April 30, 2007

 

India Food Corp invites bids to import wheat by call options

 

 

For the first time ever, government-run Food Corp of India (FCI) has invited offers from several global trading companies to bid for call options contracts to import wheat, a senior government official said Friday (Apr 27).

 

Analysts say the government, stung by abysmally low local wheat purchases by FCI, does not want to take chances with local supplies despite a significant increase in the intervention price paid to farmers, For over four decades, FCI has been the government arm for procuring locally produced wheat and has never ventured directly into overseas purchases.

 

"No specific quantity to buy wheat has been decided but if call options are exercised, FCI can buy any volume up to 800,000 tonnes each month between August and January at designated ports," the official told Dow Jones Newswires.

 

Delivery has been proposed between October 2007 and March 2008, he said.

 

Earlier this week, a government official said all internationally reputed suppliers have been asked to bid for the proposed call options contracts by April 30 and submit offers, which are valid for one month.

 

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

 

Companies that are awarded the contract will have to be paid the premium upfront.

 

The base price will only be paid if the buyer presses for delivery of a certain volume in a pre-decided month at specified ports.

 

The process allows the buyer to cushion himself against any price rise between the date of issuing the tender and month of delivery, while also keeping the option of canceling the purchase plans altogether.

 

In event of a cancellation, the buyer forfeits the premium.

 

Several traders said FCI proposes to buy up to 4.8 million tonnes by exercising call options, but the government official said no quality has been decided so far.

 

"We may not exercise the options at all. Trading companies seem to be simply adding the proposed quantitative limits tabled port-wise and month-wise to arrive at the 4.8 million tonnes figure and this can be misleading," the official said.