The government started the three-day offering of Salaf contracts for wheat for the first time Wednesday on Iran Mercantile Exchange to finance its wheat purchase from farmers this year.
According to Securities and Exchange News Agency, 12% of the bonds were sold in the early moments after the sale commenced.
Government Trading Corporation of Iran is offering 32 million wheat Salaf contracts at the fixed price of 827,300 rials ($23.26 at market exchange rates), the official offering statement said. The company will raise 26.5 trillion rials ($745.2 million) from the sale, which the company will use to buy wheat from farmers under its guaranteed purchase scheme. Each contract is for 100 kilograms of wheat.
“This is the largest sale of agriculture-based financial securities in Iran’s history,” Hossein Khezri, the chief executive of Agricultural Bank Brokerage, told Boursepress.
Salaf is an Islamic contract with similarities to futures contracts and is used to forward sell an underlying commodity with a predetermined interest for the period.
The wheat Salaf contracts, which have a six-month maturity, will appreciate by 20% per annum and are being sold at a discount to their face value. The government has guaranteed the principal and interest on the contracts.
Comparatively, six-month bank deposits, which are far more liquid, earn 13% interest per year, though banks offer higher rates for deposits over $30,000.
GTC will sell the bonds on Wednesday, Saturday and Sunday, though it is unlikely for the bond sale to last more than a day given the current appetite of investors for fixed-income securities. Salaf contracts are treated as bonds by Iranian investors.
ABB First Fund, a fixed income mutual fund run by ABB, will act as underwriter and market maker for the contracts. The fund has a mandate to buy back contracts at 19% interest.
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, according to Mehr News Agency.
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.
The government has bought 11.3 million tons of wheat worth 144 trillion rials ($4.04 billion) from local farmers since the beginning of the harvest season in late March, which is 1.3 million tons in excess of the annual domestic consumption, IRNA quoted Deputy Agriculture Minister Ali Qanbari as saying on Sept. 4.
Wheat production is estimated to exceed 13 million tons from last year’s 11.5 million tons this year.
