Warehouse receipts boost farmers’ clout Mohammad Nuryazidi  ;   An analyst in Bank Indonesia Banten representative office

JAKARTA POST, 11 April 2014

                                      

                                                                                         

                                                             

The Central Statistics Agency (BPS) announced relatively low inflation in the month of March, which stood at 0.08 percent, down from 0.26 percent recorded in the previous month due to supply disruptions. Food was the only group of commodities that experienced deflation with a rate of 0.44 percent. The deflation was influenced by harvests in various regions. At first glance, the figures show an encouraging indicator. But if we look more deeply, the abundant supply following the harvest will spark problems. When supply is plentiful, the price of a commodity will fall. When the harvest is over and the planting season arrives, the price surges because supply is limited. For farmers, lower rice prices at harvest will hurt. Only if they can hold on to the commodity longer can they sell it at a better price. It is already common knowledge that farmers’ bargaining power is weak. They rarely enjoy the increases in the price of the commodity they produce. In fact, they often fall victim to the price hikes because they have sold their products at the time of harvest. This illustrates farmers’ unfavorable stock management. Problems in stock management are not easy to deal with. It is not just a matter of organizing supplies, but also related to farmers’ financial needs. From the time of the production process, planting and maintenance until harvest time, farmers need cash to feed their children and cover their school tuition, which consistently increase due to inflation. Farmers, living in rural areas, have little access to easy and inexpensive financing. When they ask for bank loans, they are constrained by collateral. Warehouse receipts are an alternative solution to increase the bargaining power of farmers. Warehouse receipts are documentary proof of ownership of the goods stored in a registered warehouse specifically issued by the warehouse manager. In Indonesia, in accordance with the Trade Ministry Regulation No. 26/M-DAG/PER/6/2007, there are eight agricultural commodities that can be stored in warehouses within the administration of the warehouse receipt system. Those commodities are unhusked rice, rice, coffee, cocoa, pepper, rubber, seaweed and corn. Although complicated, warehouse receipts can even be traded, sold, exchanged, or can be used for delivery of goods in derivative transactions such as futures contracts. But typically in Indonesia warehouse receipts are used as collateral to get bank loans. The use of warehouse receipts as collateral has multiple benefits for both banks and farmers. For banks, the warehouse receipt is secured collateral. All the data related to warehouse receipts is centrally administered at the Registration Center and supervised by the Commodity Futures Trading Regulatory Board. In addition, there is quality assurance for the owner, or prospective owner, of the goods because they are stored and managed properly and the quality is tested by an independent conformity assessment board which is certified by the National Accreditation Committee and approved by the Commodity Futures Trading Regulatory Board. In addition, warehouse receipts can also be an alternative method for banks to boost lending to agriculture, which remains low. Bank Indonesia data found that agricultural credit accounted for only 5.34 percent of the total bank credit by the end of 2013. For farmers, the warehouse receipt is one means of getting fresh funds required during the growing season until the next harvest. At the time of harvest, the farmers can store their agricultural commodities in the warehouses using the warehouse receipt system. Farmers will get a receipt that can be used as collateral to obtain fresh funds from banks, which they can use to cover their daily needs while waiting for higher commodity prices. Holding the funds, the farmers have the option of holding their commodities. Farmers have the bargaining power to sell the commodity whenever they want without worrying about how to make ends meet. With adequate time, the farmers also can choose the most suitable selling price for optimum profit. Under these conditions, farmers as producers can reap benefits from the rise in the price of certain commodities. In the context of price movements, farmers’ bargaining power to control the timing of the sale of commodities will greatly impact on price stability. During the harvest, prices are not too low because the supply of goods is not too high. In the post-harvest period, the price is not too high because the supply is still there. So the price movements of agricultural commodities, which are often volatile, can be made stable. ●