Developing Countries Will Lead Global Rice Import Growth in 2013-22, Says USDA Rice growers positive California MG prices are UP Russia MG Harvest coming to end Egypt open rice exports Vietnam’s rice export in tough competition with India Thai rice exports in May Rise Above Target This Year Viet-Nam Rice exports likely to fall this year
Australia Medium Grain Rice #1 $ N/A    Egypt 101 #2 $760    Egypt 178 #2 Rice $730    EU Prices Baldo €660    EU Prices LG-A Ariete 5% €550    EU Prices MG Lotto 5% €500    EU Prices RG Balilla 5% €500    Russia Rapan $ 700    USA Jupiter Paddy $375    USA Calrose #1 Paddy $480    USA Jupiter Rice $630    USA Calrose #1 $830   

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Rice at a price (?)
The ban on rice exports has led to a crash in local prices. The bull run has come to a screeching halt, triggering off a new drama. In a mad scramble, banks are chasing exporters with irregular accounts, rice suppliers are running for cover, while banks who financed the suppliers are going around in circles between the two.

Predicting the outcome is easy. The mugs who financed the suppliers are the most likely to blow out their brains. Suddenly those sweet deals guaranteed to reel in the annual bonus have become loaded guns.

Bigger companies in rice have bank credit lines based on the maximum permissible bank finance formula.

They not only buy paddy themselves but also from several smaller traders who procure on their behalf. During a bull run, all companies want to maximise profits by buying more rice or trading in rice.

At harvest time, suppose a large rice company wants to buy 100t more paddy than what its own credit limit permits. To get the extra cash, it casts around for other ways to raise money. The company’s rice supplier/vendor is the apna aadmi easiest on hand.

The vendor is introduced to a plump bank eager to give loans for agri-commodity trading. The bank gives the vendor money to buy the 100t without a personal guarantee but on the security of the physical rice plus the confidence that the bill will be paid eventually by the large company.

Basically, the vendor can only repay his bank if the large exporter pays him. Thus, a person who can’t pay gets another person who can’t pay to guarantee that he can pay. Till now it is all legit.

The business could continue to be legit. While rice prices were high and rising, the company makes money from selling its own rice and the vendor’s 100t. The vendor’s bank gets paid. God’s in heaven, all is right with the world.

The twist comes when the large company becomes greedy. It asks the vendor to move those 100 t to its own godowns without paying him a paisa. Every month the company has to give a stocks statement to its own bankers with details of quantity and value of rice in its godown. The rice is valued on either the purchase price or market price, which ever is lower, and this fixes the company’s credit limit.

The vendor’s 100t are shown as the company’s own ‘paid for’ rice to get more working capital. In a rising market, the company’s bankers are happy to see the increase in quantity, without enquiring too closely whether the company actually owns each sack. Put simply, the same rice gets financed twice. But no one gets hurt because the rice is sold profitably, the vendor paid and his financier gets the cash back.

But suppose rice prices crash after the vendor has bought 100t. Sharbati, for instance, has dropped from Rs 15/kg at harvest to Rs12/kg post-ban. Now the company which placed the order is itself in trouble. Since the market price is now much lower, and the company’s credit limits can get axed. Since its limits with its regular bankers will reduce when the value of the assets drop, the company looks around for help. The vendor’s 100t again comes to the rescue because it helps inflate the quantity of stocks.

When the vendor’s own financier hears of the price crash, he naturally gets nervous. But the ugly moment of truth is when he discovers that the vendor has not been paid the full value by the company and/or the rice too is no longer in his possession.
Asking the company to return the vendor’s 100t is pointless because the financier has no clout. Sometimes the company may accept the bill for payment but pay much later than the original contract. To add to the confusion, the company’s own bankers believe the 100t is legitimately theirs. The outcome of this skirmish depends entirely on the relationship between the big company and the financier.

Vendors often even offer rice to the financier, but cheat on the quality. They know the financier has no clue whether the sacks contains sharbati or basmati. No prizes for guessing the options before the vendor financier now. As I said, death appears relatively painless.

So what, you may ask. The financier bank takes a risk and pays the price. Unfortunately, it bites a bit deeper than that. One, the scale of such vendor financing is huge and is widespread in most agri-commodities.

Two, it adds to agflation. Vendor financing allows companies to buy more physical stocks than their wallets permit. Companies can use their vendors’ access to cash at very low interest rates to keep building up their own positions. That could even mean cornering stocks in a small town or few mandis.

Off balance sheet financing allows more cash to chase the same crop, thus creating an agricultural asset bubble waiting to explode. The bubble pushes up prices. Consumers and processors are directly hit. They are also the same taxpayers whose money banks loan out! Even the fig leaf of farmer interests is absent because prices begin to rise after harvest pressure eases.

Though agricultural commodity companies and their vendors are the main beneficiaries of such pyramid schemes, truth is you can’t blame them alone.

Equally culpable are those over-eager banks, who don’t scrutinise “paid for” stock statements or give clear corporate loans without specifying end use. They assume they are lending against physical stocks worth more than the loan. But you would be hard put to find the banker who knows the difference between sharbati and basmati. They say the two most beautiful words in the English language are ‘cheque enclosed.’ In India’s volatile agri-commodity trade, banks financing vendors don’t get to hear them too often.
MGR Archive 21.10.2007
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Region Type Price  
Russia Rapan $ 700
USA Jupiter Rice $630
USA Calrose #1 $830
USA Calrose #1 Paddy $480
EU Prices Baldo €660
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