Commodity Backed Warrants
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Commodity Backed Warrants

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Nairobi, 16th July, 2014. Presentation by Alexis F.K Aning (Commodity Clearing House (CCH) Finance House Ltd) on Day 2 of the Fin4Ag conference

Nairobi, 16th July, 2014. Presentation by Alexis F.K Aning (Commodity Clearing House (CCH) Finance House Ltd) on Day 2 of the Fin4Ag conference

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  • 2.  Framework for the operation of an Agricultural Commodity Backed Warrant scheme  Designed to issue and trade in commodity backed fixed income instruments in the Ghanaian financial markets to finance Commodity trade.  Allows farmers and farmer organizations to store their produce under WRS and ride the price curve for better price before selling, while receiving advances for household use or for expansion of production  Comprehensive, on-line, fully integrated and real time system for fixed income commodity-backed securities issue and trading OVERVIEW
  • 3.  Commodity producers, aggregators, traders and processors  The Economy – Deepening of the Financial Market  Warehouse & Logistics Operations  Insurance Industry  Collateral Management Industry WHO DOES IT HELP?
  • 4.  It provides a mechanism for a much broader pool of commodity producers and traders to readily and efficiently access funds for the purposes of expansion, working capital, improved efficiency and increased productivity.  It does this by converting certified warehouse receipts into a financial instrument: commodity-backed warrants, by way of “buy-sellback” or repos of the commodities under the warehouse receipts.  The warrants are then traded with the PFIs as short- dated money market instruments, under the Central Bank’s supervision.  The cash is passed on to the holders of the repos to finance their household or business until maturity. WHAT DOES IT DO?
  • 5.  Rural Poverty Cycle  Food Insecurity  Low Productivity & Inefficiencies  Illiquidity of Agriculture Value Chain  Difficult Access to Commodity Financing  Barriers to Access Premium Markets WHAT PROBLEM DOES IT SOLVE ?
  • 6.  Currently running a pilot but with significant impact in less than a year:  The repo structured financing was done against stand-alone lines of credit of the PFIs  The only institution to provide structured financing against Warehouse Receipts (WHR) issued by the Ghana Grains Council  Financed about 12,500 MT of maize stock over 6 months under its repos  Provided easy access to financing using only the WHR as security (No other fixed asset securities were required)  Financed a major aggregator which supplied to the Breweries and other processors, as well as, SME aggregators buying from small- holder farmers for supply to the poultry industry HOW HAS IT HELPED TO MAKE A DIFFERENCE ?
  • 7.  Main Findings of the Pilot  High Costs of source funding by using lines of the PFIs, on stand-alone basis (Av: 25% p.a.).  Inflexibility of the PFI’s lines of credit in meeting the roll-over requirements of the repo holders.  Long transactional lead times due to “approval” requirements of the PFIs, set against fast price volatility of commodity transactions.  These limit full adoption of the scheme by market participants LESSONS LEARNED FROM THE PILOT OPERATIONS ?
  • 8.  Working with the Bank of Ghana to develop a “Special Discount Window” for agric commodity warehouse receipts’ financing  This will enable very low cost source-funding for aggregation of commodities into certified warehouses HOW ARE THESE PROBLEMS TO BE SOLVED ?
  • 9.  Under the Central Bank’s supervision:  Issue commodity-backed warrants for primary purchase for trading by the PFIs  The warrants are backed by same commodity-type repos  The warrants are traded by the PFIs in the secondary markets  The trading dynamics are determined by yield against price risks of the underlying commodities HOW ARE THESE PROBLEMS TO BE SOLVED ?
  • 10.  Fast Access to Low Cost Finance for Warehouse Receipted Commodities  Liquidity provided by the trade of the Warrants  Leveraging the money markets for access by the larger investment community for financing agricultural trade  Opportunity for integrating the commodity-backed warrants in the monetary aggregates  Setting the stage for trading of commodity-backed instruments on a commodities exchange  Making the commodities exchange initiative in Ghana, a reality. WHAT ARE THE BENEFITS TO THE VALUE CHAIN ?