LONDON/ISLAMABAD (Reuters) - Iran's attempts to secure millions of tonnes of wheat via sanction-beating barter deals with India and Pakistan are failing, and Tehran is poised to pay premium prices on international markets to secure food and stave off unrest.
Food is not targeted under Western sanctions aimed at deterring Iran's nuclear programme, but in recent months it has paid high prices for grain to work around a freeze on financial transactions due to the measures.
Iran had turned to India and Pakistan for wheat to meet some of its needs, but international grain traders say talks with both Delhi and Islamabad are deadlocked.
"There is great doubt in the market about whether the Indian deal will happen. They are never going to get the phyto-sanitary standards worked out," one European grains trader said.
"The Indian wheat cannot reach the standards the Iranians traditionally demand."
As Iran's second-biggest crude client, India hoped to reassure Tehran on quality and secure wheat sales to help settle part of its $10 billion a year-plus oil import bill through a barter-style mechanism using rupees. India said last week it can export up to 3 million tonnes of wheat if supplies are requested.
"There is an issue of Karnal bunt (a fungal disease in wheat) ... Iranians are not too keen on Indian wheat because of the quality," said a Singapore-based trader.
"All wheat cargoes have some amount of foreign matter, but India has more because the loading is not mechanised - it is done manually."
An official with France's grain lobby told Reuters after a visit to Iran that the Islamic republic needs to buy some 2 million tonnes of milling wheat in the next few months after having imported 3 million tonnes so far this year.
"Rising food prices have become a thorny political issue for the regime and President Mahmoud Ahmadinejad in particular," said Torbjorn Soltvedt with risk analysis firm Maplecroft.
"Given the potential for food shortages to erode support for the regime, Iranian leaders are likely to continue to take an active role in attempting to secure high volume grain shipments through bilateral agreements. Despite some deals falling through, Iran has so far been relatively successful in securing large orders using its state food buyer."
PAKISTAN DEAL FADES
Trade sources said talks between Iran and Pakistan over a 1 million tonne wheat barter deal also had hit a growing number of snags including uncompetitive pricing.
"There is no movement on the barter proposal with Iran at the moment. Given the delay, it is difficult to say when and if anything will happen," a Pakistan commerce ministry official told Reuters on Thursday.
In May Islamabad said Iran offered $265 per tonne for wheat, but Pakistan asked for international prices of $312 per tonne. Benchmark Chicago July soft red wheat futures were priced at $6.11 per bushel or $224.50 per tonne in late May.
A Middle East-based trader also cast doubt on any deal.
"The dynamics for this to work are not there, and there is more chance that the Iranians will reach an agreement with India rather than Pakistan, which shows how doubtful it is," he said.
A Pakistan-based trade source pointed to wider political factors influencing the deal, which would require the nod from the United States.
"For better or worse, these days owing to their own domestic problems, Pakistan's leaders are subservient to U.S. pressure, but outwardly they give different and hard messages for local consumption," the source said.
"Something similar applies to India, which depends on U.S. military and technology support. India seems to talk with Iran but most times does not conclude deals."
INTERNATIONAL MARKET WATCHES
Iran is constantly making enquiries in the international market for supplies, trade sources said.
"I expect Iran to re-enter the international wheat market in July, and it seems the only origins available rapidly at that time will be U.S. and Black Sea. Western European harvests will only be starting," a European grain trader said.
"I expect Iran to make 3.5 million tonnes of wheat imports for 2012/13."
Iranian companies have been cut off from much of the global banking system because of the financial measures against Tehran, making payments difficult.
The government, however, has become increasingly adept at sidestepping the restrictions, creating alternative payment systems to secure vital supplies.
"The Iranians are working around the restrictions," another European based grain trader said.
"They are constantly price checking and are using other tracks apart from exploring government-to-government deals. One way or the other, there is no doubt they will get their grain."