Farmers in countries where the EBRD works often face difficulty in obtaining financing due to their inability to provide creditors with acceptable collateral. Most common types of collateral, such as land and/or machinery, are usually not available for short term finance. In the pre-harvest stage of production, this often exposes farmers to expensive and usually non-competitive financing schemes offered by input suppliers or compels them to make hard choices as to what investment they can afford. Insufficient liquidity leads to underinvestment in the agriculture sector, resulting in lower levels of productivity and less profit (whereas high quality inputs increase productivity). Post-harvest, only a robust system of public warehouses for harvested crops would allow farmers to use the stored crops as collateral. The EBRD has been promoting warehouse and warehouse receipt reforms for many years and began recently promoting an innovative pre-harvest instrument. These efforts have increased as food prices have risen, a trend that highlights the issue of food security and the urgency of helping countries with agricultural financing.
Post-harvest financing - Warehouse Receipts
Warehouse Receipts financing consists of a collateralised commodity transaction where the stored crop provides security for the loan. The financing cycle begins after the harvest. The harvested crop is stored in a licensed warehouse that issues a receipt proving that the commodity is physically in the warehouse, and on the basis of which financing will be extended. The system binds several participants together: farmers (depositors), warehouse owners and managers, banks and the government. The role of the government is to build a legal and institutional framework that ensures the performance of the system and minimises transaction costs.
The Warehouse Receipts financing system gives farmers enhanced access to credit and the possibility of delaying their sales, which allows them to take advantage of the seasonal price fluctuations. Financial institutions gain, through the use of collateral that is easier to enforce and which central banks regard as good quality. This system reduces lenders' capital utilisation requirements, which enables lower pricing.
The EBRD has supported Warehouse Receipts reforms in Bulgaria, Kazakhstan, Lithuania, Moldova, Poland, Romania, Russia, Serbia, the Slovak Republic and Turkey. Reforms are often followed or accompanied by investment projects in which the risk of lending against warehouse receipts is shared between the EBRD and partner financial institutions.
Pre-harvest financing – Crop receipts
In 2010, the EBRD began promoting the use of Crops Receipts. This new instrument originated in Brazil where it has encouraged the private sector to provide US$ 20 billion a year in financing for agricultural activities on a commercial basis.
A Crops Receipts system provides a standardised obligation to supply agricultural products or to make payment in future (to the holder of the receipt), in return for received pre-harvest finance (monetary or in kind). This obligation cannot be altered or evaded under any possible debtor’s defence (force majeure included) and can be incorporated as a tradable paper, further increasing its market value. The obligation is also secured by collateral, in particular collateral over future agricultural products (perhaps those that the financing precisely permitted to grow, but not exclusively). Since 2010 the EBRD has supported Crop Receipts reforms in Russia, Serbia and Ukraine.