclamation No. 372/2003). This proclamation was enacted with a view to increase access to finance, protect producers from price shocks, and promote efficient marketing of standardized agricultural products. Following the enactment, the Ministry of Trade (MoT), which is mandated to regulate warehouses and grading under that law, was preparing to launch a functioning warehouse receipt system. The Ministry had built up in-house expertise on warehouse receipt system, collaborated with the Ministry of Agriculture and Rural Development and the Commercial Bank of Ethiopia, purchased laboratory equipment and even printed warehouse receipts. However, in 2008, before the pilot could be implemented, the ECX was established; the governments focus shifted from MoT to ECX, and the pilot project was abandoned. The establishment of ECX has also brought about parallel regulatory regimes for warehouse receipts. As a result, employees at the MoT who were responsible for regulating the warehouse receipt system slowly began engaging in other roles. While there is currently a Proclamation supporting warehouse receipt system, Ethiopia lacks an effective regulatory system. There is no one in the MoT who regulates warehouse receipt system initiatives. Furthermore, while Proclamation No. 372/2003 was envisioned to cover a large variety of commodities and different types of warehouse operators, the more recent ECX warehouse receipt system is currently 2

restricted to coffee, sesame and white pea beans deposited in ECXs operated warehouses. We therefore see a worrisome gap in the current enabling environment for warehouse receipt system.

Assessment of the ECX warehouse receipt system

As mentioned above, Ethiopia has a warehouse receipt system housed at the ECX. However, though it is a valuable intervention, the system does not currently realize the full potential of a warehouse receipt system in Ethiopia. The ECX announced its plan to roll out a warehouse receipt financing system in 2010 and launched the system in February 2011. The scheme was intended to allow producers and traders of agricultural commodities to access bank loans by pledging warehouse receipts issued by the ECX for commodities held in its stores. In the system, commodities are deposited in warehouses operated by ECX in major surplus regions of the country (totaling 17 warehouses). All ECX-traded commodities except coffee are eligible for the warehouse receipt financing, i.e., maize, pea beans, sesame and wheat. The system offers a maximum storage and loan period of 60 days for sesame and pea beans, 90 days for maize, and 120 days for wheat. Though the WRS product is intended to increase the income of the commodity producers, the system has not been able to reach smallholder farmers. To date, according to the 2012 ECX WRS operational review report, there have been only 42 borrowers; these were ECX clients, not members, and the majority of these were traders. In addition, thus far there has not been any pledging for maize and wheat, which are the main commodities produced by the majority of smallholder farmers. Smallholders have not participated due to two primary reasons, according to ECX. First, the physical distance and cost of transport to the warehouse locations were too great for smallholders. Second, smallholders were unable to meet the minimum deposit requirement of a lot size of 50 bags. The current system also falls short on a few other dimensions. The short loan duration offered by the system restricts the benefits that could have been generated through a longer period of storage. In particular, grains like maize and wheat require a longer storage period for a steady price increase. Hence, the short loan duration for these two commodities limits the incentives for participation.

The path forward for Ethiopias warehouse receipt system

Two new approaches can increase the impact of warehouse receipt system initiatives in Ethiopia. The first is a systemic effort to strengthen the regulatory environment that supports warehouse receipt system interventions across the nation, while the second is a targeted intervention to increase the onthe-ground presence of warehouse receipt system initiatives by piloting simplified models in several woredas. First, it is essential to reactivate the Ministry of Trades mandate to regulate warehouse operation and grading. This will help to broaden the geographical spread and diversity of commodities traded within the warehouse receipt system. It will also send a strong signal to the private sector and financial institutions that they can and should participate in and benefit from a warehouse receipt system. 3

Moreover, the ECX has signaled its plan to eventually phase out its involvement in warehouse operation and regulation. Hence a regulatory system for licensing and inspecting third party owned/managed warehouses and grading must be in place before ECXs involvement ceases. Second, ATA has devised a simplified intervention, called a Community Warehouse Receipt System (CWRS), to increase the on-the-ground presence of a warehouse receipt system. The main objective of the CWRS is similar to the ECX WRS: to increase the income of smallholder farmers by allowing them to store their commodities and take advantage of seasonal price variation. It also aims to enable smallholders to access bank loans through pledging warehouse receipts for commodities held in storage facilities. But in order to ensure this product reaches smallholders, the CWRS adopts a different model than the ECX WRS. The CWRS is a simplified version of warehouse receipt system at a community level that provides loan products only to smallholder farmers. The CWRS uses simplified facilities that are already available at a community level. For example, the system uses community storage facilities (e.g., at primary cooperatives) to aggregate farmers product. Because these community storage facilities are located relatively close to smallholder farmer, they are easier to access. The system would not impose minimum deposit restrictions at the aggregation points, which would enable farmers to deposit based on their ability. In addition, a longer loan duration (6-8 months) would be offered by financial institutions to allow farmers to benefit more from price increases. In addition, all components of the system would be based in the community. The system would be regulated, certified, and inspected by community officials, composed of the woreda level bureau of agriculture and cooperative promotion agency. This would be more convenient for the farmers since they would not have to travel to resolve any issues that arise. Participating bodies and organization would be from the community itself, which would enable farmers to better understand the system. Financial institutions would either be microfinance institutions or SACCOs located within the communities of smallholder farmers depending on their capacity. Farmers are already familiar with these institutions, making it easier to introduce the new product. We suggest piloting this intervention in four woredas, one each from the four major regions, this year. The purpose of this pilot is to test whether the model is applicable in Ethiopia, as well as to evaluate whether the anticipated impacts of the system can be achieved. After evaluating the results of the pilot, this intervention would be scaled in the following years to cover a larger number of woredas and commodities. However, an effective regulatory system must be in place in order for the pilot to take place this year.

Recommendations
In order to create a more positive enabling environment for a warehouse receipt system and to enable the CWRS pilot to launch, we urge the Government of Ethiopia to take the following actions: Action Systemic Request that the Ministry of Trade put in place the necessary organizational structure and staff that will be responsible for regulating third party warehouse receipt system initiatives, including inspection, certification, and grading. The MoT could also delegate in part or in whole its regulatory authority to a third party as per Article 44 of Proclamation No.372/2003. Request that the Ministry of Trade develop competence requirements for licensing third party warehouse operators and graders (outside the current ECX system). Rationale Establishing a dedicated organizational structure will reactivate the MoTs role in regulating WRS. This would mean fewer disputes and risks for actors participating in a warehouse receipt system.

Given that ECX will phase out its role in warehouse operation and also that there are some private sectors players who are interested in setting up recognized warehouse facilities, there is a need to license third party operators and graders. This will also facilitate the growth of a national WRS. In order for the CWRS pilot to proceed, the system must be regulated according to the WRS Proclamation. The actors best positioned to execute this mandate are at the regional level.

Targeted Request that the Ministry of Trade delegate regulatory powers to the regional bureaus of trade and industry or agriculture to regulate the functions of the Community Warehouse Receipt System pilot as provided under Article 44 of Proclamation No. 372/2003. Request that the Ministry of Trade issue directives that set criteria for cooperatives to be warehouse operators and determine the governance structure for the community warehouse receipt system as per Article 26(3) of Proclamation No.372/2003.

In order for the CWRS pilot to proceed, the system must be regulated according to the WRS Proclamation. The actors best positioned to operate warehouses in this system may in many cases be cooperatives.