How Does the Licensed Warehousing System Contribute to Price Stability?

Long-term and lasting price hikes occur from time to time in storable agricultural products such as grains and legumes. In this respect, storable products differ from fresh fruits and vegetables that are rather susceptible to high-frequency and temporary seasonal price shocks. Based on this observation, we can say that the price movements in storable agricultural products directly feed into the rigidity and persistence in the level of food inflation. On the other hand, price movements in perishable fresh fruit and vegetable products increase the volatility in food inflation and reduce predictability. The periodical excesses in fresh fruit and vegetable prices offer striking examples revealing the food inflation problem in Turkey and are therefore frequently debated in public. However, to be able to see the big picture concerning the food inflation, the lasting price movements in storable products that have long-term effects should not go unnoticed.

In this study, we first introduce the licensed warehousing and specialized commodity exchanges system which has rapidly developed in Turkey recently and is expected to affect the price dynamics of storable products significantly. Then, we discuss the channels through which this system can contribute to a healthy price formation in storable products and to price stability in food products overall.

The licensed warehousing and specialized commodity exchanges system allows for the storage and trading in a deep market of agricultural products such as grains, legumes, nuts, olives and olive oil that can be standardized and stored for a long time.^[1] This system serves as a sophisticated trade platform bringing together producers, tradesmen, industrialists and middlemen as well as banks, insurance companies and investors. In the licensed warehousing system, the classes and qualities of storable agricultural products are determined by laboratories called authorized classifiers. Then, these agricultural products are stored in licensed warehouses equipped with modern infrastructure. Agricultural products stored in licensed warehouses can be subject to trade on international Specialized Commodity Exchanges and/or on commodity exchanges authorized by the Ministry of Customs and Trade, via electronic product certificates [Çalış et al. (2016); Tosun et al. (2014)].

The licensed warehouse firm prepares the electronic product certificates, which represent the ownership of the products stored in the warehouse, over the Central Securities Depository of Turkey (MKK) and transfers these certificates to the product-owner depositors’ investment accounts at banks. Depositors can offer the electronic product certificates for sale by giving a sale order on electronic transaction platforms established within the authorized commodity exchanges. Accordingly, buyers such as tradesmen, industrialists and investors can issue a purchase order for these certificates by registering with the same electronic platform.

The fact that the agricultural products in licensed warehouses are analyzed, standardized and stored by authorized classifiers urges farmers to produce high-quality products and thus improves food safety. Moreover, in this system, the processed food sector is able to get input at the amount and quality it needs by purchasing the product certificates, without having to bear the cost of building a warehouse and managing it. In addition to allowing producers without storage capacity to store their products in licensed warehouses with guarantee and insurance facilities, the licensed warehousing system is also instrumental in extending the product supply from producer to the market over the whole year. In this way, informal stockpiling and price speculations are also avoided. On the other hand, depositors can obtain credit by offering their product certificates as collateral and thus meet their financing need.

The legal infrastructure for the system was introduced in 2005 with the Law No. 5300 on Agricultural Products Licensed Warehousing. The system was first put into practice in July 2011 with the opening of a warehouse of forty thousand tons capacity in the district of Polatlı in Ankara. As of today, a total of 68 firms have received a licensed warehouse establishment permit from the Ministry of Customs and Trade. If all of these 68 firms get a license, the resulting storage capacity will be sufficient to meet the current need.^[2]

The effective functioning of the licensed warehousing system is expected to have a positive impact on food inflation via its role in healthy price formations in storable products. Here, two main mechanisms are in play. The first one is through the growth in agricultural productivity due to the easier access to financing by farmers and the removal of financing constraints as a result of licensed warehousing [Aysoy, Seven and Tümen, 2017], which in turn brings about a sustainable increase in the product supply. A sustainable increase in the supply will reduce the recently more visible propensity to import storable products and consequently weaken the effects of the exchange rate shocks on the prices of these products. The second mechanism works through the fall in the supply/price volatility and the increase in predictability in the market, due to the balanced supply of products in terms of timing and amount as a result of increased storage capacity as well as due to the reduced informal storage.

Enabling healthy price formations in storable products through these two mechanisms will also keep the lasting and continuous price shocks to these products at reasonable levels. Chart 1 shows the difference between the price movements in storable products and the price movements in perishable fresh fruits and vegetables.

Among the sample products, the price shocks are of a more permanent and long-lasting nature in chickpea and rice whereas the price shocks in perishable products such as tomato and long green pepper are high-frequency and temporary. In other words, price shocks in storable products create strong trends that extend over a few years whereas shocks in perishable products fade away very quickly however strong they may be. The licensed warehousing system is expected to curb these persistent price hikes and thus reduce the permanence of shocks, by triggering a rise in the production of storable products and improving the efficiency in stock management. For example, achieving price stability in products such as barley and corn will favorably affect the feed costs and hence mitigate the cost pressures on processed and unprocessed meat products. Likewise, the stability in wheat prices will have a positive effect on bread and other wheat product prices through the cost of flour. These products are among the most important items that affect the food inflation with their high shares in household spending basket.

To conclude, the licensed warehousing system will underpin the healthy price formation in storable products by containing the persistent upward trend in food inflation. In the meantime, it will also enable the financing of investments that boost productivity in the production procedures by facilitating farmers’ access to financing. This increased productivity will reduce the import dependence and restrain the exchange rate pass-through. Additionally, this system will extend the product supply over the whole year by improving the stocking capacity and quality. In sum, the advancement of the licensed warehousing system offers a solution, albeit partially, to structural problems that lie behind the strong upward trend in food inflation. For the effective functioning of this system, technical work is being carried out by the Food Committee on the one hand, while on the other hand capacity enhancements are introduced and incentive packages are being devised to expand the use of licensed warehouses.

[1] Relatively non-perishable fresh fruit and vegetables such as lemon, apple, pear, etc. can also be considered in the scope of licensed warehousing.

[2] The Ministry of Customs and Trade (http://icticaret.gtb.gov.tr/istatistikler/lisansli-depoculuk, Date of Access: 26.05.2017).

Bibliography

Aysoy, C., Seven, U. and S. Tümen (2017), “Agricultural Credits and Agricultural Productivity: Cross-Country Evidence Highlighting the Interaction between Credit and Labor Markets”, unpublished working paper.

Çalış H., Karaman E. and B. İ. Yurtoğlu (2016), “Tarım Ürünleri Ticaretinde Yeni Bir Dönem: Lisanslı Depoculuk ve Ürün İhtisas Borsacılığı” (“A New Era in Agricultural Products Trade: Licensed Warehousing and Specialized Commodity Exchanges”, in Turkish only), Gümrük ve Ticaret Uzman Görüş Dergisi, No: 41-42.

Tosun D., Savran K., Özge C. N., Keskin B. and N. Demirbaş (2014), “The Evaluation of the Warehouse Receipt System for Agro-Food Products in Turkey,” Journal of Agricultural Sciences (Anadolu Tarım Bilimleri Dergisi), 29: 240-247.