Opinion

Augment wheat exports to Bangladesh

TEJINDER NARANG | Updated on February 25, 2013

Wheat shipments to Bangladesh can be expedited by tackling procedural issues.— Shiv Kumar Pushpakar





Bangladesh last year imported about 3 million tonnes (mt) of wheat from Russia, Ukraine (1.0mt), Canada/Australia (0.9 mt), while India’s contribution--- which is flush with huge stocks -- has been minimal (0.5 mt).

Though there is regular cross-border export of wheat to Bangladesh by the medium-sized traders, import on Government and private account via Chittagong and Mongla port of approximately 2.5 mt per annum takes place from all origins. This includes a tendered annual import of Director General, Department of Food (DG Bangladesh) of approximately 800,000 tonnes. India should actively exploit this market for better “fob” value realisation, as logistics costs would be the least; there are no quarantine concerns like Iran/Egypt and payment arrangements are fairly smooth.

INDIA MISSES OUT

In 2010, the Bangladesh government made an official request for import of 300,000 tonnes of rice and 200,000 tonnes of wheat from Food Corporation of India (FCI). However, the terms of trade offered by FCI were “as it where is” basis from warehouses at port towns. It took no liability on account of quality, quantity shortage and transit loss after the material was de-stocked. The Bangladesh government had desired supplies on delivered basis — (C&F Liner out shipments); 90 per cent payment against shipping documents and 10 per cent payment after quality and quantity are contractually complied with, or pro rata deduction thereof. The Indian and Bangladesh governments, respectively, represented by three PSUs (STC, PEC, MMTC) and DG Bangladesh could not arrive at a compromise. Repeated requests made by the Bangladesh government for supply of grains could not be appropriately responded to by the Indian side. Bangladesh feels let down by this episode.

During 2010-12, the aggressive bidders/shippers in “DG Bangladesh” tenders were international traders based in Dubai, Singapore, Bangkok, who sourced wheat from diverse origins. (Most MNCs have stayed away from Bangladesh Government wheat tenders.) However, upon execution of the contracts, they discovered that there was an extra cost of $10-12/ tonne, which remained unforeseen (at the time of bidding) for deemed contractual non-compliance. The option was either to perform at a loss, or abandon implementation by allowing the Bangladesh Government to encash their performance bank guarantee.

After losing money, these traders have withdrawn from their aggressive posturing in tenders, while new kids on the block-- South Korean trading firms and some other companies --- are bidding for Indian/third country wheat at $12-15 below performing price. They might also face a similar situation like their predecessors, unless they see major bearishness in coming months. The chances are that Bangladesh may not be able to import the contracted quantity, but may be content with monetary compensation by invoking bank guarantees. The objective of any Governmental institution should be to secure its food supplies, rather than to be in the business of making money out of defaults. Therefore, there is an immediate need on the Bangladesh side to correct these procedural wrangles.

DIFFERENT MODEL

The “South Korean” model necessitates the involvement of two intermediaries and two additional banks in a string of seven parties, while the normal trade flow comprises three entities. A local trader in Bangladesh assigns the contract to his foreign principal. Extended intermediation is meant to mitigate risk exposure due to quality or quantity claims, after wheat is discharged at ports in Bangladesh and for expediting 10 per cent payment/ release of bank guarantees. This risk premium induced by extreme contractual cautiousness reduces FOB realisation of the supplier. It also adds additional cost burden to the Bangladesh government and extra banking cost. The prospects of supply of poor quality grains also increase. The net effect is that the Bangladesh Government acquires feed quality /low grade wheat, though payments appear to be made for good milling wheat.

For private wheat imports by Bangladesh, Singapore/Australian traders have an edge because they can offer 180 days secured or unsecured credit at better terms. That may not be possible for Indian players.

However, for efficient trade flow for official imports the Indian side has to be flexible as well. The way out is simple: (a) GOI/private trade should be willing to supply wheat to Bangladesh on C&F Liner Out delivered basis and (b) Bangladesh government should accept quality/quantity final at load port (c) a performance guarantee of 5-10 per cent may be held as security for contractual performance, instead of the existing provision of making 90 per cent payment against the shipping document, and holding 10 per cent payment till quality issues and performance bank guarantee are finalised.

Such a procedure would be cost effective and pave the way for much greater bilateral co-operation.

(The author is a freelance grains trade analyst)

Published on February 25, 2013

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