What is a Warehouse Receipt?
A warehouse receipt is a type of documentation used in futures markets to guarantee the quantity and quality of a particular commodity that is stored within a given, approved facility. They are technical ‘assurance’ for goods or materials that are left for safekeeping in a warehouse. They are non-negotiable if it permits delivery to only a named consignee or receiver.
Warehouse receipts are signed by the warehouse keeper, which guarantee the existence and availability of a specific quantity of a commodity. They are used as an instrument of transfer in cash (spot) and futures transactions.
Warehouse receipts are also a part of the operational business processing involved with futures contracts for physical delivery. Warehouse receipts are used to settle futures contracts, rather than immediately moving actual commodities backing a contract. When working with precious metals, warehouse receipts may also be referred to as vault receipts.
When are warehouse receipts used?
Warehouse receipts are used in many instances where a seller forms a contract with a producer, purchasing certain goods that are not in stock, then they use warehouse receipts to claim the product at the warehouse.
Here’s an example: Let’s say Jake Smith has approached a rice producer and ordered a shipment of rice. The rice hasn’t been produced yet, but Smith has already signed a contract with the producer and agreed on a price for the delivery of the rice for an agreed-upon quantity, once it becomes available.
When the contract with the producer ends, Smith becomes the owner of the rice that he purchased but instead having loads of rice delivered to his store, Smith receives a warehouse receipt, with details of where the rice is stored in the purchased quantity. Smith can then easily choose to use or sell his rice, using the warehouse receipt as proof that he owns this product.