The Warehouse Receipt System, meant to create market and credit opportunities for agricultural products is gaining popularity among farmers which could transform agricultural marketing processes.

Although currently the system only caters for cereals like maize, cotton and coffee Uganda's leading export earners will soon join the growing list of agricultural products being managed under the system also called the warehouse inventory credit.

If that happens, farmers will be able to rid wastage by storing their produce in a safer system, access credit using their crop inventory as collateral and beat market price fluctuation by adjusting supply according to demand.

Coffee beans in a cup. Coffee and cotton will benefit from the Warehouse Receipt System. FILE PHOTO

"We are under final touches to include coffee and cotton and our possible warehouses for these two are situated in Mbale and Kasese districts where farmers will deliver the commodities," Mr Alex Rwego, manager Uganda Commodity Exchange (UCE), an organisation which regulates the WRS on behalf of government said.

There are so far three warehouses certified by the WRS and government. These include; Masindi Seed and Grain Ltd (MASSGA). Other certified Warehouses are Nyakatonzi Cooperative Union Ltd situated in Fort Portal and Agroways (U) Ltd in Jinja.

The biggest challenge farmers in Uganda face is the lack of market for their produce. Only a tiny fraction of the food produced gets to the markets, the rest is either consumed on the farm or lost to pests or disease after harvest.

According to researchers, the market for staple food crops like maize, sorghum, rice and millet within Africa is estimated at $150 billion a year, far exceeding Africa's market for internationally traded cash crops like coffee, tea, and flowers.

A year of record high food prices presents a unique challenge and opportunity for Africa.

To benefit, African farmers must produce more food, but more importantly, they must have access to markets to sell their harvests at prices that benefit them and the consumers.

New approaches are needed to create vibrant food markets in Africa.

The Warehouse Receipt System (WRS) was started to help farmers get good market for their produce.

Secondly, the warehouse operator issues warehouse receipts, which form the basis for financing.

"Products held in storage improve the bargaining position of the depositor," Mr Rwego said.

Lenders can mitigate credit risk by using the stored commodity as collateral. This form of collateral is more readily available to rural farmers and is less difficult to liquidate than the more accepted fixed form of asset collateral.

"Rather than relying on the producer's or exporter's promise that the goods exist and that the proceeds of their sale will be used to reimburse the credit provider, the goods are put under the control of an independent warehouse operator. Credit provider has to ensure the goods have not pledged previously," Mr Rwego explained.

The warehouseman who is in most case owns and qualified to run the warehouse becomes legally liable for the goods he stores. The warehouse can also be located within a factory or processing plant to enable value addition processes to be conducted on the warehoused produce.

Mr Rwego said If these goods are stolen, damaged or destroyed, through any fault of his, he and his insurance companies have to make up for the value lost.

He said the integrity of the warehouse operator and warehouse facility is secured by government licensing and controls and by guarantees that the warehouse man has obtained from bonding companies and insurance companies.

So far, the World Food Programme is the biggest customer of the WRC system. According to Mr Moses Byakagaba, general manager of MASSGA, they have managed to mobilize about 75 tonnes of maize from over 200 farmers.

More than 2,000 farmers have so far registered under the system from Busoga, Kasese and Masindi regions. These farmers have a combined collection of 2,000 metric tonnes of mainly maize, beans and Rice.

Mr Rwego said the advantage of WRS, compared with a simple bill of sale which gives title to commodities to the credit-providing institution, it's use as collateral provides the additional advantage that the commodities are no longer in the possession of the borrower, and hence if the borrower defaults, the lender has easy recourse to the goods.

Unfortunately, fewer farmers for whom the system is meant have used it to the full. According to Mr Rwego, more processors and traders in Uganda have made far more use of warehouse finance than the farmers using non-negotiable warehouse receipts where financing is provided under a tripartite contractual arrangement between a bank, collateral manager and individual exporter.

"In all cases, however in the absence of a regulatory regime for inventory based financing, banks have still taken "extra comfort" in fixed asset collateral, debentures and personal guarantees to secure their lending. These "extras" on the other hand are not readily available to small scale farmer groups," Rwego explained.

The Warehouse Receipt Systems Act 2005 which was passed about two-years ago, seeks to mitigate quality and storage risks by the warehouse operators' guarantee of delivery and loss of value by monitoring movements in the market value as well as value discounting and other price risk management instruments.

Foreclosure is relatively simpler and less costly without having to go to court.