India to issue call option wheat tender: source

India to issue call option wheat tender: source

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, a government source said on Monday, 17 March.

It bought 1.8 million tonnes of wheat last year following up from much larger imports of 5.5 million tonnes 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 a bushel on 27 February.

Pressured by profit-taking, US wheat futures settled lower on March 14 at $11.91 a 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, told Reuters.

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 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 74.81 million tonnes, down from 75.81 million tonnes last year. But officials have said the estimate was conservative and production might touch 76 million tonnes 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 73 million tonnes of the grain a year and maintains buffer stocks to cover emergencies and help run subsidized food schemes for the poor.