April 25, 2011
 

Traders facing dilemma to purchase India's wheat for exports

 

 

Traders are debating whether to grab opportunities to purchase and export wheat from India.

 

On paper, the scope to export exists, as the price of Indian wheat is quite competitive in today's world market.

 

Loose wheat is currently selling in markets such as Shahjahanpur and Hardoi in Uttar Pradesh at INR10,600-10,700 (US238.44-240.69) a tonne, below the minimum support price (MSP) of INR11,200 (251.94).

 

When the news of the centre paying a INR500 (US$11.24) bonus over and above, the MSP filtered in, open market prices hovered even lower at INR10,200-10,300 (US$229.44-231.69) a tonne.

 

Even assuming a price of INR11,000 (US$247.44) and 7-8% incidentals (mandi tax, labour, commission agent fee, gunny bags and transport to upcountry warehouse) on it would take the cost to roughly INR11,800 (US$265.43) a quintal at the local dispatch point.

 

If one adds INR200 (US$4.49) for loading into rail rakes and INR1,000 (US$22.49) towards freight, the cost till the port would be about INR13,000 (US$292.43) a tonne. After factoring in US$10-12 of stevedoring ('fobbing') expenses, the wheat can be exported at US$305 a tonne, free-on-board. This is lower than the US$320 a tonne for Australian soft wheat.

 

There is money, no doubt, to be made from exports, trade sources said.

 

Moreover, the global signals on wheat are bullish, with exportable surpluses from the Black Sea region (Russia, Ukraine and Kazakhstan) constrained by last year's drought. There are dry-weather concerns even over the crop in the US, China and parts of Europe.

 

The uncertainty over global supplies is reflected in wheat prices at the CBOT. The May contract there, on Friday, closed at US$7.99 a bushel. The subsequent quotes for July, September, December, March 2012 and May 2012 are ruling higher at US$8.35, US$8.75, US$9.11, US$9.38 and US$9.54 a bushel, respectively. A bushel is 27.216kg; and at US$8.35 a bushel a tonne costs US$307.
 

However, for prospective exporters, the real uncertainty is whether the centre would allow shipments in the first place.

 

While the Agriculture Minister, Sharad Pawar, on Thursday (Apr 21), made a strong case for lifting the ban on exports, given the record harvest expected this year, his enthusiasm may not be as widely shared by others in the government; especially the Finance Minister, Pranab Mukherjee, and the Food Minister, K.V. Thomas.

 

"After the bitter experience in sugar where mills burnt their fingers from the centre first allowing shipments and then not issuing the necessary notification, nobody wants to risk buying too much in the expectation that the export window will be opened up," the source pointed out.

 

While the likes of Cargill and Louis Dreyfus have been purchasing wheat, the bulk of it is said to be for supplying to flour mills in the South and not for exports.

 

They have an arrangement to buy and warehouse wheat for 6-8 months on behalf of the mills. The mills are required to deposit 15-20% of the value of the purchased stock, besides paying interest (at about 12.5%) and warehousing charges to these big buyers, the sources added.