Centre considers derivatives market for wheat buffer stock

Centre considers derivatives market for wheat buffer stock

New Delhi: The government is actively considering tapping global wheat derivatives market to hedge for 1 million tonnes (mt) of wheat to meet that shortfall in the buffer stock in the current fiscal. It is also working on a full-fledged hedging programme for 2008-09 in case India needs to import wheat next fiscal.

“An empowered group of ministers (eGoM) under the external affairs minister, Pranab Mukherjee has taken stock of rising trend of wheat futures at the Chicago Board of Trade (CBoT), and is of view that there is no evidence of softening of International prices of wheat in the near future," said an official close to the development who did not want to be identified. CBoT is the largest international exchange for wheat.

The official also said the eGoM is expected to take a decision on a hedging strategy for 2008-09 when it meets later this month.

Officials in the know of the developments said the National Collateral Management Services Ltd, an associate of the National Commodity and Derivatives Exchange Ltd, is likely to be made the consultant-cum-trader for hedging and that the government’s importing agency, the State Trading Corporation of India, will implement the programme and not the procurement agency—the Food Corporation of India—as envisaged earlier.

Hedging is a tool that helps one to cushion oneself against price fluctuations. By selling or buying at a currently quoted futures price, one can lock one’s price, which means that whatever happens to the actual prices in the future, one is not affected because of the hedge. Most large buyers or sellers of wheat in the world have some kind of hedging mechanism in place.

With the international prices of wheat soaring high, the Indian government is under pressure to consider taking futures in the international market.

The estimated requirement of wheat under the government’s public distribution system between September and March 2008 is 8.2mt. With a buffer requirement of 4mt, the government will have estimated a closing stock of 3.1mt in April, including 1.3mt which is already approved to be imported. This leaves a shortfall of nearly 1mt, which will be required to be imported. Rajini Panicker, head of commodities research at Man Financial Commodities India, said hedging is a good move to remove uncertainties over international wheat prices and it is never too late. “I feel it is a good risk management technique and India can take a long-term position in exchanges such as CBoT," said Panicker.

While the government set up an empowered committee headed by U.K. Sinha, chairman and managing director of UTI Asset Management Co. Ltd, a state-owned mutual fund company, to work out the mechanics of hedging earlier this year, the government is yet to do any hedging. As reported by Mint on 15 March, that committee had recommended import of around 2mt of wheat at competitive rates using the global derivatives market to help the government avoid paying more for wheat in case prices in the international markets rise.

Analysts also say that the government could have avoided paying an average price of $389.4 (Rs15,459) per tonne for 750,000 tonnes of wheat that it recently approved as also an average price of $325.59 per tonne for contracting 511,000 tonne in the earlier lot, a couple of months back. Earlier, in May, the government rejected a price offer of $263 per tonne saying the price was high. Even now, wheat for March 2008 delivery is quoting at nearly $355 a tonne at CBoT.

In the eGoM held last month, Susan Thomas, an assistant professor at Indira Gandhi Institute for Development Research, who specializes in financial markets, suggested that hedging should be done for the balance of 1mt proposed to be imported in 2007-08 and that a hedging strategy be developed for 2008-09. This would allow hedging to be planned in the beginning of the sowing season of wheat-exporting countries. India imports wheat largely from Canada, Ukraine, Australia and the European Union.

An expert in a leading commodities exchange, who did not wish to be quoted, however, cautions that India should not go overboard on hedging at this point. “India’s low stock is fuelling sentiments in the international commodities exchanges and we may not be able to strike a good deal now, especially when there is a 70-80% rise in prices of wheat on CBoT and India has no negotiating strength," he said, adding that, as a long-term strategy, India should build its own domestic stock.