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Government plays it safe on wheat stocks

Government plays it safe on wheat stocks
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First Published: Mon, May 26 2008. 12 05 AM IST
Updated: Mon, May 26 2008. 12 06 AM IST
New Delhi: Although the Union government had already bought 20.7 million tonnes (mt) of wheat this year by 23 May, it is keeping its options open on importing foodgrains and also seeking to build strategic reserves.
“The food ministry has proposed that futures and options contracts be looked into at overseas commodities exchanges such as the Chicago Board of Trade for importing 3mt of wheat in the current year. The proposal is to engage (government-owned trading company) MMTC Ltd for executing such tenders beginning the second week of June,” said a senior government official who did not wish to be named.
India plans to build strategic reserves of 4.4mt of wheat and 3mt of rice in 2008-09 fiscal year, in addition to the buffer stock it already holds.
Every year after harvest, the government buys foodgrains, which are added to its buffer stock that is sold largely to the poor at subsidized rates through a public distribution system.
On 7 May, stocks in the central pool, which included those maintained by public sector Food Corporation of India and state agencies, stood at 30.07mt—12.61mt of rice and wheat 17.46mt of wheat.
A group of ministers meeting on 29 May is expected to discuss the proposal.
A senior MMTC official, who did not wish to be identified, said: “We have been instrumental in the import of wheat. However, at this point, Iwill not be able to confirm the current move.”
By buying at a currently quoted futures price, the government will be looking to hedge its position by locking into a price. So, if prices actually go up by the time the contract is due, it will be able to import at a lower price.
The government had failed to do so last year despite a recommendation by the committee headed by U.K. Sinha, chairman and managing director of state-run mutual fund company UTI Asset Management Co. Ltd, to hedge for the import of at least 2mt of wheat.
Later, international wheat prices rose following a decline in global production, placing the government in a bind, especially since it was able to buy only 11.1mt wheat from domestic farmers, lower than what it had targeted.
The prices, which ranged between $263 and $389 per tonne between May and September last year, rose to $460-570 a tonne after the government-owned State Trading Corp. of India Ltd floated a tender on 10 December to import of 350,000 tonnes of wheat.
As a result, India could import less than 2mt, although the cabinet of ministers had cleared import of up to 5mt.
Jayant Manglik, head of commodities at Religare Ltd, said it is a good idea to hedge despite good domestic production and procurement.
“This move will actually mean an admission by the government that hedging is a sensible activity for price discovery and making a choice,” he said.
“In fact, the government should open futures in wheat and itself hedge on the domestic bourses to get good prices.”
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First Published: Mon, May 26 2008. 12 05 AM IST