$278m Bonds to Finance Wheat Purchases

EghtesadOnline: The government sold 10 trillion rials ($278.8 million at market exchange rates) of Murabaha contracts for wheat on Monday on the Iran Fara Bourse over-the-counter market.

News ID: ۷۳۷۴۹۵

15 October 2016

The money raised will be used to pay farmers under the government's guaranteed purchase scheme for wheat.

High demand for the two-year bonds, which bear 20% interest per year, abridged the three-day offering to one day, SENA reported.

"The money raised from selling these bonds will be used to repay government debt to wheat farmers through the Keshavarzi Bank," in the coming week, Abdolmahdi Bakhshandeh, deputy minister of agriculture, told IRNA.

"After paying this sum, 80% of the government's debt to wheat farmers will be paid, and we hope to pay the rest in the coming weeks."

Murabaha is an Islamic financing structure in which an intermediary buys a property with free and clear title. Similar in structure to a rent-to-own arrangement, the intermediary retains ownership of the property until the loan is paid in full.

> Turning to Bonds

The government turned to bonds for financing its various ventures, partly forced by a shortage of funds due to less than expected oil revenues and high operational expenditures.

This is the first year the state is selling various financial securities for funding its guaranteed purchase scheme for wheat. The effort started with an offering of Salaf contracts for wheat on Iran Mercantile Exchange last month. It is now continuing with the sale of Murabaha contracts.

Government Trading Corporation of Iran offered 32 million wheat Salaf contracts last month, raising 26.5 trillion rials ($745.2 million) from the sale.

Salaf is an Islamic financial instrument with similarities to futures contracts used to forward sell an underlying commodity with a predetermined interest for the period.

Contrary to the Murabaha bonds sold on Monday, the wheat Salaf contracts will mature in six months and earn a 20% annual interest for their buyers.

"This is the largest sale of agriculture-based financial securities in Iran's history," Hossein Khezly, the chief executive of Agricultural Bank Brokerage, told Boursepress about the Salaf offering.

Keshavarzi Bank's brokerage has carried out the offerings for both bond offerings.

> Record Wheat Production

This is just a start for the GTC's wheat Salaf contracts. The company promised to sell all the non-subsidized wheat it buys every year on the IME using Salaf, Mehr News Agency reported.

That would mean 3 million tons of wheat each year. With Salaf contracts, GTC no longer needs to put up tenders for selling the wheat and can sell them on the IME instead.

GTC is a government-owned company specializing in the purchase, import and distribution of essential foodstuff. The government enforces its market controls using GTC. The company is also in charge of keeping a three-month supply of wheat, rice, cooking oil and meat as the country's strategic reserve of essential goods, reports Financial Tribune.

A record high of 14 million tons of wheat have been domestically produced this year, more than 11.76 million tons of which, worth over $4 billion, have been purchased by the government from local farmers at guaranteed prices, Managing Director of Government Trading Corporation of Iran Ali Qanbari said late last month.

Every year, the government buys wheat from local farmers at guaranteed prices to build up its strategic reserves and control prices in the domestic market.

Minister of Agriculture Mahmoud Hojjati says amid the increase in wheat production and reserves– sufficient to meet domestic demand for two years–the government is planning to export wheat flour to the neighboring countries of Iraq and Afghanistan.