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FACET Brief: ICT to Enhance Warehouse Receipt Systems and Commodity Exchanges in Africa

FACET Brief: ICT to Enhance Warehouse Receipt Systems and Commodity Exchanges in Africa

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Published by Jason Wolfe
Under the FIELD-Support LWA, the Fostering Agriculture Competitiveness Employing Information Communication Technologies (FACET) project has created a series of Briefing Papers designed to help USAID missions and their implementing partners in sub-Saharan Africa use information and communications technology (ICT), through sustainable and scalable approaches, more successfully. This Brief provides an overview of the fundamentals of warehouse receipt systems (WRSs) and commodity exchanges (CEXs), describes ways in which ICT tools are being mobilized, and captures key lessons learned with a focus on sustainability without donor support.
Under the FIELD-Support LWA, the Fostering Agriculture Competitiveness Employing Information Communication Technologies (FACET) project has created a series of Briefing Papers designed to help USAID missions and their implementing partners in sub-Saharan Africa use information and communications technology (ICT), through sustainable and scalable approaches, more successfully. This Brief provides an overview of the fundamentals of warehouse receipt systems (WRSs) and commodity exchanges (CEXs), describes ways in which ICT tools are being mobilized, and captures key lessons learned with a focus on sustainability without donor support.

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Published by: Jason Wolfe on Jan 17, 2011
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ICT to Enhance Warehouse Receipt Systems and Commodity Exchanges in Africa Last updated November 20101
BRIEFING PAPER
 
ICT TO ENHANCE WAREHOUSE RECEIPT SYSTEMSAND COMMODITY EXCHANGES IN AFRICA
INTRODUCTION
This is one of a series of briefing papersto help USAID missions and theirimplementing partners in sub-SaharanAfrica use information andcommunications technology (ICT) moresuccessfully —via sustainable and scalableapproaches—to improve the impact of their agriculture related developmentprojects including Feed the Futureprojects.
1
In the last 50 years, the landscape fortrading commodities globally has radicallychanged. Before revolutions in mobilecommunication and ICT, markets wereonly loosely integrated. Trading wasbased on proprietary informationacquired through trips to distantcountries and building relationships withkey informants. Today, screens aroundthe world reflect trading transactionsalmost instantaneously whether physicalcommodity, stocks, shares or currencyrates. The daily price of traded maizefutures on South Africa’s SAFEX(commodity exchange) is fully integratedwith the traded price of maize futures onthe Chicago Board of Trade. The globalnature of trading has also changed;This paper provides a brief overview of the fundamentals of warehouse receipt systems (WRSs) andcommodity exchanges (CEXs), describesseveral ways in which ICT tools are beingmobilized, and captures key lessonslearned with a focus on sustainabilitywithout donor support. It is not focusedon assessing the general impact of WRSsand CEXs for smallholder farmers, butrather, the use of ICT for such systems.
1
ICT includes cell phone and Internetservices, radio, and a wide range of digitaldevices and related tools including cameras,geographic information systems, and a widerange of hand-held computing devices.
speculative international physical tradershave greatly reduced in numbers asaccess to information has eroded theiradvantages. At the same time,speculation by outsiders (e.g., hedgefunds) in commodity markets throughcommodity exchanges has increasedsignificantly. For every metric ton that isdelivered onto the exchange in SAFEX,25 times more contracts are bought andsold speculatively. The staple foodspikes in 2008 were driven to a largeextent by outside speculators and didnot reflect the physical reality of stocks.ICT has facilitated these changes bothpositively and negatively. However, thesemarkets were already trading on stablebuilding blocks. It is therefore
critical 
fordonors and development practitioners insub-Saharan Africa to consider
whether and, if so, how 
to intelligently support theintegration and utilization of ICT inwarehouse receipt systems andcommodity exchanges
.
In general in Africa, smallholder farmersfarming very small parcels of land usebasic agricultural techniques to producestaple crops. Each farmer has a very smallsurplus. Generally farmers sell in a localmarket or from their farm gate when asmall trader passes by. These smallvolumes are collected by traders usingbicycles, ox carts or pick-up trucks. Thesevolumes are brought to the nearest smallstorage point and kept generally in poorconditions before being collected by thenext trader up the supply chain. For somecrops, the next level of trader providessome conditioning – generally limited toreducing moisture content. Thecommodity is stored in fairly poorconditions before being sold onward towholesale traders, who then sell either toprocessors or to the traders whichservices the consumer markets. Themajority of trade in Africa is turnovertrade —very low margins per unit, butmany units. With some exceptions, it ischaracterized by poor storage, inexactstandards, no contracts, and no finance.Post harvest loss due to spoilage isgenerally high.
 WRS AND CEX IN AFRICA
Understanding the fundamentals of WRSs and CEXs is important whendeciding if one or both are critical forthe development of a specific agriculturesector and whether they require any ICTsupport.CEXs and WRSs are built on a numberof building blocks essential for eithersystem to function sustainably:standardized grading and weights,standardized storage facilities,professional storage management,suitable insurance products, enforceablecontacts and market intelligence. Bothsystems can function without ICT—orminimal ICT—as long as volumes arelow. A WRS is usually a building block for a CEX.
Warehouse receipts
are paper orelectronic documents of title whichstipulate the commodity, quality grade,location and ownership of thecommodity deposited in the warehouse.The receipts can be transferable or non-transferable. Transferable warehousereceipts allow whoever has access to thetitle to transfer its ownership tosomeone else. A non-transferable titlemust go through a particular processoften controlled by a regulator totransfer ownership. Warehouse receiptsare generally issued by regulator-
 
 
 
ICT to Enhance Warehouse Receipt Systems and Commodity Exchanges in Africa Last updated November 20102
certified warehouses, and their issuance,handling, liens, and cancellation aremanaged by systems overseen by theregulator. The receipts can be used in acommodity exchange, enabling buyersand sellers to conduct transactions usingthe receipts to represent the physicalgoods, which can remain in warehousesand are moved only after the transactionis completed.ICT is a recent tool for WRS, beingprimarily employed to improvetransaction speed and allow for 24 hourtrading. As transaction volumesincrease, ICT becomes more valuable.In Africa, almost all of the storagebetween harvest and when the staplecrops are consumed is financed byfarmers and the myriad traders andprocessors holding stock. This involvesvast amounts of capital; in Kenya alonethe harvest value of the main staplecrops is over $750 million; Kenya,Uganda, and Tanzania’s average maizeharvest has a value of over $1 billion.This capital cost is tied up month aftermonth until it is sold to the consumer.Without finance, the companies that buyor own stocks of commodities areconstrained by tying up their capital inthese stocks. Properly managedwarehouse receipt programs provide aregulated instrument that allows financialinstitutions to advance loans against thereceipts with the commodity ascollateral, freeing up the capital held inthe system. This is a key benefit of warehouse receipt systems.Even though the WRS may not directlyhelp smallholder farmers, there are anumber of important indirect benefits.With a WRS, financing becomes moreavailable so there is more money to buythe commodity from the farmers, whichincreases the number of times thetraders can go back into the market topurchase grain, increasing competitionand generally reducing the sharp drop of prices at harvest. If the smallholderfarmer can meet the minimumconditions for a deposit to a warehouse(either individually or in a group), she orhe can delay selling their commodity,waiting for prices to increase, and stillprovide for immediate cash needsthrough financing the warehouse receipt.The term “
commodity exchange” 
covers arange of structured marketconfigurations including physical marketplaces; however in modern parlance theconcept has come to mean an electronicplatform where buyers and sellersinterface through registered brokers totrade multiple lots of differentcommodities. The standardized contractstraded specify quality, quantity, andsometimes location. Depending on thesophistication of the market orexchange, the contracts will include spotprice, forward, futures, and optionscontracts. Brokers are used as exchangelicensed intermediates who guaranteethe performance of the buyer and/or theseller of a contract. Generally buyersand sellers will have provided the brokerwith financial guarantees that underpintheir performance. Most exchanges havea specified lot size (e.g., 100 metrictons). At the end of any particulartrading period (e.g., three months), thesales and purchases are reconciled; mostcancel out and the remainder isconcluded through delivery of warehouse receipts (paper or electronic)from acceptable registered warehouses.The owner of the receipt then arrangesfor collection from the statedwarehouse, or sells it back onto theexchange to another buyer.Most exchanges carry out significantlymore transactions than there is realcommodity in the market. Someexchanges, such as ACE in Malawi, haveno underlying guarantee of commodityand therefore no official confirmation of quality and volume. Offers and bids arebased on trust that the commodity isreally there and of the quality stated,with the broker taking the risk that bothbuyer and seller are legitimate.Generally this type of exchange has failedto achieve high volumes in Africa.Ownership structure of an exchangeranges from those entirely owned andsupported by the private sector (e.g.,SAFEX, which began with 84 memberseach paying Rand 50,000 to join), to thosethat are government-owned (e.g. UCE,Uganda Commodity Exchange).
2
Thereare variations, such as the Ethiopianmodel, which is government-owned, butsells membership seats on an annual basis(the most recent price was an average of Birr 210,000 per seat).
3
Current systems in Africa:
 Warehouse receipt systems andcommodity exchanges are moreprevalent in east and southern Africathan in west or central. There arecurrently operational warehouse receiptsystems or inventory finance systems inKenya, Uganda, Ethiopia, Tanzania, SouthAfrica, and Madagascar. Several WestAfrican countries utilizewarrantage/inventory credit (Ghana,Burkina Faso, Niger, Senegal) andcontrats de tierces detention (Mali). 
4
 
2
Approximately $18,000
3
Approximately $16,300
4
Warrantage in its simplest form isdepositors (farmers) storing their commodityalongside other depositors (farmers of thesame group) in a small general store. Thesesystems have extended to include inventorycredit, which is the financing of a proportionof the commodity’s value in the store. Oftenthe financier, the store owner, and thefarmer group representative will each controla key to one of the padlocks on the door andtherefore control the movement of thecommodity from the store. In Mali the ‘tiercedetention’ (third party holding) worked in asimilar manner with the banks controlling therelease of traders’ goods stored in a thirdparty warehouse.
Initiatives to launch warehouse receiptsystems are in process in Ghana andNigeria. Commodity exchanges—or atleast entities labeled as commodityexchanges—include ACE in Malawi,ASCE in Nigeria, ECX in Ethiopia,SAFEX in South Africa, UCE in Uganda,and ZAMACE in Zambia. There are alsoefforts underway to launch a nationalcommodity exchange in Khartoum, aWest Africa Commodity Exchange basedin Accra, and a Pan-African exchangebased in Gaborone. As of November2010, there is also an effort under wayto establish a regional commodityexchange in east Africa facilitated byKenya’s National Cereal and ProduceBoard.
 
 
ICT to Enhance Warehouse Receipt Systems and Commodity Exchanges in Africa Last updated November 20103
HOW ICT CAN HELP 
The primary use of ICT in WRSs andCEXs has been to shift from paper-basedadministration to electronic systems andto accommodate 24 hour trading. Thisspeeds transaction times (which under apaper-based warehouse receipt modelcan take up to 14 days to transferownership of a warehouse receipt), and,with significant volumes, can reduce back office administration costs. Using ICTcan also allow far-flung traders toparticipate in a CEX. Of the roughly sixWRSs in sub-Saharan Africa, onlyEthiopia, Uganda, and South Africa useelectronic receipts and link to CEXs,however Ghana and Kenya intend toinvest in electronic systems.
1. Software:
Software applicationsdeveloped for CEXs range from linkedfinancial spreadsheets to more complexsoftware. Software can be “off the shelf”(meaning developed for and used bymany customers) which is then adapted(e.g. ACE); custom developed (e.g. UCE)or a combination of the two approaches.Either way, cost estimates start at about$80,000. Most of the softwareengineering expertise has been sourcedfrom either South Africa (e.g., SandboxProjects, which designed software forSAFEX and UCE) or outside of Africa.ECX developed their system locally andACE is using local talent to develop theadditional World Food Program (WFP)ICT platform link between ACE andZAMACE.ACE actually supported its initialsuccessful WFP purchase using a simplespreadsheet projected onto a screen soall bidders and the WFP representativecould see it simultaneously. Bidderswrote their bids on paper forms, handedthem to the ACE representative toreview, and then they were passed tothe person updating the spreadsheet.This is an example of how a littletechnology can be used to help newtrading mechanisms get started and havea significant impact on bidders. Beforethis, WFP used a closed paper tenderprocess (with additional restrictions onbidders) and no sellers could improvetheir bids based on seeing whatcompetitors were bidding. The biggestweakness of this basic ICT approach wasthat it was next to impossible for bidderselsewhere to participate in the process.WRSs use software to manage a secureinterface between the issuer of thewarehouse receipt, the owner of thereceipt and the financial institutionholding a lien on the receipts, and thetransfer to buyers.
2.
 
Telecommunications:
WRSs thatuse electronic receipts use the Internet totransfer title documents to owners,banks, buyers and, where required, to acentral registry that records issuance,cancellation, transfer of ownership, liensfor financial transactions, and stock reconciliation by location.Exchanging such electronic transactionsdoes not require broadband Internetaccess so it can be done using relativelycheap data exchanges via cell phonenetworks, most of which provide accessto the Internet today. Given the chancesof losing connectivity, any system needsto have built-in safeguards to confirm anydata exchanges have been completedsuccessfully (a standard process forrobust telecommunications dependentsoftware applications).Exchanges can also use SMS (textmessaging via cell phones) to offerinformation—essentially market priceinformation—to traders or producers infar flung locations. For example, Kenya’sWRS uses SMS to communicate with thewarehouse receipt owners to registerwarehouse receipts with the regulator.ECX in Ethiopia uses SMS codes todisseminate price information. At themoment these systems are simple andnot designed to push information tousers based on users’ profiles. Anefficiently working, high volumecommodity exchange will result instandardized pricing information that canfeed back into the market. Other thanSAFEX, exchanges in Africa are not yettrading sufficient volumes of staples tooffer an effective price discovery system.All of the CEXs in Africa have websites,but these are not used to conductbusiness. Online access does providetraders far from the CEX “real time” (ornear real time) reporting of bids, offersand traded prices for any particularcommodity. ECX in Ethiopia alsoprovides electronic feeds of tradedprices in markets around the country.Access to the trading platforms isthrough different types of brokers whomay be accessing the system virtually orin physical “pits” at exchange locationswhere different brokers buy and sellfrom each other on behalf of theirclients.
4. Radio and television:
Radio andtelevision can be useful tools to raiseawareness of both CEXs and WRSs,such as how to work with these newmarket institutions and to disseminatetraded prices by commodity. UCE usesradio and ECX uses both radio andtelevision for such purposes.
IMPACT 
There is currently no data in Africa thatshows if, and if so, how, ICT used inwarehouse receipt systems andcommodity exchanges increases anybenefits to smallholder farmers orimproves the competitiveness of Africanagriculture commodity value chains.Further, it is important for donors andpractitioners to recognize that ICT is
not 
 the driver in the development of warehouse receipts systems andcommodity exchanges, nor is it evennecessary for scale or sustainability. Infact, using ICT (and its challenges) mayprove to be an expensive distraction tothose working to create successful anduseful WRSs and CEXs, given the othercritical components that must beaddressed for such systems to besuccessful. Even the Chicago Board of Trade still largely uses a paper receiptingprocess, though the trading floor iselectronic. Nonetheless, after the initialcost outlay, ICT software and applicationscan reduce operating costs. Electronicreceipts and automated commodityexchanges can, if properly implemented,increase transaction speed; allow remoteparticipation; and reduce human errors,though the impact may be minimal untiltrade volumes increase.

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