What is a warehouse receipt?
Used in future markets, a warehouse receipt is a document that serves to guarantee the quantity and quality of a given commodity availability in an approved facility. These receipts serve as proof that the commodity is in the warehouse and that the necessary documentation has been received. In order to sell a commodity on the futures market, certain quality standards need to be met, and the warehouse receipt helps verify those requirements.
The warehouse receipt can also be used as an instrument of transfer in cash (spot) and futures transactions.
When working with precious metals, warehouse receipts may also be referred to as vault receipts.0
How do warehouse receipts work?
In a situation where a seller forms a contract with a producer to purchase certain goods that are not in stock, they would purchase the goods in advance and receive warehouse receipts, which they would then use to claim their product at the warehouse once it is in stock. Thus, the warehouse receipt guarantees that the product will be reserved for the buyer in the warehouse.
For example: say John Smith approaches a rice farmer and wishes to order a large shipment of rice, but the rice has not been harvested yet. Smith can sign a contract with the producer for an agreed-on delivery price and quantity when the rice is harvested and available.
Whenever the rice is harvested and ready, Smith owns that rice, however, instead of having it delivered to him at his store, he receives a warehouse receipt. This will tell him where the rice is stored and he uses this receipt to claim all or some of the rice at the warehouse and it can then be delivered to his store if he chooses. Throughout this process, his warehouse receipt serves as proof of ownership.
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