INDIA INDONESIAN RICE DEAL---NOT LIKELY TO BE SUCCESSFUL-FINANCIAL EXPRESS 9.06.2016

http://epaper.financialexpress.com/c/10867774

  

WILL “G TO G” RICE DEAL WITH INDONESIA SUCCEED?

There is wide spread reporting of upcoming Government to Government (G to G) export deal of one million tons of non-basmati rice from India to Indonesia from the stocks of FCI through one of the PSUs—may be STC or MMTC. The counter party or the buyer is Indonesia's state-run logistics agency “BULOG” which undertakes annual import of 1.5 to 2 million tons of rice for meeting any supply demand mismatch and domestic price stabilization. Barring a few exceptions, most of imported rice for Indonesia is bought from Thailand and Vietnam.

Indonesia/BULOG purchased the following “non –basmati rice” in the past from Indian private exporters.

Year	Indonesian Buyer	Indian Sellers	Qty.Metric tons	Price C&F in $/mt	Broken % of white  rice
Nov-11	Bulog	Private Trade	250000	483	10
Dec-12	Bulog	Private Trade	120000	437	15

The experience of the private trade in dealing with rigid and inflexible terms of BULOG was very challenging and almost all traders either suffered loss of profit or outright loss after the implementation.

Under Indonesian contracts,

ü  Delivery schedule (that is arrival of rice at the discharge port) is very sacrosanct;

ü  Any late arrival of the ship at the destined port may be rejected outright for acceptance and then the entire cargo may have to be offloaded at another country or re-consigned to Indian ports even if the establishment of letter of credit is delayed by the buyer in favour of the seller

ü  Quality is checked by BULOG inspectors at the load port and then again cargo condition is reviewed at discharge ports before releasing final 10% payment, notwithstanding furnishing of 10% performance bank guarantee by the seller. In short 20% payment is subject to deductions at buyer’s choice for lack of compliance to any of the contractual terms.

ü  BULOG being a governmental agency thus has no discretion in relaxing agreed terms, unless force-majeure is justified and accepted.

BULOG standard terms of contract must be minutely studied for implications before proceeding with any export agreement.

The above narration is vital for the proposed new dialogue for export of rice ex-FCI stocks via PSUs to BULOG. FCI carries 25% broken non-basmati white rice, while preference of Indonesian is for 10%-15% rice, unless the government directs it to upgrade-- which will inflate the price from current economic cost of $486/mt or Rs 32670 /mt ex warehouse. Upgrading one million tons of grain through domestic rice millers is a humongous exercise and scheduling or synchronizing it with an export contract is an appalling job.

With upgradation and re-bagging, the cost of FCI rice will escalate beyond $500/mt, plus port handling cost  and shipping freight, while Indian private trade will be able to supply at $ 368 fob/mt Kakinada—east coast India-- ( around Rs 25000/mt) and freight of $25/mt---thus at about  $393/mt. Likewise Thai and Vietnam fob values (around $360/mt fob) will compete with Indian private quotes along with added advantage of lower freight rates by about $10/mt. Pakistan is also quoting 15% broken rice at $365/mt fob.

 Commercially it does not make a sense for BULOG to deal with FCI stocks at uncompetitive prices.  There is no Indian competent authority which can subsidise rice exports from government holdings when privates can exports without any subvention. Indian annual exports of non-Basmati rice are 7-8 million tons in the recent past and combined with Basmati rice shipments of 3.5 to 4 million tons, this nation’s private trade (totalling 11-11.5 mill tons) is one of the largest in the world.  (World’s rice trade is apprx. 42 million tons)

Domestic procurement is the forte of FCI, while it has never been exposed to rice exports directly. All exports of FCI in 2000-05 were through private trade or through PSUs who also retained privates as back to back parties. In this instance though MMTC /STC may be directly dealing with BULOG as contractual party –they too will depend upon efficiency or inefficiency of FCI. All trading partners in the string –FCI/PSU/BULOG are official agencies and thus carry the least options of flexibility when any complications crop up in the course of implementation/shipment.

In 2010 and 2011 too, Government of Bangladesh (GOB) approached GOI for FCI rice of about 0.5 million tons, to be supplied through a PSU. FCI response was that buyer may arrange to lift grain from their stocks on “as is where is basis” at economic cost and let other parties— Indian PSUs and GOB take care of the rest. “As is where is basis” means that quality and specifications are not guaranteed by FCI.  Despite intervention from the highest level of the Government and multiple visits of officials of GOB to India, the talks failed to break the deadlock. No paper contract could be signed. 

Considering that FCI does not have rice of the specs that BULOG desires and its price (based on economic costs) will be much higher than other competing origins like Thailand, Vietnam, Pakistan and Indian private trade too--- why would any party, let alone BULOG shell out more than $100/mt higher because of Indian local taxes, storage cost and other incidentals. Furthermore, BULOG being a very reputed procurement agency is fully aware of dealing with nuances of Indian PSUs—where a selection of a vendor for upgrading, re-bagging, local transportation requires a tendering procedure.

Any buyer would require a seller of track record of performance as availability of food grain in a country is critical for socio-political reasons. No purchaser will dare to take a chance if the timely deliveries of acceptable quality are doubtful.  Will “G to G” rice deal to Indonesia will take off and succeed, is a big question?