INDIAN- IRAN TRADE OF 1121 BLENDED RICE

1.   WIN- WIN FOR BOTH COUNTRIES

2.   VAGUENESS ON LEGAL MATTERS REMAINS

“PUSA BASMATI parboiled rice variety 1121”, produced from hybrid gene developed by IARI—Indian Agriculture Research Institute Delhi--- in northern states of Punjab and Haryana, has caught the taste and fancy of Iranian market due to its superior length and elongation properties on cooking. Average Grain length of 1121 Rice is about 8.3 mm while that of Non Basmati is 6mm. It is 25- 30% cheaper prices than traditional Basmati that are exported to Saudi and other Middle East countries.

a)   India has been exporting around 0.8- 1 million tons of 1121 Basmati Rice annually to Iran for last five years. 

b)   During 2008 -11, trade to Iran was routed through Dubai based intermediaries in hard currency.

c)   After Indo-Iran Rupee payment agreement was concluded in 2011, Indian parties transacted exports directly with Iranian traders. 

d)    Price band of 1121 Rice has ranged between US $ 900.00 to US $ 1400.00 per metric tons (mt) fob depending upon Dollar –Rupee exchange rate. Thus total exports are now around $ 1.00 – 1.4 billion per annum. As of mid-October 2013, parboiled variety is offered at @1150 fob/mt West Coast India.

Blending

a)   Indian rules permit 20% of admixture of other rice grains for Basmati quality certification. Thai Home Mali or Jasmine verities, which are eq. to our Basmati, stipulate 8% of other rice grains. Apparently Indian admixture parameters are quite liberal and prone to manipulation.

b)   When price of 1121 variety spikes to $1400-1500 fob in mid-season or later, Indian grain becomes overpriced in Iran. Since the domestic parity in the Iranian market has ranged between $1000.00 – $ 1200.00 pmt fob, Indian exporters in consultation and consent of Iranian parties have shipped Basmati Rice with blended variety of Non basmati exceeding 20%. Blend ratio is reported to be 60:40 or 70:30. “Purity of 1121” is mentioned as 60% or 70% in specifications.  The fob price of Non Basmati Rice is around $ 400 per metric tons, which is 1/3^rd of 1121 Rice.  By adjusting the mixture of two varieties of Rice, Indian Sellers and Iranian Buyers are trading “1121 rice” with 60-70 percent purity.  The word “Basmati” is omitted from the invoice and the specifications, for obvious reasons.   

c)   It is a win-win situation for buyers and sellers. Sellers are able to work on higher margins and partially lessen Iranian risk of delayed payments. Buyers are also enabled to dispose of rice in Iranian markets at profit and swiftly.

Implications:

a)   Adjustment by blending enables commercial transactions to take place without any hindrance provided it is with the prior agreement of the buyer.

b)   However, such a blending provides an alibi /excuse in the hands of the buyer to reject the consignment/ or raise claims on arrival on the plea that it is not pure 1121 Basmati Rice.

c)   The dispute at (b) above gets provoked if the market price of 1121 Basmati Rice declines in Indian market or in Iran.

d)   Iranian Buyer also gets a reason to renege from the commitment under the L/C for effecting payment to the Indian seller. Disputes of either delay or non-payment arise.

e)   The practice of blending gives a bad name to the Indian quality of Basmati Rice in general despite the fact that the shipments are undertaken after understanding between the parties.

Legal issues

     I.         Another area of ambiguity between Indian and Iranian contracts is the applicability of the law of resolution of disputes.  Indians are not willing to accept Iranian law and vice versa. An independent arbitration—a third country arbitration or internationally recognized GAFTA arbitration-- can be a way out.  But enforceability of any arbitration in Iran is also doubtful.  Neither this matter has been raised at the inter-governmental level.

   II.         In view of uncertainty of trade with Iran due to US sanctions, agreement on applicable law and jurisdiction of enforcement need to be well defined.

 III.         Recently a case has been reported where an Indian exporter has obtained GAFTA award of $7.5 million against Iranian importer who was transacting 1121 rice trade with Indian parties, from Dubai. The jurisdiction of enforceability of the award remain vague because Importer has shifted back to Tehran. Only a shell company survives in Dubai.