What Makes Farmers Creditworthy?

The total amount of bank loans extended to farmers against the collateral of grain warehouse receipts in the agricultural marketing year of September 2003 to September 2004 came to UAH 350 million. You can judge whether this is a little or a lot by comparing this figure with the amount of budget funds earmarked for the payment of interest on loans extended to agricultural producers. The 2004 state budget provides for a mere UAH 120 million in partial repayment of interest on such loans, i.e., nearly three times less.

Thus, the long-discussed mechanism that was set forth in the Law “On Grain and Grain Market in Ukraine” several years ago has proved effective. Warehouse receipts for grain are no doubt a blessing for agricultural producers who need to borrow money. Agribusiness, with its annual cycle, rules out quick accumulations of profits, which results in a chronic shortage of floating funds. Given the absence of land mortgaging in Ukraine and banks’ reluctance to extend loans against collateral in the form of rickety cowsheds and rusty jalopies, it is easy to understand the constant hunger for loans in the agricultural sector. However, the situation has changed of late, forcing creditors to deal with warehouse receipts. No longer able to cash in on operations with international currency, banks have been forced to do what they are supposed to be doing in the first place, i.e., trade in the national currency. Put simply, the interests of all parties coincided. The wheels began to spin and foreign aid poured in. Since warehouse receipts are widely used the world over as collateral for bank loans, the European Bank for Reconstruction and Development founded a project to introduce the system of warehouse receipts as part of its program of technical assistance in Ukraine.

According to project manager Viktor Andriyevsky, the mechanism of extending loans to agricultural producers against the collateral of grain warehouse receipts generally works this way. A producer deposits his grain at a state-certified elevator or warehouse and receives a warehouse receipt in return. Warehouse receipts are documents of strict accounting, and their format, circulation, and issuance procedure are determined by the Cabinet of Ministers as per the law on grain and the grain market. When issuing the receipt, the warehouse insures the grain against the risk of loss or damage. The owner of the grain then takes out a bank loan against the collateral of this warehouse receipt.

According to project specialists, the system is so simple that so far it has caused no problems or complaints. But unofficial sources have reported cases of counterfeit warehouse receipts. Even though specialists caution against accepting certificates that do not match the state-prescribed format, these facts are indirect proof of the success of this undertaking, as no one would bother faking worthless certificates.