NEW DELHI India's newest attempt to boost wheat exports and cut its bulging stocks by offering private traders the chance to buy direct from warehouses is likely to be spurned by most traders as they baulk at the costs of transportation and financing.
The world's No. 2 producer embarked on exports in September 2011 after a four-year ban as it sought space in stretched warehouses for bumper harvests, but has only managed to sell about 5 percent of what it produces in a year, partly because of its high prices.
It is now offering 5 million tonnes to private traders such as Cargill CARG.UL, Louis Dreyfus LOUDR.UL and Glencore (GLEN.L) -- but even though global prices are rising on supply concerns, the high cost of Indian wheat may still be a deterrent.
State-run Food Corporation of India (FCI), the central grains procurement body, kicked off the process on Monday, inviting bids for about 1 million tonnes in total.
Pictures of rotting sacks of wheat protected only by tarpaulin and vulnerable to attack by rodents triggered widespread criticism last year of the government, which has promised to provide cheap food to its poor.
India has sold about 3.6 million tonnes of the 4.5 million tonnes put up for sale by tender through state-run traders, with the grain available conveniently at ports. But the cumbersome process and a high floor price of $300 a tonne has kept sales sluggish.
Its need to cut stocks, which were six times target at 24.2 million tonnes on April 1, is increasingly desperate as the new wheat harvest of over 90 million tonnes rolls in.
So now the government is going direct to traders, a different tack that it hopes will smoothen the process.
But it has set the floor price here at 14,840 rupees a tonne for traders' bids, which compares unfavourably to global prices that are around $280 free on board (FOB).
The government is under pressure to cut the floor prices. But New Delhi wants to hang on to these levels as it was offering 14,800 rupees per tonne to domestic bulk buyers. And even at these prices, it would mean it was selling at a loss -- given purchase, storage and local levies add up to 17,990 rupees per tonne.
Moreover, FCI wants private traders to lift stocks only from its warehouses in the states of Punjab and Haryana, the big-hitting wheat producers, and pick up transport costs to ports.
Obtaining the trucks and railway wagons to carry the grains could also prove tricky given India's creaky infrastructure but the government has taken the view in the past that its wheat exports should take priority.
"On top of the floor price, which in itself is a big deterrent, we are now expected to bear the cost of bringing wheat to ports after we buy from warehouses in Punjab and Haryana," said a New Delhi-based grains trader.
These premium prices are likely to mean the only interest will come from traders needing urgent cargoes or with customers close by, where freight rates will be low.
"The condition that private traders will have to pay high transportation cost is like the government throwing a spanner in its own works," said Tejinder Narang, adviser at New Delhi-based trading company Emmsons International.
The cost of transporting wheat to east coast and west coast ports from Punjab and Haryana states -- a distance of up to 1,100 miles, or the journey from Washington DC to Kansas City -- stands at about 1,500 rupees per tonne, traders said.
"Other than paying for transportation, we will have to make an upfront payment the moment we buy from warehouses," said another trader. "I can tell you that direct exports will come a cropper."
Interest costs for at least three months will also have to be factored in because of delivery lags to clients.
The process of exports through state-run trading companies, where private traders do not have to transport wheat to ports, was "relatively better", the New-Delhi based grains trader said.
In the latest tender in that process, the highest bid was $304 per tonne for 200,000 tonnes, lifting on the west coast.
(Editing by Jo Winterbottom and Muralikumar Anantharaman)
Trending On Reuters
The Reserve Bank of India kept its policy rate on hold at 7.25 percent on Tuesday, as widely expected, while leaving the door open to ease further depending on the inflation outlook and how swiftly banks lower their lending rates. Full Article | Full Coverage