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FCI's wheat e-auction faces hurdle

Delay will push open-market prices and hinder creation of space for new rice crop arrivals

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The Food Corporation of India’s (FCI) plan to sell through spot exchanges may not take off smoothly, as the two spot exch-anges—the National Spot Exch-ange Ltd (NSEL) and NCDEX Spot—have quoted ‘high’ transaction costs of about Rs 8-12 per tonne.

An official said a decision is yet to be taken. “We have not taken a final decision so far on the proposal sent by spot exchanges a few weeks ago. But a section of the ministry is of the view that the transaction cost is high. But, the FCI proposes to sell everything through spot exchanges once the final decision is taken,” said the official.

However, the spot exchanges justified their transaction cost. “The quoted transaction cost of between Rs 8 and 12 a tonne is in line with other agri commodities, which the exchanges are currently selling through their online platforms. The cost includes delivery charges and administrative fees for conducting auctions online,” said Anjani Sinha, managing director, NSEL.

In million tonnes*
  Rice Wheat Total
In storage 28.70 40.23 68.93
In transit 0.25 0.35 0.60
Total 28.95 40.58 69.53
Buffer norms 5.20 11.00 16.20
Strategic reserves 2.00 3.00 5.00
Required total 7.20 14.00 21.20
* Data as of November 1, 2012, Buffer norms as of October 1, 2012
Source : The Food Corporation of India

A high-level committee of the ministry of food, which takes a final decision on grain stocks with the FCI, had earmarked three million tonnes of saleable wheat for this season, until the beginning of rabi crop harvesting in March 2013. The wheat is scheduled to be distributed between and NCDEX Spot.

If there is a delay in the sale of wheat by FCI, it will hurt in two ways. One, the open market prices of wheat are rising. Over the past month, prices have gone up nearly 10 per cent as there is not enough stock. Sources say FCI direly needs to release stocks in the market as new wheat will come only after April. Two, FCI has set a target of procuring 40 million tonnes of rice, while its godowns are full. Against buffer norms of 16.2 million tonnes of wheat and rice, it has about four times that capacity and there is an urgent need to offload that to create space in godowns to store new rice being procured.

Against the mandatory requirement under buffer norms of 11 million tonnes (wheat) and 5.2 million tonnes (rice); and strategic reserves need of three million tonnes and two million tonnes, FCI had 43.15 million tonnes of wheat and 23.37 million tonnes of rice in the central pool as on October 1, 2012. Apparently, FCI had over three times the required stocks in its control.

Since the procurement of rice is expected to remain high this season, FCI needs to vacate space for additional quantity. The government has set a target of 40 million tonnes of rice procurement for this 2012-13 kharif season, five million tonnes more than the previous season. By the time rice procurement is completed, rabi wheat harvesting would start, thereby creating continuous pressure on FCI for additional space. Two years ago, NSEL had conducted sale of online wheat auctions for the FCI and managed to sell 300,000 tonnes at higher than the base price quoted by the public sector grain procurement agency. The sale auctions were conducted on pilot basis, free from transaction charges.

According to Sinha, the transaction cost is half of that incurred by FCI currently on the sale of wheat. “Since placing advertisements in newspapers to overall administrative expenditure for conducting physical tenders, FCI incurs an average Rs 20-22 a tonne for wheat sales. Against that, we are offering Rs 8-12 per tonne depending upon delivery locations. This is not only cheap, but also smooth and hurdle-free sales.”

Under the online trading system, a buyer participates in the tenders floated by spot exchanges, and quotes higher than others in case of many bidders. The highest quote becomes an obvious choice for sellers. In the process, however, both FCI and online trading platforms would benefit.

The amount so collected would be passed on directly to FCI’s account, which immediately passes on a release order. On receiving the order, NSEL would inform the buyer to collect the goods from the nearest FCI godown. While FCI would ensure quality, NSEL would play the role of an intermediary. While the realisation above the base price would be an earning for FCI, NSEL would get only the finalised transaction charges.

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