June 4, 2007

 

India's Food Corp lets wheat call options lapse

 

 

Government-run Food Corp of India has not purchased any imported wheat from its tender based on call options issued last month, a company official said Friday (Jun 1).

 

FCI was seeking to buy any quantity up to 800,000 tonnes of wheat each month, if it exercised the call options between August and January.

 

This is India's second wheat import initiative in quick succession that has been cancelled after another government-run company, State Trading Corp, scrapped a tender to import up to 1 million tonnes of wheat Wednesday.

 

"The call options tender (issued by FCI) has been allowed to lapse, we have not purchased any wheat," the official said.

 

He said the option inbuilt in the tender to take delivery or not to take delivery of the wheat contracted, made the bids too costly for current purchase.

 

The official declined to comment on whether there are any plans to issue more such call options tenders in next few months.

 

FCI, the Indian government-run local food grain procurement agency was for the first time seeking wheat from the global market and received only two bids at very high prices of US$298.50-US$328.75/tonne inclusive of premium.

 

One of the companies, Hamburg-based Alfred C. Toepfer International offered to supply around 65,000 tonnes wheat at Mundra port on India's west coast in September at US$298.50/tonne including a premium of US$21/tonne.

 

The other company, Louis Dreyfus offered three shipments of 40,000 tonnes each for delivery between August and October quoting around US$302.25/tonne for India's west coast and around US$307.25/tonne on the east coast, excluding premium, he said.

 

The premium it quoted is US$18.50/tonne, US$20/tonne and US$21.50 for delivery in August, September and October.

 

Under the call options mechanism, all companies asked to bid to supply wheat quote a base delivery price and a premium in their offer.

 

Those companies chosen to supply wheat have to be paid the premium upfront.

 

The base price is only paid if the buyer actually takes delivery in a pre-decided month at specified ports.

 

In the process, the buyer cushions himself against any price rise between the date of issuing the tender and month of delivery while also keeping with himself the option of cancelling the purchase plans altogether.

 

In event of cancellation of purchase plans, the buyer forfeits the premium.

 

Analysts say such call options are more useful for buyers if the market is moving towards tight supplies from a surplus.

 

"Global supplies are expected to increase and not fall in the next few months as harvests around the Black Sea region and Europe arrive onto the market," said a Delhi-based official of an international trading firm.