India's first wheat export tender opened on May 24. It discovered the intrinsic value of grain at $228-230/tonne FoB (free-on-board) at Kandla/Mundra port for 94,000 tonnes. A high-level Cabinet committee is expected to take a decision on disposing of this miniscule quantity even as wheat stocks exceed 50 million tonnes in the central pool. The immediate necessity is to evacuate 4-5 million tonnes this year.

An FoB price of $228/tonne includes local transportation and port handling of $40/tonne, in addition to service charges of about 2 per cent for the Food Corporation of India (FCI), or about $5/tonne. The net realisation to FCI's central pool is $228-$45= $183 or Rs 10,248/tonne (1$=Rs 56).

Since the economic cost is Rs 18,220 per tonne, the subsidy involved would be Rs 7,972 per tonne. This may still be the best option, as domestic disposal at much lower prices in a saturated market will be counterproductive. On the day the bids were opened (May 24), the CBOT (Chicago Board of Trade) price of the most traded wheat, SRW (Soft Red Winter variety), was $243/tonne or $6.62/bushel (1 tonne=36.7 bushels). Thus, FCI's release price is at a discount of$60 ($243-$183) to the Chicago exchange.

FIXING RELEASE PRICES

Ideally, a release price of Rs 10,248 a tonne can be fixed for at least two months to facilitate buyers and exporters to work out their shipments. Calling international tenders on a weekly or fortnightly basis for unspecified tonnage mandates three weeks of time for formal submissions of offers. It may take 10-15 days for any high-powered committee to accept or reject them.

Procedural delays, negotiation of prices and synchronisation of availability of tonnage at ports, may defy the objective of attaining high export volumes. Besides, a tender-to-tender approach to decision-making by any committee may lead to variations, inviting audit and vigilance comments.

Here is an illustration for indexation to CBOT— as of June 14, 2012, CBOT price for September contract is $ 233/tonne ($6.35/bushel) and December contract is $ 243/tonne ($6.62/bushel) or Rs 13,048/tonne and Rs 13,608, respectively.

Discounting it by $60/tonne or Rs 3,360, FCI's central pool price effective September and December can be settled correspondingly at Rs. (13048-3360)=Rs 9688/tonne and Rs.(13608-3360)= Rs 10248/tonne. FCI realisation can be adjusted up or down if the rupee depreciates or appreciates.

Bimonthly or quarterly prices can be notified one month in advance in a transparent manner and stocks made available to all by FCI from port towns to PSUs and traders, with a 15-20 per cent bank guarantee for ensuring export shipments. Local prices of wheat are below Rs. 11,550/tonne, and therefore would eliminate concerns of recycling in the open market. FCI procurement in any case is not scheduled before April 2013.

The CBOT prices, its calculations in equivalent Indian rupees with exchange rate adjustments and after accounting for handling costs, can be certified by NCDEX, NCMSL (National Collateral Management Services Limited) or Agriwatch for notifying the release price. CBOT indexation will also enable State procurement agencies (like Markfed, Hafed) in Punjab, Haryana, Madhya Pradesh, Rajasthan, which are physically holding stocks, to participate in the export endeavour.

WHY CBOT'S BETTER

All commodities like sugar, soybean, soybean meal, corn, edible oils, gold and silver are traded internationally on a premium or discount basis in future exchanges in Chicago, London, New York and Kuala Lumpur.

This model is an accepted practice that may be introduced in India for transparency in price movement. Any other model linked to CBOT values that are convenient to stakeholders and market participants can also be devised.

Why link wheat contracts to CBOT? This is the most traded wheat contract in the world, where commercials and non-commercials, hedgers and speculators, traders and buyers, weather marketers, supply and demand fundamentalists, soothsayers of crop conditions, players of financial markets, and followers of USDA reports are in the fray.

Local conditions in each origin then determine the degree of convergence with, or divergence from, CBOT. Quality of price determination in CBOT futures may be more authentic when compared with a tendered procedure where some participants may be privy to specific information and data. In fact rupee-dollar exchange rates may be more speculative and interventionist than price movements in CBOT.

Three weeks have passed, and a decision on disposal of 0.1 million tonnes commodity tender is still pending.

A prominent international report on wheat says, “India potentially has a lot of new crop to sell, Australia has a lot of old crop, the Black Sea harvest is about to start with the currency making interior prices very attractive and virtually nothing on the books; importers/consumers continue to wait or just buy the strict minimum amidst uncertainty over the macros and anticipation of big crops/harvest pressure.”

India is entering the world market when bearishness is at its peak.

(The author is a grains trade analyst.)

Related Topics