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The last decade has seen a gradual trend towards the liberalization of many economies, both in the developing world of Africa, Asia and Latin America and, more recently, in Eastern Europe and the new states of the former Soviet Union.

An important feature of these changes has been the liberalization of agricultural markets. This has involved an increasing role for the private sector in food marketing and, to a lesser but nevertheless significant extent, in the marketing of export and industrial crops.

In most countries the lack of finance for private traders has emerged as a significant constraint to the emergence of a dynamic private sector able to take over the bulk of trading and storage functions from state trading bodies. The authors, and their colleagues in NRI and FAO, recognizing this constraint, identified inventory credit as constituting, at least in part, a useful approach to resolving the problem. Initially, our two organizations worked separately, but when it was realized that we were working along similar lines it was felt beneficial to collaborate on this publication.

Anthony Beattie
Chief Executive
Natural Resources Institute

Abdoulaye Sawadogo
Assistant Director-General
Agriculture Department
Food and Agriculture Organization




The authors acknowledge the many people and organizations who have assisted with this research. The contribution of Dr Edward Asante, of the Ghana Institute of Management and Public Administration, is particularly acknowledged with regard to the Ghana case study, as are the contributions of Jonathan Lindsay, Cristina Leria (both of FAO), Richard Swinburne and Simon Gleeson (of Richards Butler, International Law Firm) in the preparation of a highly informative legal section (Annex 2 to this report). Thanks are also due to the directors and staff of the following institutions: Quedan and Rural Credit Guarantee Corporation (Quedancor), the Philippines; the Central Warehousing Corporation, India; the Programme pour la Restructuration du Marché Céréalier (PRMC) and the Institut d'Economie Rurale (IER), Mali; TechnoServe (Ghana) Ltd., the Agricultural Development Bank, Barclays Bank (Ghana) Ltd., the Ghana Food Distribution Corporation (GFDC) and the Société General de Surveillance (SOS) (Ghana) Ltd., Ghana; and the Grain and Feed Trades Association (GAFTA), based in London, United Kingdom.

The authors also thank colleagues who have assisted in the preparation and editing of this publication, including Richard Roberts, Ed Seidler, Pekka Hussi, Anton Slangen, Lawrence Christy, Jaime Novoa, Åke Olofsson (all of FAO), and Paul Hindmarsh, Peter Tyler and Chris Haines (of NRI).




ADB - Agricultural Development Bank, Ghana
BNDA - Agricultural Development Bank, Mali
BULOG - Badan Urusan Logistik, Indonesia
CM-Gs - Commodity Certificates with Guaranteed Delivery
CWC - Central Warehousing Corporation, India
FAO - Food and Agriculture Organization of the United Nations
FAQ - Fair Average Quality
FCI - Food Corporation of India
GAFTA - Grain and Feed Trades Association
GFDC - Ghana Food Distribution Corporation
IER - Institut d'Economie Rurale, Mali
MIS - Market Information Senices
NGO - non-governmental organization
NFA - National Food Authority, Philippines
NRI - Natural Resources Institute
ODA - Overseas Development Administration
OPAM - l'Office des Produits Agricoles du Mali
PDS - Public Distribution System, India
PRMC - Programme pour la Restructuration du Marché Céréalier, Mali
Quedancor - Quedan and Rural Credit Guarantee Corporation, Philippines
RBI - Reserve Bank of India
SGS - Société General de Surveillance (Ghana) Ltd.
WFP - World Food Programme




This publication addresses a problem which has emerged in recent years in many, if not most, countries which have liberalized their agricultural marketing systems. Such changes are being witnessed in Eastern Europe and states of the former Soviet Union as well as in many developing countries.

Government marketing boards and parastatals usually had ready access to finance to enable them to purchase and to store food and industrial crops. Following liberalization, such finance has not been easily available to private traders who are expected to take over the marketing functions previously carried out by the state. Particularly in the case of food crops, this lack of finance places the burden of storage on farmers who are not always well equipped to store efficiently. The consequence of this is high levels of inter-seasonal price instability, to the detriment of producers and consumors alike.

Inventory credit is one way of overcoming financing constraints. This is not a new concept; archaeological evidence shows that it was practiced in Ancient Rome. Obtaining finance against stocks of a wide range of products held in bonded warehouses is common in much of the world. Inventory credit for agricultural produce is widely used in Latin American countries and in some Asian countries (see Case Studies 1 and 2). In many countries, however, it is seldom practiced and real estate remains the main form of collateral acceptable to banks.

Various different approaches to inventory credit are presented. For countries discarding interventionist systems or with little experience of commercial storokeeping, an approach is suggested involving a three cornered arrangement between a bank, a borrower and a warehouse operator. The borrower can be a trader, a miller, a large farmer or a group of farmers. The warehouse operator is generally an organization which is specialized in this field and which does not trade in the produce stored.

Inventory credit is of use in financing the procurement and storage of durable agricultural produce, including: (a) cash crops destined for export markets, (b) imported produce, usually held in bond, for which the importer needs finance during disposal, and (c) domestic food and feed crops, particularly grains, subject to seasonal gluts. This publication is mainly concerned with the last use.

In the case of foodgrain for domestic consumption, inventory credit would involve a borrower negotiating a line of credit, to be made available against the presentation of warehouse receipts. At harvest time, he or she deposits grain at the warehouse as security for a bank loan. This can then be used to purchase further produce, which can itself be pledged as security for a further loan. In this way the borrower's stocks can be increased well beyond his or her initial means. When market prices rise, he or she repays the bank, either in full or in part, pays the warehousing charges and withdraws the relevant quantity of grain for sale on the market. If the borrower does not repay the loan by the due date, the bank seizes the grain and sells it to a third party.

However, in many countries, before this apparently simple commercial transaction can be implemented, various requirements need to be fulfilled. The publication discusses these in detail, with reference to case studies in the Philippines, India, Mali and Ghana. The main conclusion which emerges is that inventory credit should not be "targeted" at particular users, but should be offered without subsidy to those who are able to use it profitably. Similarly, the exercise should be profitable to the lender and the borrower alike, and lending decisions should be made by banks without any kind of external pressure.

Setting up inventory credit as some kind of development "scheme" should be avoided. The banks, rather than Government should be the prime movers, and successful implementation depends above all upon their capabilities. Sustainable results are more likely to be obtained if they provide credit from their own resources, rather than using concessional funds from donors or governments. Outside assistance may, however, be useful to create the appropriate enabling environment for inventory credit to work, e.g. by promoting the concept, by assisting with the drafting of necessary legislation and by supporting the establishment of market information systems.

A crucial element of inventory credit is the availability of reliable warehouse operators. These should not only have the necessary infrastructure and technical skills in storage management and pest control, but should also have business skills and independence from political pressure, which will provide a reasonable guarantee of the integrity of the stocks. A key to getting banks to make a serious commitment to this sort of lending is the presence of warehouse operators of outstanding reputation. For this reason it may be appropriate to involve companies of international repute, or leading national enterprises, in selling up these services. Companies with a background in inspection services, freight forwarding or pest control may be suitable. In some cases the banks may see fit to set up their own warehousing subsidiaries to carry out a range of collateral management activities concerned with domestic or internationally traded goods.

The establishment of inventory credit in any country requires a careful analysis of the existing legal framework and, on the basis of this, legislative reform may be needed to protect the interests of the parties involved, and to facilitate trading in warehouse receipts.

Inventory credit can only function in a conducive policy environment. It also requires the availability of support services such as market information. Government, will need to accept that traders are entitled to make profits from crop storage. There should be no controls on grain stocking or on the movement of produce, nor any price controls. Government trading, through parastatals and other government-supported bodies should be strictly limited. Policies regarding introduction of food aid onto the market should be transparent and adhered to at all times. Finally, it is likely that inventory credit will not be able lo function in countries where there are high or volatile real interest rates.

These conclusions, based on a number of individual experiences, are believed to have a significant degree of general applicability. In particular, they have been corroborated by practical experience in Ghana, where NRI promoted the introduction of a pilot scheme for the financing of the maize trade, and thus was well placed to monitor closely the issues bearing on its utility and viability.

Lastly, it is noted that inventory credit is a significant step in the modernization of agricultural marketing systems. In the longer term, it can facilitate the development of more efficient commodity trading, based on standard grades. Brazilian experience suggests that in some countries it can lead to the creation of commodity-based financial instruments, thereby involving the public at large in the financing of agricultural trade.




This publication aims to address a problem which is widespread in developing countries, and others which are liberalizing their agricultural marketing systems, i.e. the lack of finance for trading and inter-seasonal storage of durable agricultural commodities, particularly grain crops. Since the early 1980s in Africa and more recently in E Europe, the problem has been of increasing concern due the general trend away from marketing by state-controlled marketing bodies to marketing by private traders.

In sub-Saharan Africa, the scenario for food commodities is typically as follows. Marketing boards used to enjoy privileged access to bank funds for buying maize or other foodgrains but the private traders, who in most countries now dominate the trade, have only limited access. As a consequence, the trading sector must live on a hand-to-mouth basis, quickly turning over stock in order to avoid running out of funds. Seasonal price variability is often large as there is little cash for buying up stocks to be sold off in the lean season. As a result of these changes to marketing systems, the burden of storage is increasingly being placed on farmers.

Among banks, there is a general reluctance to lend to private traders in domestically produced foods. This seems to be for the following reasons.

(a) Traders are mainly within the informal sector, often keep no written records, have limited resources and have little contact with the banking system.

(b)Lending for agricultural trade involves significant risks, due to the difficulties of accurately forecasting price movements and to deterioration of the produce if improperly stored.

(c) Much of the policy environment surrounding African banks appears to encourage conservatism and discourage the development of new lending instruments. Liquidity controls, imposed as a result of structural adjustment and the high level of interest which banks can obtain on treasury bonds, diminish their interest in finding new private sector clientele. Apart from this, banks often entertain lingering uncertainty about government policies towards private traders in staple commodities, even after markets have been liberalized. In most of the post-independence period, traders have been stigmatized as exploiters, and on occasions have been subject to price controls and even seizures. Bankers may wonder whether the new policies will be rigorously upheld, particularly in times of food crisis.

One of the main limitations on lending for private trade is the requirement for conventional guarantees. In developed countries, stored produce is widely accepted as collateral for lending. For example, in the United Kingdom, banks will typically advance a farmer or trader 80 percent of the market value of grain which is stored in an authorized warehouse and duly insured against losses arising from fire, theft and damage by unusual weather conditions.

In most African countries such financing is seldom available and, if so, only for financing stocks of commodities entering the export or import trade. The main form of collateral acceptable in Africa is real estate, but this greatly limits the feasible volume of lending. Most rural real estate has no market value and is unusable for this purpose. Land is largely untitled. Even in urban areas, traders often have little or no real estate to their name.

Many traders do, however, have some working capital. Stocks purchased by a trader with this capital could be pledged as security for a bank loan, thereby increasing total funds available to him or her for leading.

A solution to the trade financing problem, therefore, could involve increased usage of stocks of commodities as a physical guarantee, an approach which in this paper is referred to as "inventory credit". Indeed this approach may be a key to forging strong long-term links between the banks and the trading sector. It should be noted that banks will not reIy exclusively on inventories as collateral, but will tend to use them in combination with more conventional guarantees. By doing this they will be able to increase their total volume of lending to trade customers, and attract new business from informal sector customers who have hitherto been unable to meet all the collateral requirements.

This publication also aims to assist those who are looking for ways of increasing the role and efficiency of private-sector trading, as well as those who simply wish to develop new lending instruments, and is targeted principally at the following types of reader:

The experiences of various countries which have attempted to introduce inventory credit or other trade financing mechanisms are examined through case studies from two Asian (Philippines and India) and two African (Mali and Ghana) countries (see Case Studies 1-5). The case studies refer to cereal crops, but the reader should be aware that inventory credit can work for any durable commodity which exhibits seasonal price variations, including items such as cowpeas, palm oil, dried fish and dried chillies, and commodities entering international trade. The successful introduction of inventory credit for food crops may, in turn, open opportunities for the concept to be extended to other commodities.


Section 1 - Why it is important to improve trade financing

The situation described below, encountered in a survey of 357 wholesale grain traders in Tanzania, has features in common with many African countries. While this fragmented trade structure encourages competition, it is far from ideal. Traders are generally under-capitalized, and seldom engage in inter-seasonal storage to take advantage of seasonal price rises. They prefer to turn over their stock quickly and obtain a modest, but assured, profit.



The tracers' scales of operation were typically small. At the time of interview, 58 percent of maize traders and 71 percent of rice traders handled 25 bags or less per shipment. For traders moving grain between locations, the average number of bags handled was 37 for maize and 25 for rice, with three shipments normally being made per month.

There were few links in the market chain between producer and consumer, and three-quarters of the traders claimed to have bought directly from farmers. They had developed little specialization in their functions.

Few traders had any trucks and they usually had to rely on hired transport, which was often difficult to find. They generally lacked storage facilities in the towns, and bags of grain were mainly kept in the open, giving rise to storage problems.

Only 2 percent of traders used bank credit, almost entirely larger traders dealing in rice, and their access was very restricted by lack of money on the banks' side. The three most important problems identified were credit (49 percent), transport (49 percent) and storage (31 percent).

Source: Marketing Development Bureau. Dar es Salaam (1992)

With a decline in the level of public-sector stockholding, and little storage on the part of traders, farmers find themselves obliged to hold on to stocks which in previous years would have been purchased by the parastatals. In African countries, such stocks are held in rustic storage cribs or granaries made from locally available materials, including wood, mud and various thatching materials.

In general terms, increased on-farm storage is a desirable outcome of liberalization, relieving the State of much of the costs of holding commercial food stocks, and making an important contribution to local and national food security. Given the low level of investment required, it is often the cheapest form of storage. Unfortunately, farmers often experience problems in storing large quantities of grain. Notwithstanding the prospect of higher lean-season prices, they are often forced to sell grain either to satisfy immediate cash needs or to avoid storage problems. Such problems are particularly acute where farmers grow hybrid varieties of maize - due to their susceptibility to pests - and in areas where rainfall occurs after harvesting. In some countries, farmers grow traditional varieties of maize for home consumption during the year, while hybrid varieties are cultivated for the market. Traditional storage techniques are usually adequate for storing the traditional varieties but not for hybrids, which must be disposed of quickly in order to avoid spoilage.

These constraints suggest that farmers should not be relied upon exclusively to carry out the inter-seasonal stocking function within liberalized marketing systems. In the absence of commercial storage, there is likely to be a high degree of price variability between harvest time and the lean season.

Empirical evidence from Africa (see Annex 1) shows that the degree of interseasonal price variability is often high, and is also extremely variable from country to country, and from crop to crop. Available data indicate that the average increase in lean-season over harvest prices ranges from around 31 percent in Sahelian countries to over 100 percent in Ghana.

The main determinant of price variability is the speed at which farmers release grain onto the market, and the amount they hold back as precautionary reserves. In Ghana, maize is predominantly a cash crop in the main surplus-producing areas, and for this reason farmers do not hold precautionary reserves. Moreover, on-farm storage is made difficult by high humidity at the time of harvest and, until very recently, private traders have made little use of mechanical dryers. By contrast, farmers in Sahelian countries often hold stocks of millet and sorghum for several years. Grain is usually dry at harvest time and, stored on the sheath, losses are minimal. Farmers have a much greater role in buffering inter-seasonal price fluctuations than in the case with maize in Ghana and neighbouring coastal states.

In many African countries the level of inter-seasonal price variability is likely to increase during the 1990s due to the effect of market liberalization. This is particularly true of countries like Malawi, Zimbabwe, Kenya and Zambia which had been relatively effective in enforcing their public sector grain monopolies.

Another problem noted in the study of the Tanzanian marketing system is considerable short-term price fluctuation (Marketing Development Bureau, 1992), due to the absence of intermediate-level stockholding between the farmer and the consumer. In Dar es Salaam, feed millers were unable to find wholesale merchants who could supply stocks of grain on demand, but were dependent upon a flow of trucks arriving from distant supplying locations (Courter and Golob, 1992).

Price instability of the kinds described and associated low levels of commercial stockholding are believed to be disadvantageous to society for the following reasons.

For these reasons the authors believe that there is a stong case for improving the financing of agricultural trade in Africa. In some countries (e.g. Ghana), the high degree of price variability suggests that traders will wish to use inventory credit in almost every year. In other cases, as with millet and sorghum in Sahelian countries, traders are likely to use inventory credit services on a more opportunistic basis, when they are trying to accumulate stocks for export to neighbouring countries, or when they judge that market prices may increase substantially, as happened in 1988 and late 1990 (see Annex 1, Figure A2).

Better trade financing should result in a higher degree of inter-temporal market integration. Over the long term, this will happen as follows. As closer links are forged between the financial and commercial sectors, funds will increasingly flow backwards and forwards between them. As already hapens in developed countries and some of the more advanced economies in the developing world, trade will attract commodity finance seeking speculative profit. Indeed finance will continue to tee attracted up to the point of what economists call "normal profits", i.e. the minimum level of profit to attract those who are speculating on price rises.

Indonesian experience suggests how better trade financing can reduce interseasonal price variability: during the 1980s average spreads were only 11 percent (Trotter, 1992). This low level can be attributed to several causes, including lower production variability than is the norm in Africa, and the intervention of the parastatal, Badan Urusan Logistik (BULOG). However, much of the smoothing can be attributed to the fact that millers have adequate access to finance to cover their stockholding needs.

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