What it means
When a business stores grain, metal, coffee or other commodities with a warehouse company, the warehouse gives it a receipt. The receipt describes the goods, their quantity and grade, where they are held and the terms of storage.
The warehouse operator, called the warehouseman, has a duty to take reasonable care of the goods and to deliver them to the person entitled to them. Receipts come in two main kinds.
A negotiable receipt is made out to bearer or to the order of a named person, and whoever holds it properly endorsed can collect the goods or sell the receipt to someone else. A non-negotiable receipt names the depositor and gives its holder a claim only against the warehouse, so it cannot be passed on in the same way.
Lenders value receipts because they can take security over goods without moving them. A bank lending against stored goods will normally hold the negotiable receipt, or have the warehouse acknowledge its interest, so that the goods cannot be released to anyone else.
The loan is limited to a share of the goods' value, called the advance rate, which leaves a cushion for price falls. For a trading company, the receipt turns stock into something that can be financed or sold while it sits in storage.
A commodity trader can sell a cargo several times by passing on the receipt, and each buyer takes over the right to collect the goods. The key risks are fraud, double pledging and warehouse failure.
A forged or duplicated receipt can mean the goods are pledged to two lenders, so banks check warehouse operators carefully and inspect stock from time to time. In the United States, the law on these documents is mainly found in the Uniform Commercial Code, while other countries have their own rules, so the details of negotiability and the warehouse operator's liability depend on the place.
Anyone relying on a receipt as security should confirm the local rules with a lawyer before lending.
In practice
Real-world examples.
Example
A coffee importer stores 400 bags of green coffee in a bonded warehouse near the port. The warehouse issues a negotiable receipt that the importer gives to its bank as security for a working capital loan. When the importer sells the coffee, the bank releases the receipt and the buyer collects the bags.
Example
A metals trader buys 1,000 tonnes of copper that stays in a warehouse and sells it to another firm while it is still there. Instead of moving the metal, the trader endorses the receipt over to the buyer. The buyer then holds the right to take delivery.
Example
A furniture manufacturer places finished goods in a third-party warehouse and receives a non-negotiable receipt that lists the items. The receipt helps its accountants confirm the stock exists at year end. The manufacturer cannot sell the stock by passing on the receipt.
Formula
Calculation
Loan available = Value of goods on the receipt x Advance rate
A grain merchant stores 50,000 bushels of wheat in a licensed warehouse and holds a negotiable receipt. The market price is $5 per bushel, so the value of the goods = 50,000 x 5 = $250,000. The bank lends 80% of the value. Loan available = 250,000 x 80% = $200,000. If the price falls to $4 per bushel, the value is 50,000 x 4 = $200,000, and the bank's 80% limit becomes 200,000 x 80% = $160,000, so the merchant would have to repay $40,000 or add security.Case study
Seen in the real world.
Riverbend Cotton is an illustrative, fictional merchant that buys cotton after harvest and sells it throughout the year. It stored 2,000 bales in a licensed warehouse and held negotiable receipts for them.
The company's bank agreed to lend 75% of the market value of the stored cotton. With cotton valued at $300 per bale, the value was 2,000 x 300 = $600,000 and the loan was 600,000 x 75% = $450,000, which funded the purchase of the next crop.
In the illustrative sequel, a fall in cotton prices of 10% reduced the value to 600,000 x 0.90 = $540,000 and the loan limit to 540,000 x 75% = $405,000. The merchant repaid $45,000, and the example shows why lenders set the advance rate below 100%.
Watch out
Common mistakes.
- Assuming every warehouse receipt can be sold or pledged, when only negotiable receipts pass the right to the goods to the next holder.
- Lending against a receipt without checking that the warehouse is reliable and that the same goods have not been pledged elsewhere.
- Forgetting to endorse a negotiable receipt properly when transferring it, which can leave the buyer without a valid claim.
Questions
People also ask.
What is the difference between a warehouse receipt and a bill of lading?
A warehouse receipt covers goods stored in a warehouse, while a bill of lading is issued by a carrier for goods being transported.
Who is liable if the goods are damaged in storage?
The warehouse operator is generally liable for damage caused by a failure to use reasonable care, subject to any limit in the contract.
Why do banks accept warehouse receipts as security?
The receipt gives them control over the goods without taking physical possession, provided the warehouse is reliable.
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