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India may seek bids for wheat using call option

India may seek bids for wheat using call option
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First Published: Mon, Mar 17 2008. 11 14 PM IST
Updated: Mon, Mar 17 2008. 11 14 PM IST
New Delhi: India is expected this week to seek bids for wheat imports, using a call option to hedge against rising prices as it plots a third successive year of grain purchases, an official familiar with the matter said on Monday.
The country bought 1.8 million tonnes (mt) of wheat last year, following up from much larger imports of 5.5mt in 2006 as the domestic crop dropped in an economy where higher wages and changing eating habits are pushing up demand.
India’s imports helped fuel a rise in global prices, which have more than doubled in the past year. Wheat prices on the Chicago Board of Trade soared $12.80 per bushel (Rs511 then) on 27 February.
Pressured by profit-taking, US wheat futures settled lower on 14 March at $11.91 per bushel.
“One of the government agencies is likely to issue a call option wheat import tender this week,” the official, who did not wish to be identified, said. He did not give details of how much wheat would be sought or when deliveries would be expected.
A call option gives a buyer the right to purchase a commodity at a specified price within a specific time period. Prices are agreed in advance in return for a non-refundable premium.
“Although we will have to see details like quantity and date of purchases, it is a smart move by the government,” said K.N. Rahaman, deputy research head of Mumbai-based brokerage Way2Wealth.
“The government will agree (on) a strike price with suppliers for deliveries of specific quantities at a specified date and watch the local wheat crop and procurement by its agencies,” he said.
India, the world’s second biggest producer, grows only one wheat crop in a year. Sowing begins in October and the crop is ready for harvest by March-April.
The government last month forecast 2008 wheat output at 74.81mt, down from 75.81mt last year. But officials have said the estimate is conservative and production might touch 76mt on favourable weather.
“The whole world is watching India. If the crop is below expectation or the government fails to buy enough from local farmers, global prices will rise further,” Rahaman said. “Therefore, the government has decided to go for call option now.”
India consumes around 73mt of the grain annually and also maintains buffer stocks to cover emergencies and help run subsidized food schemes for the poor.
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First Published: Mon, Mar 17 2008. 11 14 PM IST