TEJINDER NARANG, THE HINDU BUSINESS LINE
3 October, 2012
For the last nine months, India and Iran have been exchanging official delegations for export of Indian wheat, while not a single gram has been shipped out.
The Prime Minister-led delegation, during its recent visit to Tehran for the Non-Aligned Movement (NAM) conference, also interacted with the Iranian side on this subject.
Pursuant to the discussions at the highest level, India is dispatching another official team soon to Tehran for further “discussions” so that concerns for facilitating a Government to Government (G-to-G) deal may be understood.
Meanwhile, Iran's state grains agency, GTC (Government Trading Corporation), has discreetly contracted approximately one million tonnes of wheat of EU/Romania/Australia origin through MNCs/private trade at undisclosed prices in the second half of September 2012.
US sanctions are not applicable to food items on humanitarian grounds. This portends that Iranians do not expect any rapid developments regarding purchase of Indian wheat. (Iran may have already contracted about 4.5-5 million tonnes between January and September 2012, which is more than their normal import appetite.) A gap of 280 per cent between the official and market exchange rate — 1$=12250 Iranian Rials vs market rate 1$=34500 Rials as on October 1, 2012 — reflects severe scarcity of foreign exchange reserves.
India’s Food Minister K.V. Thomas recently mentioned a possibility of two or three million tonnes of wheat export on a “long-term basis”, while Iranians indicated some relaxation in zero tolerance to “Karnal bunt”— an infectious fungus — which is virtually non-existent in Indian wheat, but was an inhibiting factor in acceptance of Indian quality. In the highly volatile commodity markets, there cannot be any long-term binding agreements, and even if they are entered into, they snap sooner than later.
PITFALLS
G-to-G deals too, invariably meet a similar fate with negative publicity. It will be prudent to start and price smaller transactions of 200,000-300,000 tonnes of wheat on a monthly or bi-monthly basis.
The timing of the conclusion of the prospective deal remains uncertain. The procedural and contractual architecture are yet to be formalised by two sides. The resolution of differences is sought through bureaucratic intervention, rather than trading channels.
Proclaiming an official intent to export enormous volumes of Indian wheat to any country can be highly counterproductive, commercially and economically. The proposed deal can be frustrated by established competing origins.
It lends incorrect strength to the idea of Indian wheat lacking bulk importers. The whispers in the international trading community are that India does not know how to export wheat.
It also delineates India’s desperation to offset “rupee reserves” accumulated under “Indo-Iran rupee agreement”. The operation of this agreement needs to be smoothened to prevent delayed payments to Indian exporters.
DEALING WITH IRAN
The “long-term” fallout of the rupee payment arrangement could be that the Gulf nation might seek use of its huge credit balance, if not set off against exports, for purchasing assets in our domestic market that may be awkward for the Indian side to agree.
Iran has demonstrated that it can commercially access wheat from any part of the world, including US, on its terms and conditions, and may require India to fall in line.
Indian PSUs are apparently not experienced with the risk matrix of GTC. Major deviations between GTC requirements and Indian PSUs’ capabilities are:
GTC undertakes business on a negotiated basis on its preferred timings. Prices are not made public.
Iran is not amenable to bid against tenders of PSUs. A special policy framework for Iran will have to be approved.
Shipments are required on delivered basis, and not “fob” terms. Indian PSUs have rarely done export business on cost plus freight (CFR) on their account.
Iranian shipping terms are tough. Business can be abandoned or renegotiated by citing non-adherence to ‘shipping conditions’. This can happen when the market reverses — that is world prices drop lower than contracted values. Will GTC agree to fob shipments?
The international practice is to accept cargo with “quality and quantity” final at load port. GTC needs “quality” final at “destination” port to be certified by their official agencies. The risk scenario is — cargo can be rejected on arrival; quality claims can be raised; payment may be delayed till settlement is reached. “Risk free” business, without any loss to PSU — defined under audit and vigilance guidelines may not be feasible.
Unless agreed otherwise, Iranian payments will be authorised after inspection at destination. PSUs will not be able to remit proceeds to the FCI/Government for a much longer period than what is currently possible, wherein proceeds of LC are realised by “payment on sight”. Loss of interest may have to be factored in by the Government.
GTC calls for resolution of disputes as per Iranian law, and not even as per Gafta (Grain and Feed Trade Association London) rules, while Indian PSUs require arbitration as per the “Indian Arbitration Act”. Some middle path has to be found for this crucial issue.
International wheat prices are around $345-350 fob, while Indian values are $302-$316 fob. A pricing formula can be worked out with Iran, but realisation of payments in the light of the above divergence will be a concern. A single dispute can stall/terminate future dealings.
GTC is accustomed to a one-to-one relationship with the world’s private traders/MNCs. Modifying their structure to suit Indian G-to-G requirements may be difficult. Any rigid positioning by Iran can delay or deny India’s wheat export.
STOCK CLEARANCE
If the Government is keen to push out two or three million tonnes wheat on a long-term basis, it might as well seek participation of private trade and give them the option of procuring wheat from FCI either at port warehouses or in places such as Madhya Pradesh and Rajasthan, by prior payments at pre-determined rupee rates.
Private trade can deal freely with GTC and the Iranian private sector. Private to Government (P to G) or Private to Private (P to P) affiliations can then be developed by both sides.
It is up to Indian traders to take a call on GTC or Iranian private trade, while keeping FCI/ Government insulated from all risks.
This alternative also merits serious consideration.
(The author is a grains trade analyst)
3 October, 2012
For the last nine months, India and Iran have been exchanging official delegations for export of Indian wheat, while not a single gram has been shipped out.
The Prime Minister-led delegation, during its recent visit to Tehran for the Non-Aligned Movement (NAM) conference, also interacted with the Iranian side on this subject.
Pursuant to the discussions at the highest level, India is dispatching another official team soon to Tehran for further “discussions” so that concerns for facilitating a Government to Government (G-to-G) deal may be understood.
Meanwhile, Iran's state grains agency, GTC (Government Trading Corporation), has discreetly contracted approximately one million tonnes of wheat of EU/Romania/Australia origin through MNCs/private trade at undisclosed prices in the second half of September 2012.
US sanctions are not applicable to food items on humanitarian grounds. This portends that Iranians do not expect any rapid developments regarding purchase of Indian wheat. (Iran may have already contracted about 4.5-5 million tonnes between January and September 2012, which is more than their normal import appetite.) A gap of 280 per cent between the official and market exchange rate — 1$=12250 Iranian Rials vs market rate 1$=34500 Rials as on October 1, 2012 — reflects severe scarcity of foreign exchange reserves.
India’s Food Minister K.V. Thomas recently mentioned a possibility of two or three million tonnes of wheat export on a “long-term basis”, while Iranians indicated some relaxation in zero tolerance to “Karnal bunt”— an infectious fungus — which is virtually non-existent in Indian wheat, but was an inhibiting factor in acceptance of Indian quality. In the highly volatile commodity markets, there cannot be any long-term binding agreements, and even if they are entered into, they snap sooner than later.
PITFALLS
G-to-G deals too, invariably meet a similar fate with negative publicity. It will be prudent to start and price smaller transactions of 200,000-300,000 tonnes of wheat on a monthly or bi-monthly basis.
The timing of the conclusion of the prospective deal remains uncertain. The procedural and contractual architecture are yet to be formalised by two sides. The resolution of differences is sought through bureaucratic intervention, rather than trading channels.
Proclaiming an official intent to export enormous volumes of Indian wheat to any country can be highly counterproductive, commercially and economically. The proposed deal can be frustrated by established competing origins.
It lends incorrect strength to the idea of Indian wheat lacking bulk importers. The whispers in the international trading community are that India does not know how to export wheat.
It also delineates India’s desperation to offset “rupee reserves” accumulated under “Indo-Iran rupee agreement”. The operation of this agreement needs to be smoothened to prevent delayed payments to Indian exporters.
DEALING WITH IRAN
The “long-term” fallout of the rupee payment arrangement could be that the Gulf nation might seek use of its huge credit balance, if not set off against exports, for purchasing assets in our domestic market that may be awkward for the Indian side to agree.
Iran has demonstrated that it can commercially access wheat from any part of the world, including US, on its terms and conditions, and may require India to fall in line.
Indian PSUs are apparently not experienced with the risk matrix of GTC. Major deviations between GTC requirements and Indian PSUs’ capabilities are:
GTC undertakes business on a negotiated basis on its preferred timings. Prices are not made public.
Iran is not amenable to bid against tenders of PSUs. A special policy framework for Iran will have to be approved.
Shipments are required on delivered basis, and not “fob” terms. Indian PSUs have rarely done export business on cost plus freight (CFR) on their account.
Iranian shipping terms are tough. Business can be abandoned or renegotiated by citing non-adherence to ‘shipping conditions’. This can happen when the market reverses — that is world prices drop lower than contracted values. Will GTC agree to fob shipments?
The international practice is to accept cargo with “quality and quantity” final at load port. GTC needs “quality” final at “destination” port to be certified by their official agencies. The risk scenario is — cargo can be rejected on arrival; quality claims can be raised; payment may be delayed till settlement is reached. “Risk free” business, without any loss to PSU — defined under audit and vigilance guidelines may not be feasible.
Unless agreed otherwise, Iranian payments will be authorised after inspection at destination. PSUs will not be able to remit proceeds to the FCI/Government for a much longer period than what is currently possible, wherein proceeds of LC are realised by “payment on sight”. Loss of interest may have to be factored in by the Government.
GTC calls for resolution of disputes as per Iranian law, and not even as per Gafta (Grain and Feed Trade Association London) rules, while Indian PSUs require arbitration as per the “Indian Arbitration Act”. Some middle path has to be found for this crucial issue.
International wheat prices are around $345-350 fob, while Indian values are $302-$316 fob. A pricing formula can be worked out with Iran, but realisation of payments in the light of the above divergence will be a concern. A single dispute can stall/terminate future dealings.
GTC is accustomed to a one-to-one relationship with the world’s private traders/MNCs. Modifying their structure to suit Indian G-to-G requirements may be difficult. Any rigid positioning by Iran can delay or deny India’s wheat export.
STOCK CLEARANCE
If the Government is keen to push out two or three million tonnes wheat on a long-term basis, it might as well seek participation of private trade and give them the option of procuring wheat from FCI either at port warehouses or in places such as Madhya Pradesh and Rajasthan, by prior payments at pre-determined rupee rates.
Private trade can deal freely with GTC and the Iranian private sector. Private to Government (P to G) or Private to Private (P to P) affiliations can then be developed by both sides.
It is up to Indian traders to take a call on GTC or Iranian private trade, while keeping FCI/ Government insulated from all risks.
This alternative also merits serious consideration.
(The author is a grains trade analyst)
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