Why Indonesia may not buy 1 mn tonnes (mt) of rice from India

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Updated: June 9, 2016 12:45:25 PM

Not only is FCI’s price likely to be uncompetitive, it may not be able to ensure timely delivery which is a ‘must’ for Indonesia

Indonesia/BULOG has purchased non-basmati rice in the past from Indian private exporters, as shown in the accompanying table.Indonesia/BULOG has purchased non-basmati rice in the past from Indian private exporters, as shown in the accompanying table.

There have been many news reports of an upcoming G2G export deal between India and Indonesia, of 1 million tonnes (mt) of non-basmati rice from the stocks of FCI through one of the PSUs-either STC or MMTC. The buyer is Indonesia’s state-run logistics agency, BULOG, which undertakes annual imports of 1.5-2 mt of rice for meeting any supply-demand mismatch and stabilising the domestic price. Barring a few exceptions, most of Indonesia’s rice imports are from Thailand and Vietnam.

Indonesia/BULOG has purchased non-basmati rice in the past from Indian private exporters, as shown in the accompanying table.

The experience of the private trade in dealing with the rigid and inflexible terms of BULOG was very challenging and almost all traders either suffered a loss of profit or outright loss after the deal was carried out. Under Indonesian contracts:

> the delivery schedule (arrival of rice at the discharge port) is very sacrosanct,

> any late arrival of the ship at the destined port may be rejected outright for acceptance and then the entire cargo may have to be offloaded at another country or re-consigned to Indian ports even if the establishment of letter of credit is delayed by the buyer in favour of the seller, and

> quality is checked by BULOG inspectors at the load port and then again cargo condition is reviewed at discharge ports before releasing final 10% payment, notwithstanding furnishing of 10% performance bank guarantee by the seller. In short, 20% payment is subject to deductions at buyer’s choice for lack of compliance to any of the contractual terms.

BULOG, being a governmental agency, has no discretion in relaxing the agreed terms, unless force majeure is justified and accepted.

Therefore, BULOG’s standard terms of contract must be minutely studied for their implications before India proceeds with any export agreement.

FCI normally carries 25% broken non-basmati white rice, while the Indonesians prefer 10%-15% broken rice. So, unless the government directs FCI to upgrade stocks-which will cause the price to shoot up sharply from its current cost of $486/tonne or R32,670/tonne ex-warehouse. Upgrading one million tonnes of grain through domestic rice millers is a humongous exercise and scheduling or synchronising it with an export contract is a taxing job.

With upgradation and re-bagging, the cost of FCI rice will rise to beyond-$500/tonne, plus port-handling costs and shipping freight, while Indian private trade will be able to supply at $368 fob/tonne (around R25,000/tonne) in Kakinada and a freight of $25/tonne, or at $393/tonne. Thai and Vietnam fob values (around $360/tonne fob) will compete with Indian private quotes, given the advantage of freight rates lower by about $10/tonne. Pakistan, too, is in the fray, quoting 15% broken rice at $365/tonne fob.

Commercially, it doesn’t make any sense for BULOG to ink a deal with FCI at such uncompetitive prices. There is no competent Indian authority to subsidise rice exports from government holdings when the private sector can export without any such subvention. India’s annual exports of non-basmati rice have been at 7-8 mt in the recent past, with basmati rice shipments at 3.5-4 mt. Its private trade (totalling 11-11.5 mt) is one of the largest in the world. (The global rice trade is approximately 42 mt.)

Domestic procurement is the forte of FCI, while it has never been exposed to rice exports directly. All exports of FCI in 2000-05 were through private trade or through PSUs who also retained privates as back-to-back parties. In this instance, though MMTC/STC may be directly dealing with BULOG as the contractual party, they too will depend upon the (in)efficiency of the FCI. All the links in the chain-FCI, PSUs and BULOG-are government agencies and thus carry the least potential for flexibility when any complications crop up in the course of deal-implementation/shipment.

In 2010 and 2011, Bangladesh approached India for FCI rice of about 0.5 mt, to be supplied through a PSU. FCI’s response was that the buyer may arrange to lift grain from their stocks on an “as is where is basis” at economic cost while other parties-Indian PSUs and and the Bangla government-take care of the rest. “As is where is” means that quality and specifications are not guaranteed by FCI. Despite intervention from the highest level of the government and multiple visits of Bangla officials to India, the talks failed. No contract could be signed.

Considering FCI doesn’t have the rice of the specification BULOG desires, and the price of what it offers will be much higher than that of rice from competing origins like Thailand, Vietnam, Pakistan and Indian private trade, too, why would any party, let alone BULOG, shell out more than $100/mt higher, that too on account of Indian local taxes, storage costs and other incidentals. Furthermore, BULOG, being a very reputed procurement agency, is fully aware of the nuances of dealing with Indian PSUs-the selection of a vendor for upgrading, re-bagging, local transportation will only follow a long-drawn tender process.

Any buyer would require a seller with a good track record of performance; even more so in this case, as availability of food grain in Indonesia is critical for socio-political reasons. No purchaser will dare to take a chance if the timely delivery of grain of an acceptable quality is doubtful. Will the G2G rice-deal with Indonesia even take off? That is the big question.

The author is a grains trade analyst

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