Grain Bank Model in China vs. Grain Warehouse Receipt System in Ghana

1. Overview of the project

In China, inadequate storage facilities not only lead to significant grain losses, but also to poor living conditions.Inthe meantime, the fluctuation of grain market prices results in low prices for farmers to sell grain during the output period and high prices for buying grain in lean season. In addition, farmers often have difficulty in obtaining bank loans due to the lack of collateral. Grain banksare able tomeet farmers' needs for grain storage, income increasing and pledge financing.

In Ghana, Small-scale farmers often hold onto their crops until the lean season, when the price and potential for profits are at their highest. However, improper preservation or drying techniques, coupled with inadequate storage facilities, can force small farmers to let commercial or foreign traders reap the rewards of seasonal price swings. With the use of warehouse receipt financing, small farmers gain an advantage on the playing field.

2. Approaches and methodology

a) Grain Bank Model in China

The functions and business scope of the grain bank are expanded along the upstream and downstream of the grain industry chain with “grain storage” as its core service. 1. Grain storage. The grain bank retains the farmers ownership of the grain by contract, grain bank can be either open to the farmer, allowing the farmer to withdraw produce or cash at any time, or sealed, so the farmer cannot access produce until a predetermined date. 2. Agricultural socialization services. Including pre-production supplies, in-production technical training and agricultural machinery services, post-production transport and collection services, etc. 3. Loan collateral services. Grain bank provides loan collateral services to small-scale farmers, then farmers can use “grain bank card” as a proof of collateral to apply for loan from financial banks. 4. Grain loan service. Grain processing enterprises and other business entities lend raw grain from the grain bank after pledging their assets to the bank and pay the corresponding principal and interest as agreed. 5. Opening of “food and oil” shores. The grain bank provides “safe grain and oil” in accordance with the national regulations, and farmers can directly buy the "safe grain and oil" from the grain bank with the “grain bank card”.

The difference in grain production between the main grain-producing regions and the main grain-marketing regions determines the different paths for the development of grain banks in the two regions. In the main grain-production regions, the grain stored by farmers is usually of a large scale. Grain banks in these regions are “commodity grain banks”, which can provide grain deposit and loan services, supporting farmers’ grain business and reproduction. In the main grain-marketing regions, the grain stored by farmers is usually of a small scale. Grain banks in these regions are “ration banks”, which is focused on grain depositing and cashing rations.

b) Grain Warehouse Receipt System in Ghana

Warehouse receipt provides three types of services:

1. Storage: Providing farmers, traders, processors and aggregators with reliable public storage facilities.

2. Access to credit: Providing a financing system to depositors of commodities in public warehouses using securely stored goods as loan collateral against a receipt certifying the deposit of goods of a particular quantity, quality and grade.

3. Access to market: Providing depositors a marketing platform to market their commodities using warehouse receipts.

There are typically three parties involved in warehouse receipt financing: the bank, the farmer, and the warehouse. The farmer identifies a warehouse and takes his or her goods to the warehouse for deposit. The warehouse operator grades and classifies the goods and gives a receipt for storage of goods to the farmer. The farmer then takes the receipt to the Microfinance institutions (MFI) and, based on projections of the goods’ market value, the MFI gives the farmer a loan. The loan is extremely flexible as it allows the farmer to spend it to finance expansion activities, pay off debts, or use it for any other reason.

By storing their goods in a reliable warehouse until the price increases while using the goods as loan collateral, farmers may access funds before they sell their goods. Warehouse receipts are often administered to producer groups, instead of individuals, which helps the flow of market information. Warehouse receipts can also create price transparency. This empowers farmers to make informed sales decisions rather than waiting for buyers who often offer below-market prices. The farmer thus may use the warehouse as a channel for selling the goods, in which case the goods are released to the buyer, the loan and fees are deducted from the selling price, and any remaining profits are released to the farmer.

3. Beneficiary description

In China, grain bank can not only save farmers' manpower expenditure on grain drying and storage, reduce grain losses, but also provide precise services to build the bridge between grain-growing farmers and grain-receiving enterprises, helping farmers access to the market quotation and increasing their income.

In Ghana, warehouse receipt financing has clear advantages for both producers and MFIs. Producers can gain access to storage facilities, which allows them to maximize their profits as never before. The use of collateral as a loan guarantee makes the MFIs’ risk to minimal and opens up a new client segment that MFIs usually have difficulty reaching.

4. Reference and recommendation for other countries

The functions and business scope of the grain storage systems are supposed to expand along the upstream and downstream of the grain industry chain with “grain storage” as its core service. In the meantime, grain storage systems should choose the different paths for the development according to the differences in grain production between the main grain-producing regions and the main grain-marketing regions.

Sources:

[1] Exploring the operation mechanism and optimization path of China's grain bank. Wang Xue, He Guangwen, Zhang Rui. 2021/2

[2] Grains market and financial service. GCX. PPT

[3] Warehouse Receipts: Financing Agricultural Producers

https://pdf.usaid.gov/pdf_docs/PNACQ697.pdf#:~:text=Warehouse%20receipt%20financing%20is%20the%20use%20of%20securely,institution%20such%20as%20a%20bank%20or%20an%20MFI.