New Delhi, India – On the evening of May 13, India announced a surprise ban on wheat exports, attracting almost all buyers and sellers of unprepared grain.
One notable exception was billionaire Mukesh Ambani’s Reliance Industries, which has since entered the grain business and quickly became the country’s second largest wheat exporter in the period following the ban.
That Friday in May, India’s Ministry of Commerce ruled that exporters with a bank guarantee – an irrevocable letter of credit (LC) – issued on or before that date, would only be allowed to export wheat.
Several traders Al Jazeera spoke to said that the unusual situation surprised the industry because most Indian exporters do not usually use a letter of credit.
One of the only companies to use letters of credit as part of normal business practices is India’s largest wheat exporter, ITC Ltd. But even the International Trade Center has been shut down because it has not yet obtained letters of credit for future shipments, a person familiar with the development who is not authorized to speak to the media for Al Jazeera.
However, on May 13, another company had a letter of credit ready made – Reliance Retail, which had at least one letter of credit for $85 million issued on May 12 to purchase about 250,000 metric tons of wheat. Al Jazeera viewed an electronic copy of the letter of credit.
With this bank guarantee in hand, Reliance entered the grain business for the first time.
vagaries of politics
The move to halt wheat exports came against the backdrop of rising global prices that “endangered” India’s “food security,” the government said in its notification. But the political upheaval came just a month after Prime Minister Narendra Modi offered to use Indian stocks to feed the world as the Ukraine crisis disrupted food supplies.
The decision left both farmers and small traders saddled with heavy losses. Small merchants were buying wheat in huge installments, hoping to sell it at a profit in international markets, and farmers would keep some of their crops, believing that prices would rise even more.
But in one fell swoop, these plans were shattered because practically all major exporters, including ITC and Reliance, activated the “force majeure” clause in their contracts and refused to eat wheat at pre-agreed prices, many traders told Al Jazeera.
Sandeep Bansal, a mill in Mathura, Uttar Pradesh, is one of many affected. On the Monday after Friday’s ban, he received an email from his ITC buyer asking him to stop all deliveries to the company “with immediate effect”. Soon after, the orders were rescinded under the pretext of “force majeure.” Al Jazeera checked the emails.
“Traders had to accept this,” he said, adding: “Wheat is a cash crop — for the farmer and the merchant. You sell it and you get paid. Traders are not in a position to hold out for long, especially on negative sentiment.”
Some dealers submitted letters of credit requests on May 13, and pleaded with the government to include them in those allowed to export, but the government rejected the petitions, insisting that only existing letters of credit counted.
A few affected exporters concluded agreements to sell wheat to the UAE and applied to UAE banks for their letters of credit on May 13. But that was the day the long-ailing ruler of the United Arab Emirates, Sheikh Khalifa bin Zayed Al Nahyan, died and the country died. announce Suspension of work for three daysincluding in the private sector.
As a result, requests for letter of credit only came within the following week and were rejected by the Indian government.
“The UAE government wrote to the Indian government saying that this happened, but it had no effect,” one of the traders, who declined to be named because he did not want to put himself in the crosshairs of government scrutiny, told Al Jazeera.
India resumed exports around May 22, allowing only companies with letters of credit dated May 13 or earlier to ship wheat.
Of the 2.1 million tons of wheat that has sailed or is in the process of being shipped since then, about 334,000 metric tons belong to Reliance, second only to ITC’s 727,733 metric tons, according to port data as of August 16.
Reliance and ITC did not respond to requests for comment.
Reliance growing effect
Looks like Reliance has been preparing for agricultural export since last year. The first hint was the stock exchange file last October in which it said it had set up a wholly owned subsidiary of Reliance International Limited in Abu Dhabi to carry out activities related, among other things, to trading in crude oil and agricultural commodities.
Industry watchers say the newly established unit is expected to supply both the company’s exports and its domestic business.
Wheat export restrictions have provided Reliance with an opportunity to influence the local market as well, buying massive amounts of grain for its own branded products sold across its chain of more than 15,000 Reliance stores.
Last week, Reliance Retail turned out to be the highest bidder for wheat stocks from the states of Haryana and Madhya Pradesh. According to this tender, the governments were looking to sell 100,000 tons of wheat, with a minimum of 5,000 tons. Industry players say Reliance has in the past bought less. (The Madhya Pradesh tender has since been reissued as the original bids turned out to be too low.)
Experts say the entry of a large company like Reliance could affect trade in other ways. Currently, the wheat supply chain in India is unorganized and consists of many small traders who collectively play an important role. These players, by the nature of their size, usually have limited storage capacity, which means they buy small amounts of the crop and rarely offer the highest dollar value.
says Sambad Nandy, global agriculture editor at S&P Global Commodity Insights.
While that day is still a long way off, there was an immediate effect of the export ban, other than allowing Reliance to take its first steps into the grain market.
Because of farmers, traders and storekeepers who kept their wheat before the export ban, and expected to sell at high prices internationally, domestic prices soared against the backdrop of market shortages. In August, it rose about 25 percent month over month and is practically back at the same levels as before the ban, causing a brief drop in the price, says Nandy.