Gaps in STC's wheat export tender

Now, it is clear that the government wants to evacuate its bulging inventories. The State Trading Corporation of India (STC) has invited bids from overseas buyers for export of wheat from Food Corporation of India (FCI) stocks at Kandla and Mundra ports.

It also appears that STC's mandate is to discover the FoB price in dollar, take approval from policymakers for the best bids received, and ship out subsequently. The tender is limited to foreign buyers only. It provides no opportunity to Indian exporters to participate in the export programme.

The bid invitation does not call for pre-defined criteria or experience in grains trade. This inherently entails the risk of getting FOB prices, which may not be easily tradable, and denial of opportunity to serious/reputed traders. The collateral of encashment of 5 per cent performance guarantee in the event of default may not ensure the objective of prompt physical exports. All factors that may delay shipments at this critical juncture will be counter-productive.

Commercial terms

Bid documents indicate that STC will be strictly bound by the rules, procedures or actions of the FCI or Government of India (Para XIII) and the buyer has to accept them unconditionally. The availability of inventories at port towns will be at the discretion of FCI — though STC may play the role of a mere co-ordinator.

The exporting agency will not be able to exercise any independent control over the totality of operations. The foreign buyer will naturally have no relationship with FCI or Government, while STC can sight and rely upon non-performance by these non-contractual parties.

Even if the intended formalities are finalised on a back-to-back basis, FCI is governed by plethora of its own rules and regulations.

FCI can point a finger at the Railways for shortage of rakes, or lack of storage at the port concerned, or compulsions of PDS movement, irrespective of the agreed delivery schedule between the STC and the buyer. This shall severely marginalise the efficacy of provisions of agreements between STC and buyers.

Specifications of wheat that are documented are grossly deficient. International wheat trade is not governed by “as per FCI's standard specification of Wheat” (para III). No indication has been provided on protein, test weight, gluten, falling number, and so on — the refractions which are pertinent for determination of the quality of wheat. However, wheat import tenders of STC of 2004-06 specified such refractions.

The parameters that are highlighted now refer to 15 per cent maximum damaged/shrivelled grains, which far exceed the international norms of 6-7 per cent. Purchasers will have to be simply content with presumptive ideas of the goodness of Indian wheat.

For load port, clearing handling agent (CHA) is to be nominated by STC. Para VII of the notification states that the inspection report issued by an independent (inspection) agency for “quality” at FCI “godown” and “quantity” at “load port” will be “final and binding” on both the parties. Normally, quantity and quality is “final at the load port” for FOB contracts.

Though CHA is the nominee of STC, the quality at the load port is not the responsibility of STC. The buyer will have to depend upon the integrity of the CHA for quality, while the CHA is not a party to the contract with the buyer. This is a grey area of substantive importance — both FCI and STC are thus not liable for any quality claims. How can any buyer accept such a status??

The closing date of the tender is May 24, 2012, but offers are to be kept valid till June 22, 2012 — almost a month. Commodity prices are very volatile and bids are normally not kept for more than 48 hrs.

Keeping a bid valid for almost a month will certainly result in erroneous (lower) price discovery. Since STC has to seek Government/FCI consent on price matters, such a requirement may be a necessity for the time being.

Shipping terms

What will be the rate of loading to be provided by STC at Kandla and Mundra port? No load rate has been committed by STC, except that the vessel should be capable of loading at the rate of 3000-4000 tonnes per day at Kandla/Mundra, respectively. Buyers might presume lower load rate of 2500 mt/day for freight calculations, though break bulk loading at Kandla/ Mundra port can be undertaken at the rate of 10,000 MT per day.

When the momentum of exports builds up, demurrage claims for the vessels are sure to pile up, both due to non-availability of cargo at port towns and congestion at port. FCI has no provision or mandate to pay demurrage claims to STC, and in turn STC denies or defers squaring up these damages.

The combined impact of poor rate of loading and no hope of recovery of demurrages means higher freight rates, and therefore lower or below market FOB dollar bidding for STC. The net worth of Indian wheat will be invisibly discounted. Good terms of trade mean better prices and vice versa.

There can be times where buyers and sellers need to renegotiate the agreements due to market dynamics. Any vagueness in terms and conditions should be eliminated to mitigate risk and loss for both buyers and sellers.

(The author is a grains trade analyst.)

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