Implementing Effective Warehouse Receipt Financing Systems Lessons from a pilot WRS project in the Senegal River Valley Guigonan Serge Adjognon, Aram Gassama, Jonas Guthoff, Victor Pouliquen Context the product in storage, at a 5% annual interest rate, pro-rated to the duration of the credit. The warehouse was chosen based Farmers in developing countries, including in Sub Saharan on its proximity to rice production areas, and also because it Africa, face financial constraints and storage access limita- met the minimum requirements defined by the WRS regula- tions, which often expose them to pressure to sell immediately 6 tory framework adopted by the parliament in 2017 . Given their production right after harvest and buy it later at a much 1 the limited capacity of the warehouse compared to the rice higher price. Warehouse Receipt Systems (WRS) financing, farmer population in the area, there was a selection process through which farmers can bring agricultural commodities to that followed the following steps: (i) a sensitization campaign a certified warehouse and receive receipts certifying the quan- to educate farmers about the WRS and stimulate their inter- tity, quality and location of the commodity stored, which in ests; (ii) a listing of farmers via the rice farmers’ associations turn can be used as collateral to access credit from financial in the area, during which farmers had indicated their interest institutions, is gaining popularity, as a potential solution. in participating in the pilot; (iii) a computer-based lottery pro- However, there remains limited empirical evidence on the cess to select the farmers who would be given access to the impacts of WRS on smallholder farmers in developing coun- warehouse; (iv) a high frequency data collection starting right tries. To contribute to filling such gap, the Government of after harvest and spanning the whole post-harvest period, to Senegal (GoS) partnered with the Development Impact Eval- capture rice sales, prices, and storage from individual farmers. uation (DIME) department of the World Bank Group (WBG), and the International Financial Corporation (IFC) to embed a rigorous impact evaluation design in a pilot WRS project. Research Questions and Methods 2 The pilot was led by the Ministry of Commerce (MoC) , with This pilot is designed as a Randomized Controlled Trial (RCT), technical assistance from the IFC, focusing on the rice sector to answer the following primary question: What are the im- in the Senegal River Valley. pacts of a WRS on access to finance, sales prices, This brief summarizes the lessons learned from such pilot and revenues of rice farmers ? The random selection in- and aims at providing useful guidance to inform the implemen- sures that the farmers in treatment and control groups are tation of WRS in Senegal and beyond. similar and that the comparison between these groups after the program implementation provides unbiased estimates of Intervention the treatment effects. As shown in Figure 1, there was a two In 2018, the IFC, in partnership with DIME and the Senegal step randomization process involving a total of 1066 farmers Ministry of Commerce, led the implementation of a WR fi- from 120 producers’ organizations (POs). In the first stage, nancing pilot, with rice farmers in the Senegal River Valley, listed POs were randomly assigned to treatment and control 3 during the post harvest period of the dry season . As part groups. The control group received no intervention while, in of the pilot, selected farmers were offered the opportunity to the treatment group, farmers inside each PO were assigned 4 bring their rice production to a designated warehouse , and re- (randomly) to full treatment and contamination groups. The ceived a warehouse receipt that they could take to CNCAS, a full treatment farmers were officially offered the opportunity 5 partner bank in the pilot . At the bank, farmers could use their to bring their rice to the warehouse in exchange for a receipt, receipt against access to credit for up to 80% of the value of while farmers in the contamination groups belong to the same 1 Marshall Burke, Lauren Falcao Bergquist, and Edward Miguel. Sell Low and Buy High: Arbitrage and Local Price Effects in Kenyan Markets. Tech. rep. National Bureau of Economic Research, 2018. 2 MoC=Ministère du Commerce, de la Consommation, du Secteur informel et des PME. 3 The dry production season, locally called “saison sèche chaude”, goes from January to July and its commercialisation lasts generally between July and December. 4 The warehouse was rented specifically for the purpose of this pilot. 5 CNCAS = Caisse Nationale du Crédit Agricole du Sénégal partenered with the MoC to support the pilot WRS. 6 Loi numéro 2017-29 du 14 juillet 2017 portant sur le Système de Récépissé d’Entrepôt de Marchandises au Sénégal. POs as the treatment farmers but were not allowed to bring fected participation. We conclude that limited arbitrage oppor- their products to the warehouse. The contamination groups tunities in the rice sector, high transaction costs, and limited are primarily useful for capturing within POs spillover effects marketable surplus, may have curbed participation of farmers from the treatment. This two-stage randomization process in the WRS pilot. yielded overall 363 farmers in treatment, 242 in contamina- Limited arbitrage opportunities tion, and 461 in control groups. In a classical storage model, rational farmers are expected to store as long as the discounted expected future price is Treatment 7 greater than the current price plus the unit storage costs. Farmers This suggests that if farmers do not expect prices to increase Treatment PO sufficiently during the post-harvest period to justify the costs Contamination of bringing their rice to the warehouse and go to the bank to ex- Eligible PO Farmers change the WR against some credit, they will not have the in- centive to participate. We explore this using the high frequency Control PO farmers sales price and, as shown in Figure 3, we found that av- Figure 1: Study Design erage paddy sales prices varied between 124 and 126 FCFA/kg during the post harvest period (August-December). A sim- ple cost-benefit analysis, considering the transaction costs of Results the 8 farmers who actually participated, and assuming no dis- Low take up rate counting, revealed that expected future prices should reach at Out of the 363 farmers assigned to the full treatment least 133FCFA/kg, to justify participation in the WRS. The group, only 8 used the warehouse to deposit their rice. With low participation rates in the WRS seems consistent with a such a low participation rate (around 2%), we could not ex- rational expectation by farmers about limited increase in fu- ploit the research design and answer the intended questions. ture price trends. Nevertheless, there were still cases of paddy However, we leveraged the large amount of quantitative and sales during all those months, suggesting that some farmers qualitative data collected, to explore the factors that had af- did hold positive storage, though primarily at home. Figure 2: Map with compliers versus the whole sample. The central point shows the position of the warehouse, red points show position of compliers, while the small blue dots show position of other farmers belonging to the sample but who did not deposit their rice 7 Atanu Saha and Janice Stroud. “A household model of on-farm storage under price risk”. In: American Journal of Agricultural Economics 76.3 (1994), pp. 522–534. primary questions of interest. However, we drew important in- sights for WRS implementations, based on the qualitative and quantitative data collected: Figure 3: Rice sales prices during post harvest season Figure 4: Reasons reported by respondents for non participating in the High transaction costs pilot High costs of using the WRS, including transportation costs, handling and storage fees, interest rate, etc., could all • The post harvest arbitrage opportunities justifying WR Fi- affect farmers’ participation in the WRS. GPS data collected nancing systems do not always materialize for all types of on farmers locations indicated that the location of the ware- commodities in all contexts. In cases where post harvest house rented was relatively far from the key production area prices do not increase sufficiently to compensate for the (Figure 2). The median distance between farmers locations costs of participation, farmers will likely not participate and the warehouse was 33.74 km. On the other side, the in a WRS. Therefore, a thorough investigation of price median distance for producers who participated in the pilot trends and forecasts is important for guiding the types of was 17.68 km, which is much lower than the overall sample commodities to target with a WRS. one. This suggests that distance may have played a role in the • When designing WRS, it is important to take into account decision to use the WRS. In addition, the rural feeder roads the transaction costs faced by the potential users. Large in the pilot area were in bad conditions and, with the heavy transactions costs arising from remoteness, poor trans- and continuous rain, were hardly accessible. Those conditions portation infrastructures, and other fees related to storage may have increased transactions costs so high as to completely and borrowing, increase the costs of participation relative deter rice farmers from participating in the WRS. to the benefits and discourage farmers from participating. Having warehouses located near the production areas, for Moreover, an endline survey implemented at the end of easy access, has the potential to decrease significantly the season asked producers to self report why they did not par- transaction costs and increase participation. A potential ticipate in the WRS. In addition to the factors reported above, way to reduce those constraints of remoteness would be many of them mentioned not having enough marketable sur- to encourage the private sector to engage and invest in plus. After paying their debts in kind for inputs and labor the warehousing industry and provide professional ware- received on credit, many farmers were mainly left with just housing services. enough paddy for auto-consumption. Therefore the limited • When introducing a WRS in a new context, with farmers quantities they had could not justify economies of scale large who might not all be financially savvy, it is important to enough to make the participation in the WRS worth it. The put in place a sound communication and financial educa- figure 4 summarizes the reasons reported by farmers. tion strategy that not only explains sufficiently the bene- fits from adopting the system, but also provides enough Concluding Remarks information to make farmers comfortable and trust the We embedded an experimental design in a WRS pilot, in the system enough to want to experiment it. Because a WRS rice sector, in the Senegal River Valley, to understand the im- can appear complex and even risky to many farmers, a pacts of such system on farmers’ access to finance, storage local and trusted focal point who can answer all ques- patterns, sales prices, and income. Due to a low take up of tions timely should be available and easily accessible by the system (2%), we lacked the statistical power to answer the farmers.