MUMBAI: India’s decision to ban non-basmati white rice exports will spur traders to cancel contracts to sell around 2 million metric tons of the grain, worth $1 billion, on the world market, dealers said on Friday.
India, which accounts for 40% of world rice exports, on Thursday, ordered a halt to its largest rice export category to calm domestic prices, which climbed to multi-year highs in recent weeks as erratic weather threatens production. Anticipating that the government would impose restrictions on rice exports, traders have obtained letters of credit (LCs), or payment guarantees, over the past few days, said a Mumbai-based dealer with a global trade house.
“But the trade wasn’t expecting the government to impose restrictions so soon. It was expecting them to come into effect in August or September. As a result, these traders have no choice but to use the force majeure clause to cancel the contract,” he said.
Force majeure refers to unexpected external circumstances that prevent a party to a contract from meeting their obligations. Four dealers confirmed that export contracts of around 2 million metric tons of rice, worth $1 billion, are at the risk of being cancelled.
On Thursday, the government said the ban would be effective from July 20, and only vessels currently loading would be allowed to export, not future shipments backed by LCs.
“Traders typically sign contracts in advance, so the contracts signed for the next few months cannot be executed now,” Nitin Gupta, senior vice president of Olam Agri India Ltd told Reuters.
Before the export ban, India used to sell around 500,000 tons of non-basmati white rice every month, Gupta said. Around 200,000 tons of rice is being loaded at various Indian ports, and this quantity would be allowed to move out, said B.V. Krishna Rao, president of the Rice Exporters Association.
But the government should also allow exporters with valid LCs to ship out their cargoes, Rao said.
Two traders and one government official said India was unlikely to allow any such exemption. Some exporters bought rice from mills at higher prices as global buyers, in a rush to secure supplies, were willing to pay a premium. Now, prices are likely to drop, and the traders are likely to suffer losses, said a New-Delhi-based dealer with a global trade house.
Traders say while global prices will go up because of India’s export ban, local rates are likely to drop. Top buyers of Indian non-basmati rice include Benin, Senegal, Ivory Coast, Togo, Guinea, Bangladesh and Nepal.
Rice is a staple for more than 3 billion people, and nearly 90% of the water-intensive crop is produced in Asia, where the El Nino weather pattern usually brings lower rainfall.
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