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FCI's wheat sale through online exchanges faces hurdle

Dilip Kumar Jha/Mumbai 06 Nov 12 | 03:13 PM

Food Corporation of India (FCI)’s plan to sell wheat through spot exchanges is facing hurdles.

Delay, if any, in sale of wheat by the FCI will hurt in two ways. Open market prices of wheat are rising and in last one month they have gone up nearly 10% as there is not much stock, and there is dire need to release stock in the market as new wheat will come only after April.

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On the other hand, FCI has set a target to procure 40 million tonne of rice while its godowns are full as against buffer norms of 16.2 million tonne of wheat and rice. It has over four times the quantity and there is urgent need to offload that to create space in godowns to store new rice being procured.

Now reports reaching here suggest that FCI’s plan to sell wheat through online exchanges is hitting transaction cost hurdle as government officials perceives that quotes given by the online trading platforms are exorbitant.

High level committee (HLC) of the Ministry of Food, which takes a final decision on grain stocks with the public sector procurement and warehousing agency, earmarked three million tonne of saleable wheat for this season until the beginning of rabi crop harvesting probably in March 2013. The proposed quantity, however, is scheduled to be distributed between the two national level online trading platforms i.e. National Spot Exchange Ltd (NSEL) and NCDEX Spot.

But, the two spot exchanges apparently have quoted between Rs 8-12 per tonne of transaction cost, which FCI has to bear while selling wheat through online spot trading platforms.

According to an FCI official, the transaction cost is a bit high which is, obviously, delaying the final decision by both FCI and the Food Ministry.

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

Against the mandatory requirement under buffer norm of 11 million tonne (wheat) and 5.2 million tonne (rice); and strategic reserves need of 3 million tonne and 2 million tonne, FCI had 43.15 million tonne and 23.37 million tonne of wheat and rice respectively in central pool as on October 1, 2012.

Apparently, FCI had over three times of required stocks in its control.

Since the procurement of rice, having bumper season this year, is expected to remain record high, FCI needs to vacate space for additional quantity. The government has set a target of 40 million tonne of rice procurement for this 2012-13 kharif season, up by 5 million tonne or 14% from the previous season. By the time procurement of rice completes, rabi wheat harvesting would commence creating a continuous pressure on the FCI for additional space.

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

Two years ago, NSEL had conducted sale of online wheat auctions for FCI and managed to sell 3 lakh tonne 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 what FCI currently incurs on sale of wheat.

“Since placing advertisements in newspapers to overall administrative expenditure for conducting physical tenders, FCI incurs an average between Rs 20-22 a tonne for wheat sales. Against that we are offering between 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 such order, NSEL would inform the buyer to collect goods from the nearest FCI godown. While, FCI would ensure the quality, NSEL would play a role of intermediary. While the realisation above base price would be an earning for FCI, NSEL would get only the finalised transaction charges.

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