Govt may float call option tender to buy wheat

The government was likely to float a call option tender soon to buy wheat from overseas sellers, a senior official said today.

The empowered group of ministers on wheat gave its nod to float call options two-three weeks ago and a state-run agency will be asked to float a tender soon, he said.

The official did not specify which agency would be asked to float the tender.

Last year, the Food Corporation of India had invited bids to import wheat via call options. This year, other state-run agencies "" State Trading Corp, PEC and MMTC "" may also be in the fray. A senior Food Corp official, however, said the agency is yet to receive any government order to float the tender.

The call option will give the government space to later decide if it wants to take physical deliveries or not depending on the procurement this year.

A call option gives the buyer the right, but not the obligation, to buy a contract at a predetermined price within a limited period.

If the state-run agency accepts bids in the call option tender, it will have to forfeit the call option premium whether it takes deliveries or not.

The official said the call option tender would give the government a fall-back option in case its procurement falls short of the 15 million tonnes target.

The procurement has already started in Madhya Pradesh and Gujarat, and will soon start in the main wheat growing states of Punjab, Haryana and Uttar Pradesh as well. The country's wheat output this year is seen at about 74.8 million tonnes and may reach 75-76 million tonnes due to favourable weather. High wheat output, however, may not translate into higher procurement.

Last year, despite near record wheat output of 75.8 million tonnes, the government was able to buy only 11.1 million tonnes wheat, forcing it to import about 1.8 million tonnes to meet its requirement under the state-run welfare schemes.

An industry official said the call options tender this month may work out to be more expensive for the government, as traders would quote a higher risk premium.

"If the tender is floated in May-June, there would be a better picture about the crop size in the US, Canada and Europe, and the risk premiums may be lower," the official said.

Imported wheat will currently cost about $500-550 a tonnes at Indian shores, and bidders will add a risk premium of about $20-30 a tonne to it.

The government had imported wheat at a weighted average of about $205 a tonne in 2006 and at about $330 a tonne in 2007.

Concerned that India's wheat procurement this season may fall short of the target, the government is also firming up plans to dabble in global wheat futures on a regular basis to hedge possible imports next year.

The government has been hedging its wheat import contracts on Chicago Board of Trade since the past two years. Now, however, it is planning to step up its activities to hedge risks arising from importing wheat at inflated prices.

The Cabinet Committee on prices has given its nod for the proposal and is setting up a committee that would be empowered to trade wheat on international bourses on a daily basis.