Warehouse Receipt: What it is and How it Works

Key takeaways

• A warehouse receipt is a document proving that a specified quantity and quality of a commodity is stored at an approved facility.
• It supports physical delivery and settlement of futures contracts and can serve as proof of ownership for inventory financing or collateral.
• Exchange-approved warehouses inspect, certify, store, and manage commodities so they meet the quality and delivery standards of futures exchanges.

What is a warehouse receipt?

A warehouse receipt documents that particular goods—such as grain, metals, or other commodities—are stored at a specific, approved warehouse and meet the quality and quantity requirements specified by a futures exchange. For precious metals, similar documents are often called vault receipts. The receipt serves as evidence the commodity exists, is available for delivery, and has passed required inspections and certifications.

How warehouse receipts work in the futures market

Futures contracts obligate one party to deliver and another to accept a defined quantity and quality of a commodity at a future date. When a contract is settled by physical delivery, the seller typically uses an exchange-approved warehouse to hold the commodity and issues (or references) a warehouse receipt to demonstrate availability.

Typical roles of the receipt in the delivery process:
* Seller (short position) ensures commodity is stored in an approved warehouse and that a warehouse receipt exists for the lot assigned to the contract.
* Buyer (long position) relies on the receipt as assurance that the commodity will be available for transfer at contract settlement.
* If the buyer does not take full physical delivery, they can arrange partial shipments and leave the remainder in storage; the receipt represents ownership of the stored portion.

Warehouse receipts may also be used in lieu of moving physical goods when permitted by exchange rules, enabling transfer or settlement via documentation.

Exchange-approved warehouses and certificated stock

Futures exchanges set delivery and storage standards. Only exchange-approved warehouses can accept deliverable lots for certain contracts. These warehouses perform key functions:
* Inspecting and certifying commodity quality and weight against exchange specifications.
* Issuing and maintaining warehouse receipts tied to specific inventory lots.
* Providing inventory management, custody, and recordkeeping to facilitate transfers and deliveries.

Commodity producers that wish to place inventory into the futures market must often have their stock certificated—an inspection and authentication process—so the inventory can be accepted by approved warehouses and used as deliverable supply.

Other uses of warehouse receipts

• Warehouse financing: Receipts can be pledged as collateral to obtain loans against inventory without moving the goods.
• Transfer of ownership: Receipts may be sold or transferred to convey title to the underlying commodity while it remains in storage.
• Risk management: By confirming quality and availability, receipts reduce delivery risk for market participants.

Why it matters

Warehouse receipts bridge the gap between paper derivatives and the physical commodity world. They ensure that commodities backing futures contracts meet exchange standards and are available for delivery, supporting market integrity, enabling inventory financing, and facilitating efficient logistics and settlement.

Sources

• CME Group: Warehouse Receipts vs. Shipping Certificates; Definition of a Futures Contract; Understanding Option Contract Details; Understanding the Grain Delivery Process