Don’t miss the bus on wheat exports

TEJINDER NARANG, THE HINDU BUSINESS LINE
August 27, 2012:
Indian central public sector undertakings (PSUs) have so far contracted about 300,000 tonnes of wheat from the central pool, and bidding for an additional 450,000 tonnes is notified in September 2012. The Government must be complimented for putting wheat exports on a faster track at a time when prices are good. It needs to accelerate its pace before the current buoyant trend reverses.

BULLISH BIDDING BIAS

On August 24, 10 major international traders participated in State Trading Corporation (STC) wheat tender, upped their bids by $10-15 per tonne from earlier offers and reconfirmed bullishness in wheat trade. The highest bid was at $311 per tonne f.o.b Chennai. Russian wheat was quoted between $319 and $333 f.o.b per tonne in the Egypt tender of August 25.

Indian f.o.b export price from open market saw a spike of $30/tonne last week. This perhaps urged international buyers to aggressively bid for central pool stocks of the Food Corporation of India (FCI) through PSUs. As more wheat is contracted from FCI’s plentiful pool, the “Uttar-Pradesh centric” local market will find its own equilibrium.

A higher bidding pattern is more focused on East Coast ports of India, which provide a freight advantage to the Far-Eastern markets of South Korea, Thailand, Malaysia, Vietnam, the Philippines, Indonesia and Bangladesh. These countries are likely to supplant expensive corn and soyameal with Indian wheat for feeding livestock.

That is why Chennai and Krishnapatnam ports have seen bids at $311 and $308 f.o.b/tonne with excellent open interest at the $302-307 levels. Western Asian buyers have yet to favour India.

Overseas markets point to a firm trend. Five million tonnes of “Western Australian” wheat crop are estimated to have ‘disappeared’ due to extreme dryness, from last year’s production of 11 million tonnes. This news has reached buyers in the Far East, who are accustomed to Australian grain for food and feed. US corn and soyabean crop are showing “severest damage” to yields, more than the “excessive” and “abnormal” decline anticipated earlier. Some call it the second drought in the US, with water levels dropping in major rivers, affecting navigation of all cargoes to the Gulf of Mexico.

Russian wheat, pencilled at 42 million tonnes in the August 10 US Department of Agriculture (USDA) report, is now estimated at 39 million tonnes, from 56 million tonnes last year. Traders expect Russia to exit wheat exports from November onwards. Those trading Russian wheat now may be stuck with some restrictive conditions or a ban announcement, forcing buyers to cover “shorts” at higher prices.

The fear of drought in the US and South America has compelled Taiwan to cover 175,000 tonnes of soyabean “one year in advance” by effecting purchases at a premium of $1.50- $2.0 over Chicago Board of Trade July futures on August 24.

BEARISH FACTORS

However, a bull run is always mingled with fear of bearishness. Demand destruction due to higher prices, uncertainty on ethanol mandate, wild card action from China, politics, weather, financial crisis, pulling in and out of funds, and surprises in monthly USDA reports can rattle markets with volatility. Rational thinking is occasionally superseded by unpredictable worldwide occurrences and reports flashing across the Net with digital speed.

India needs to evacuate six or seven million tonnes of wheat kept in kuccha and pucca shelters before the current bullish trend reverses. The belief that the present bidding mechanism is transparent and foolproof could prove to be a complacent one. A crude performance audit of CAG may hold the government responsible for furthering wheat sale at a discount to CBOT/US, Gulf, or even Russian fob values.

The Government can respond that it was much above open market sale values and, in some cases, above the prevailing f.o.b prices of the local market. Meanwhile, if the Government does not sell, stored wheat would lose its value with a carry cost of $60/tonne per annum.

Price discovery in five tenders is in the range of $300-310 f.o.b. The Government may, therefore, consider opening its wheat stocks to all parties — PSUs and private trade — at a fixed price of, say, $300/tonne basis port town delivery for the last quarter of 2012.

It can encash $1,500 million upfront for five million tonnes by insisting upon payment to FCI before September 2012. Trade risk will be transferred to the contracting parties with minimal burden on the exchequer.