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In Figures A1 to A6, price data are analysed for the major coarse grain staples in surplus producing areas in three countries: Mali, Ghana and Tanzania. The locations chosen are markets where traders seeking to engage in inter-seasonal storage are likely to procure grain. Price series have been deflated by the consumer price index, except in Mali where inflation was running at about 1 percent per year up to 1994.
The following observations can be made on the basis of the data for Tanzania, Ghana and Mali.
(a) In all three countries the level of inter-seasonal price variability is itself highly variable. In Dioila (Mali) lean-season prices did not rise in one of the three years shown, while in another year they reached 120 percent above lean-season prices. Similar variability is also evident in the detailed data reported by Berg and Kent (1991). In Techiman (Ghana), price variability over a seven-year period has ranged from a low in 1988/ 89, when May/June prices were between 5 percent and 35 percent above those in the previous September, to a high in 1991/92, when the difference was between 205 percent and 230 percent. In Iringa (Tanzania), the increase in inter-seasonal prices between October and March has been very low in three years (between 10 percent and 25 percent), moderate in two years (30 percent to 55 percent), and very high in one year (150 percent).
Figure A1. Monthly wholesale sorghum prices relative to January for 1990-92, Dioila, Mali
Figure A2. Monthly average millet vices (retail) for December 1986-November 1991. Mali
Figure A3. Monthly wholesale maize prices relative to September for 1985-92, Techiman, Ghana
Figure A4. Monthly wholesale maize prices for April for 1985-92, Techiman, Ghana
Figure A5. Monthly wholesale maize prices relative to September for 1986-93, Iringa, Tanzania
Figure A6. Wholesale maize prices per bag for June and December, 1986-93 (June), Iringa, Tanzania
(b) Prices do not always fall in the same month. For example, in Ghana, prices usually reach their highest levels in May and June, but in two years they peaked in July. This may reflect the trade's expectations of the availability of grain in the forthtcoming harvest.
(c) Average price variability is by far the greatest in Ghana, where real prices in May/June have been 120 percent above those in the previous September. Even if allowance is made for art assumed high moisture content at harvest time (about 20 percent), the price increase is still about 110 percent per year. By contrast, Berg and Kent's figures (Table A1) show average price increases for Sahelian rural markers to be only 31 percent. Farmers or traders storing millet or sorghum would have obtained average annual returns on capital invested in excess of 15 percent in only 7 of the 13 markets. However, in six of the seven markets, positive returns were obtained when the cost of capital is 40 percent. In Tanzania, average real price increases for maize between October and March have been 46 percent over the six-year period shown, but with one year ( 1990/ 91) accounting for half of the overall variability.
TABLE A1 Returns to inter-seasonal storage in rural markets
|Rural market data||Number of years of (6-8 months)||Average price rise between harvest and lean season (FCFA)||Av. annual return at various costs of capital (%)|
Notes: Grain is purchased at its average price in the post-harvest period (October, November, December); grain is stored for 6-8 months in a warehouse; and grain is resold at its average price in the lean season period (June, July, August). Physical storage costs include 50 FCFA/bag/month and a 5 percent physical loss over the entire storage period.
Source: Berg and Kent,1991
(d) Inter-seasonal price swings are sometimes a consequence of longer-term changes in market availability. Major swings in millet prices in Mali in 1990, and in maize prices in Tanzania in the same year, were not simply the effect of lean season shortages but reflected a change in the supply situation, lasting for more than a year, from one of overall grain surplus to one of scarcity. In the event of scarcity, prices tended towards an "import parity" level, i.e. prices which attract imports from neighbouring states or even from outside Africa. Conversely, in the event of surplus, they tended to fall to "export partly" level.
It is possible that food aid and the residual activities of parastatals have contributed to the flattening of inter-seasonal price curves in Sahelian countries and Tanzania. Ghana stands out in that it has never had a parastatal grain trading monopoly, notwithstanding official discouragement to inter-seasonal storage by private traders. In Tanzania price variability has been greater since 1990/91, i.e. since the formal abandonment of the parastatal marketing channel, suggesting that inter-seasonal price variability might have increased as a result of liberalization.
The establishment of an agricultural inventory credit programme requires a careful analysis of the existing legal framework. Among other things, this will entail a review of laws and procedures relating to the sale of goods, secured transactions, warehouse regulation, banking and credit regulation.
It should be stressed that the "practical" effects of a particular legal variable on the viability of a programme will usually not be evident from an examination of legal doctrine alone. Where the economic prospects of the scheme are strong enough, and lenders believe that the practical risks are small, then they may be able to live with a certain amount of legal ambiguity. Where, however, such prospects are not clear and the business culture of a particular country is unaccustomed to what is being proposed, legal uncertainties may present another reason for sceptical participants, particularly banks, to turn away from an uncertain venture. Thus, the development of inventory credit may require some persuasive and creative lawyering, or in the final analysis, Iegislative reform.
It is beyond the scope of this publication to analyse all the potential legal issues that might be encountered. In any event, these are subject to wide variation between countries. It is possible, however, to highlight some of the issues that are likely to require attention, and that may influence the way the system is set up. But even here a cautionary note is required. The following list of issues, heavily weighted toward common law jurisdictions, is not intended as exhaustive. The identification of pertinent questions in a given jurisdiction will itself vary depending upon the country being examined.
Therefore, it must be emphasized that the discussion that follows is intended as an ''introduction'' to some of the Iegal issues that may arise. It cannot be a substitute for a careful analysis of a given country's laws, which for any number of reasons may reveal significant variations on the themes presented here.
The basic concept of a "security interest" is deceptively simple. Whenever a lender lends money to a borrower, the Iender has a contractual right to the return of the money, usually with interest in accordance with a loan agreement. This contractural right, however, is unlikely to be much use to the lender if the borrower is unable for some reason to fulfill its end of the bargain (because of insolvency, for example). Thus, the Iender might require a number of additional protections as preconditions lo the loan. For example, it might require that the borrower take out a certain kind of insurance or provide third-party guarantees. In a "secured Iending transaction", the lender protects itself by requiring that the borrower provide collateral for the loan. This collateral might take any number of forms: land, machinery, personal possessions, inventory, receivables, etc. During the course of the loan, the Iender is said to have a "security interest" in the collateral, and has rights to satisfy its debt from the collateral in the event the borrower defaults.
This simple description, of course, obscures the many nuances and frequently highly complex rules that govern secured transactions in contemporary legal systems. For example, different sets of rules often apply to different classes of collateral, the distinction between real property and personal property being one that is particularly pronounced. A host of security devices have developed over time within both common law and civil law traditions, and many more country-specific schemes are to be found on looking beyond such broad categories.
In common law systems, several types of security arrangements have evolved over the centuries. Two concepts of particular importance are the "mortgage" and the "pledge", a distinction that runs through much of the following discussion. A mortgage involves the transfer of "title" to the collateral in question. In other words, in a mortgage transaction, the borrower will give to the lender a document which conveys some or all of the borrower's interest in the collateral. Usually, during the course of a mortgage loan, the borrower is entitled to keep possession of and use the collateral, and once the debt is satisfied, the title will once again revert lo the borrower.
By contrast, a "pledge" agreement does not involve a transfer of title. In this type of arrangement, the lender and borrower enter into a agreement whereby certain property is pledged to the lender to secure the loan. Unlike a mortgage, a pledge requires "possession" of the object by the lender in order to perfect the security interest (see discussion of "perfection" below). In most pledge situations, the lender must actually hold the collateral in its possession. A common example may be the lender which takes physical possession of jewellery while a loan is outstanding. As we shall see, however, the concept of "constructive possession" has grown up to cover situations (such as in the case of stored grain) where it may be impossible for the lender to take actual possession of the objects in question.
An obvious yet critical preliminary question is whether a country's legal system will recognize a security interest in a fungible and perishable commodity such as grain. While this cannot be taken for granted, the answer is likely to be yes, at least in common law and civil law jurisdictions.
Nevertheless, there may be a wide variation from country to country in the strength of this security interest, the level of protection it gives to the secured party, and the types of security arrangements that can be used, as discussed below.
To assess the strength of a particular security interest, it is important to distinguish between two relationships: the relationship of the lender to the borrower, and the relationship of the transacting parties to the outside world. The concepts of "attachment" and "perfection" - or their equivalents which are used in many common law countries are helpful in illustrating this distinction.
When a lender and a borrower enter into an agreement using some object as security, the security interest is said to "attach" to that object. As between these two parties, the lender now has certain rights in that object if the borrower defaults on the loan. The lender may be able to take full control of the object, and sell it to satisfy the debt. But attachment alone may not be enough to protect the lender against the rights of third parties. For example, the borrower may have sold the object to someone else who did not know of the lender's security interest. This person acquires the object free of the security interest. Therefore, while the borrower is still contractually liable for the outstanding amount of the loan, and perhaps other damages for breaching the security agreement, the loan is now unsecured.
A "perfected" security interest does not have this weakness. Perfection occurs by some act defined by law which is deemed to give notice to the world at large that a lender has taken a security interest in particular property. Thus, when real property is being mortgaged, a specified method of registration may perfect the Iender's security interest. Some form of registration may also accomplish the same thing with respect to other types of property, such as equipment, inventory or accounts. In the case of a pledge arrangement, perfection will occur where the lender takes physical (or in some cases "constructive") possession of the object during the pendancy of the loan.
Perfection gives priority to the interest of the secured party over the interests of other claimants. If a borrower has wrongfully sold property subject to a pefected security interest, the security interest remains attached to that property and the lender can still exercise its rights against the property in the event of a default.
This distinction (or similar distinctions existing in other legal traditions) is relevant to the design of inventory credit systems for several reasons. The laws of some countries, for example, explicitly provide for a system of registration by which a lender can perfect its interest in different types of mortgaged commodities. If the commodity in question is stored grain, the borrower will transfer a document evidencing title to the grain (usually a warehouse receipt, if the law recognizes it as a document of title - see below), and the lender will register this document in order to perfect its interests. This, however, is not always the case, and it is imperative that the law of each country be analysed to determine whether perfection is possible for a given type of commodity. In Ghana, for example, there is apparently no mechanism for a lender to register its interest in goods such as grain. Thus, if the borrower or the warehouse operator sells the grain to a person who is unaware of the bank's interest, the bank can no longer seize that grain to satisfy the debt.
In the case of a "pledge" arrangement, the Iender's possession of the collateral is usually considered sufficient to perfect its interest. In other words, the fact that a bank is holding possession of jewellry or bearer bonds is ample notice to the world at large that the bank holds a pledgee's interest in that collaleral. Of course, at first glance, a pledge mechanism would not appear to be applicable to stored grain, since the bank will not have actual physical possession of the grain. However, many jurisdictions recognize the concept of "constructive possession," whereby a lender can reIy upon documentary proof that the person who has physical custody of the property is acting on its behalf. For this purpose, a warehouse receipt transferred to
the bank by the depositor will be valuable. However, the bank will almost always want explicit acknowledgement from the warehouse owner that the grain is now being held on behalf of the bank. This is often known as an "attornment" agreement. A collateral management agreement between lender, borrower and warehouse typically contains such attornment language. Annex 3 contains an example of such an agreement used in Ghana.
The potential role of warehouse receipts has already been alluded to in the preceding discussion of mortgages/pledges and attachment/perfection. The attractiveness of a warehouse receipt as a mechanism for securing credit hinges in part on whether national law recognizes it as a "transferable document of title" (or something which is conceptually similar, although given a different label in different legal traditions). This is in fact two questions: is the receipt a "document of title" and, if so, is it "transferable"? The first question is dealt with here; the question of transferability, including the narrower concept of "negotiability", will be discussed under the next heading.
A document of title is a document that, by law or by business custom, is generally considered sufficient evidence that the person to whom the document is issued has title to the property it describes. Such documents typically include bills of lading, for example.
It will be recalled that a mortgage-type arrangement conceptually involves the transfer of "title" to the collateral between borrower and lender. Therefore, for designing stored grain credit systems, a critical question will be whether warehouse receipts are treated under applicable law as documents of title. In some countries, the law explicitly recognizes warehouse receipts as title documents. This is true, for example, in India and the US. In others, this might not be the case. Some countries, for example, might
simply treat warehouse receipts as evidence of possession of the stored grain by the warehouse operator on behalf of the depositer. In such situations, a mere transfer and registration of the receipt may not be sufficient to give the lender security. Instead, it may be necessary to resort to a "constructive pledge" arrangement, involving the attornment of the warehouse owner (see above for discussion of "constructive pledge" and "attornment").
In order for a warehouse receipt to be useful with stored grain, it will be essential for the receipt to be "transferable". In other words, there must be nothing in the law or on the face of the document that prevents the borrower from transferring his rights under the receipt to the lender.
A transferable receipt may also be subject lo a further distinction in some legal systems: is it a non-negotiable or negotiable instrument? Sometimes the concepts of "transferability" and "negotiability" are blurred together: when a borrower transfers a document to a lender in exchange for a loan, it would seem that the document has been negotiated. Thus, the terms ''transferable" and "negotiable" are frequently used interchangeably.
However, in some legal systems negotiability is a more specialized concept than simply the ability to transfer the document. A negotiable instrument in such systems is not only transferable, but confers upon the transferee a direct interest in the underlying property free of any outstanding claims. For example, the holder of a negotiable receipt would be entitled to the goods as described in the document, whatever the depositor or the warehouse operator may have done to the goods in the meantime. By contrast, the rights of the transferee of a non-negotiable receipt will be equivalent to the rights of the transferor. Thus, the transferee may find that its rights have been defeated by the sale of the grain to a good faith purchaser. It will be noted that when "negotiability" is used in this sense, the transferee of a negotiable receipt may actually acquire rights superior to those that the transferor had at the time of transfer. This may seem somewhat counter intuitive, but the purpose of such a rule is lo facilitate a market in such documents in which purchasers, often far removed from the underlying goods and the original transaction, can rely upon what the document says.
Thus, from the perspective of a lender who is holding a receipt as security, its characterization as a negotiable document of title is attractive for several reasons. It gives the lender all the rights of the original depositor (and perhaps more) with respect to the deposited grain, upon presentation of the receipt to the warehouse operator. The warehouse operator is duty bound to release the goods only to the holder of the receipt, even with no prior knowledge of to whom the document has been transferred. In the event of a default by the borrower, the lender can simply sell the receipt in order to liquidate the collateral, instead of having first to take physical possession of the grain. Negotiability is also an important precondition for the emergence of a secondary market in such loans, and gives the Iender greater flexibility with respect to its loan portfolio.
Some national laws make explicit provisions for negotiable warehouse receipts. Under the Warehouse Acts passed by various states in India, for example, warehouse receipts are transferable by endorsement, unless otherwise stated on the receipt itself. Warehousing laws and the Uniform Commercial Code in the US have also established a system of negotiable warehouse receipts. The laws of many civil law countries also contain similar provisions. In Nicaragua, for example, certificados de depósito can be negociable instruments (although here it appears that negotiability is closer conceptually to free transferability, without the specialized meaning found in many common law jurisdictions).
In many countries, however, such clear statutory provisions are lacking. An analysis of Ghanaian law, for example, has concluded that there is no law which accords the status of negotiable documents of title to warehouse receipts. By contrast, other documents that are generally regarded as negotiable in Ghana, e.g. promissory notes or bills of exchange, have had that status spelled out in legislation. In such ambiguous situations, some legislative intervention will probably be necessary if the eventual goal is a system of freely traceable warehouse receipts.
Again, it is important to recognize that a non-negotiable warehouse receipt may still be useful for credit purposes. In simple loan arrangements where both the borrower and the warehouse are well known to the bank, and where the easy transferability of the loan on the secondary market is not a high priority, a nonnegotiable receipt may be sufficient. If a non-negotiable receipt is "transferable" and a "document of title," it can still be used as a way for a borrower to grant to the lender an interest in the underlying goods in a mortgage-style transaction. And even where a warehouse receipt is not recognized as a document of title, it might be used in connection with a pledge arrangement to show that the bank has "constructive possession" of the collateral.
In some warehouses, grain from numerous depositers is commingled. A depositor is thus entitled to delivery of a certain amount of grain rather than to the actual grain deposited. A critical question is whether the depositor can give an effective security interest to a bank in such a situation.
The answer to this question is sometimes riddled with ambiguities. In England, for example, under the Sale of Goods Act 1979, the purchaser of a specified quantity of a bulk of goods is not deemed to have acquired title to those goods until the portion that he or she has purchased is actually identified and differentiated from the rest of the bulk. By extension, this might raise questions about whether a bank's security interest can be said to attach to an undifferentiated right to a portion of a bulk. In England, the courts have construed the Sale of Goods Act to mean that a "mortgage" of undifferentiated goods is not possible. This is because, as already discussed, a mortgage involves a transfer of "title". It would be impossible for a borrower to transfer title to undifferentiated grain if it cannot be said he or she had title to it in the first place. However, even in England, it is possible in such situations for the borrower to enter into a "pledge" agreement.
Of course, such an issue will not arise where the grain of individual depositors is stored separately and in readily identifiable lots. Furthermore, the issue generally does not arise in civil law systems, which have on the whole taken a more pragmatic approach to the question of undifferentiated bulks.
This question is of critical importance for lenders. In many countries, the ability of different types of borrowers to enter into particular types of secured loan depends upon their legal "personality." In other words, different rules may apply if the borrower is an individual, a partnership, an unincorporated association, or a company. Many common law countries make it easy for companies to register a charge, while making it extremely difficult for individuals to do the same. In some jurisdictions, it is legally impossible for a partnership or unincorporated association to engage in any secured transactions. Obviously, this is relevant for a programme that targets mainly farmers and small traders who are unlikely to be incorporated
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