Wednesday, November 13, 2013



Tejinder Narang

Bidding against tenders issued by three PSUs (PEC/MMTC/STC) for export of FCI’s wheat is due on 18th November2013. Government sponsored export will recommence after nine months. Anticipated price discovery for first tranche of 350000 metric tons has evoked intense international interest due to two reasons—first, Government recently lowered Minimum Export Price (MEP) from $300 to $260 fob per metric ton (pmt) for facilitating shipments of 2 million tons; secondly, to infer whether or not Indian re-entry will result in reduction of wheat values for price guidance globally. 

This 2 million tons export is just a beginning; more tonnage of about 6-8 million tons too may have to be offered for exports early 2014 by Indian Government. Food Security Act is deferred for another year.

Steep rise in Black sea quotes by $25-$30 pmt in mid -October was partly attributed to this year Argentina crop down to 8 million tons from 12 million tons. World market has factored this adjustment.   USDA 8th November report mentions that Canadian wheat crop this year is 33 million tons, up by 6 million tons. Global wheat production is more than adequate –705 million tons vs. 655 previous periods.  Simultaneously, world is flush with massive supplies of corn (which can be substituted for feed wheat). But higher consumptive projections for corn are also made by USDA. Thus corn has not moved down as anticipated. Speculators who had shorted corn are back, pushing it up and thus making wheat prices also firmer  in December 2013 /January 2014.  Black Sea wheat has not declined but is edging up to its resistence level. Fundamentals of grain complex are confused with no clear direction--whether market will move up or down-- at the time of bidding in the medium term. Price pattern  or movements are completely unpredictable both for wheat and corn. Egypt--world’s largest and desperate buyer of wheat has adopted a very cautious approach by buying minimal lots.

An analysis below shows that participants may bid around $285-$295 fob pmt for late December/early January shipments in tenders due on  18th November (versus $260-267 offered in PSUs tenders of 4th October2013.) The latter price was not accepted last month and tenders were passed.

Trader’s perspective
Prime bidders in PSUs tenders are major MNCs or international traders who can finance 50-60000 metric tons cargos to economise on freight before offloading to roller flour millers or feed millers. Traders transact a “cargo of wheat” and not merely “grains of wheat”. They also have to buy a pre-determined quality composition, freight, encounter payment and currency risk, hedge exposure at future exchanges and settle claims if any.   Indian quality is discounted by $10 pmt with competing countries due to higher admixture and contaminations. At the time of submission of price quotations, all these actions and eventualities are accounted for.

The plus point of FCI/PSUs wheat bargains is that it ensures guaranteed timely performance, with no post contract price negotiations even when the market has moved up, and hardly any demmurrage risk at port of loading due to preferred berthing for Government cargo.

The minus side is that India is an inconsistent supplier in overseas markets. It appears and disppears and then reappears. Black sea, EU, Australia and USA’s grains are actively traded by traders all-round the year and thus they are armed with updated commercial and logistical advice.

Pricing for the Tender
 As of 12th Nov 2013, wheat availability from major competing countries is around $280-285 fob pmt, except feed wheat from Black Sea, which is at $260-$270. Indian wheat is consumed by markets in geographical arch of South Korea to Ethiopia. Major markets include Bangladesh, Dubai, Qatar, Yemen, Oman, Vietnam, Thailand, Philippines and Malaysia. Immediate appetitie for Indian cargos is seen from UAE, Yemen, Bangladesh and South Korea.   (Bangladesh encashed performance guarantees of  two defaulting firms last week who could not perform because of unseen spikes in Black sea values). The freight to these destinations varies from $20 to $25 pmt and is of critical importance for determining bidding value.  

Recent international quotes of optional origins were offered basis $280 fob that gives landed cost of $320-325 to Mid- East and Far -East destinations inclusive of all freight charges, margins, port expenses etc. of $40-45 pmt.

Indian wheat can be sold at a discount of $10 ($325-$10) that is at $315/mt landed, at destinations. A sample calculation sheet with known risks and 1.5% margin is given below. Bidding at $287 from Indian east coasts (Kakinada, Krishnapatnam) and west coast (Kandla/Mundra) to all destinations (excluding Bangladesh) may be a possibility. There may be desperate buyers or shorts or wild card entries that can be aggressive to pull the price up to $295 at their risk and cost.  Realization for FCI  may be at par or slightly better with all major competing countries. This is incidental and should not be understood as a logical conclusion.

Unfortunately due to tender conditions of Government of Bangladesh, FCI's wheat export to the neighboring country on Government account will be missed though cross border trade on private account is a regular activity. 

Bids of about $278 from Indian east coast for Bangladesh Government purchases are viable for prices contracted $310-313 cif liner out basis. Any higher pricing in Indian tenders means that contracts settled around $313 with Government of Bangladesh will be a loss proposition. 

This negates the perception in Indian official circles that there is a cartel formation in PSUs tenders. With multiplicity of destinations and varying conditions of import internationally—that is just not possible.

How world wheat would respond value wise to dispose of surpluses available elsewhere will be analyzed through outcome of this Indian tender. That will also determine direction in India’s forthcoming tendering  for shipments in February/March 2014.

The challenge to the trade is of imminence of very high risk profile at $290plus/minus 2% that may be expected to be quoted. 


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