Govt to hedge 1mt wheat in futures mkt to cover price rise

Written by ASHOK B SHARMA | New Delhi, Oct 2 | Updated: Oct 3 2007, 06:14am hrs
Faced with severe criticism over import of wheat at high prices, the government has now decided to hedge 1 million tonne wheat in the futures market. It has decided to appoint National Collateral Management Services Ltd (NCMSL), a company promoted by the national commodity exchange NCDEX and other institutions, to render technical advice.

Hedging would be launched around the start of the sowing season in major wheat-producing countries.

The empowered group of ministers on wheat imports headed by external affairs minister, Pranab Mukherjee which met last month approved the proposal. The empowered committee appointed by the finance ministry has also recommended hedging to cover the risk of increase in wheat price and freight, and also for the risk in fluctuations in foreign exchange.

It suggested that exchange traded wheat futures may be bought in order to cover the risk of rise in wheat prices. However, there may be a loss on account of decline in future prices, which will, however, be offset by lower wheat prices for physical imports.

In order to reverse losses in the future contracts due to drop in wheat prices, the empowered committee suggested that put options might be bought if considered necessary.

Put potion will enable the hedger to minimise its losses in the event of future prices dropping below a certain limit or range. Hedging should be done for the remaining quantity of wheat (1 million tonne) proposed to be imported in 2007-08.

The empowered committee has suggested that the government approve the hedging programme for 2008-09 and a long-term hedging strategy for formulating an effective policy. Last year, the government had imported 5.5 million tonne wheat at prices ranging between $178.75 and $228.94 a tonne. Five tenders were floated between February 20, 2006 and August 30, 2006.

In 2007, the State Trading Corporation of India (STC) floated a tender in May which attracted bids for 306,000 tonne at $263 a tonne, but this was subsequently scrapped by the government citing high prices. Later, in response to a fresh tender floated in August, the government finalised bids for import of 795,000 tonne wheat at an average price of $389.45 a tonne.

The governments wheat import at high prices has also come under the Central Vigilence Commissions scanner. The CVC has also questioned as to why the government facilitated the food companies to procure 1.6 million tonne wheat from farmers in the current season. The CVC said there would have been no need for imports had the government procured this additional wheat from farmers.