The resource-constraint smallholder farmers are unattractive candidates for credit from formal financial institutions, which tend to ignore them because of their often unpredictable, fragmented and unstructured agricultural activities.

The State Bank of Pakistan, like the central banks of many other developing countries, is introducing schemes to increase access of small farmers to the formal credit channels, saving them from exploitation by informal money lenders.

The SBP, in this respect, has recently launched the electronic warehouse receipt (EWR) system for maize crop in Kasur district, almost a year after the scheme was introduced for paddy crop in Hafizabad, another central Punjab district. The EWR enables the depositor, whether a producer or dealer, of an agriculture commodity to use it as collateral for obtaining bank loans or trade in commodity markets, if and when the system is linked with the commodities exchange as well.

If run professionally and efficiently, it may also reduce pressure on farmers to sell their produce in panic immediately after harvests when prices are normally low. Thus, it may ensure a better return to farmers for their financial and physical investment and also help stabilise market prices. The system may also reduce post-harvest losses as care of the stored commodity is handed over to certified warehouses equipped with the required facilities and expertise.

If run professionally and efficiently, it may reduce pressure on farmers to sell their produce in panic immediately after harvests when prices are normally low while allowing agriculture commodities to be used as collateral for bank loans

However, the insufficient number of certified warehouses complying with preservation norms, lack of awareness among farmers and their limited business skills, and no incentives for buyers to purchase commodities from the warehouses are identified as the stumbling blocks in the expansion of the system.

Afaq Tiwana, a progressive farmer, says the EWR may be beneficial for the community only if the SBP scheme includes a blueprint for bridging the infrastructure (warehouses and logistics) gap. “There is an acute shortage of certified warehouses and reliable logistic facilities that are required to run the system satisfactorily.” He advocates for incentivising the infrastructure building by assuring business for the owners of the storage units the whole year so that they are attracted to invest more and more in the sector.

For this purpose, he argues, the government needs to get out of the business of wheat, the biggest crop of the country. The government is the major player in the wheat market but does not utilise private warehouses depriving them of around six-month business, he says. A mix of wheat, rice and maize crops, etc will ensure the warehouses do business throughout the year because of their different seasons. Mr Tiwana says for food security the government may buy grain from the warehouses if and when required through bidding.

Ibad Khan, president of Guava Growers Association, endorses the views saying by opting for the private warehousing system the government may save non-development expenditures worth billions of rupees consumed by thousands of Food Department employees in the name of salaries and perks, operating costs of their vehicles and buildings, etc “without doing any good”.

“The (provincial) government may buy four million tonnes of wheat from the certified warehouses through the Pakistan Commodities Exchange and lift the grain when needed from there. It will equal a surplus of thousands of food department employees and thus save huge funds required for the functioning of the department, as well as the hassle of checking theft of the crop from its storages by unscrupulous staff.”

Mr Khan thinks the farm produce warehousing concept may gain currency provided the farming community is given proper awareness and the purpose is well served easily by engaging the Agriculture Department’s field staff. “If a farmer learns that by spending Rs50, for instance, as storage rent, his produce will earn Rs100 then he will automatically turn towards the EWR scheme. The extension wing of the Agriculture Department is in close proximity to the rural population and may help mobilise them for it.”

An attractive package to build high-quality warehouses can find 15 to 20 investors in each village ready to build the storage if provided information/guidance about the business scope and initial technical assistance in running the facilities until these become self-sufficient, he asserts.

While the functioning of the facility will benefit the farming community in many ways, Mr Tiwana says the prevailing farm produce trade system is built to make the rich richer. “At present 70 to 80 per cent of commodities are sold at harvesting time in the country. And thus, these fetch lower rates for the farmers. Large processors and the influential (textile, feed, flour millers, etc) have huge amounts of cash at hand and make these purchases knowing that the prices will shoot up within months. Besides value-addition through their mills, they also earn a big profit through commodities trade, robbing millions of farmers of the money that actually belongs to them.”

The EWR facility will save the poor farmers from panic selling as well as stabilise prices in the open market at harvesting time because an adequate quantity of the produce would have been deposited with the warehouses, freeing the market from surplus crops. This would ensure a better return even for those farmers who will be opting to sell their produce in the spot market, he adds.

Mr Khan stresses that the warehousing concept must be linked to the Commodities Exchange for the sake of the sustainability of the system and that the Exchange should be relocated to Punjab, the largest producer of agricultural products so that those involved in active farming have easy access to it. He laments that no farmer association was engaged by the SBP or any other government entity to seek their input for the scheme.

For Amer Hayat Bhandara, a progressive grower from Pakpattan, the EWR facility seems to be working only for those farmers and final buyers who are qualified customers of commercial banks. He points out that one of the most common problems of the farmer is informal debt: farmers take loans from people in the market with personal guarantees and with a condition that the crop will be sold through them.

Will the middlemen allow the farmer to go for the EWR, he questions? Suppose if farmers want to do so, then the debt of the middleman will be repaid through EWR, but how will the inputs like seeds, fertilisers, fuel and pesticides for the next crop be acquired?

Published in Dawn, The Business and Finance Weekly, March 21st, 2022