What a renewed global food crisis could mean for the Egyptian wheat market

In 2007, before terms like subprime mortgages and credit default swaps entered our vernacular, the world’s policymakers faced a much more basic, yet equally complex, global crisis involving food.

At the time, news about the riots on the ration lines flooded the headlines, while experts harbored apocalyptic visions of a poorly fed future. Many nations erected monolithic trade barriers to protect domestic supplies, while rising oil prices and speculative investors only pushed food indices even higher.

By late 2008, of course, the global financial crisis had effectively dampened demand, and lower oil prices allowed food markets to stabilize. Then the world’s attention turned to the financial sector and stimulus plans, and the once ominous specter of an international food shortage suddenly faded into the background.

Now, however, the specter of another food crisis has reared its ugly head again.

In recent months, the falling US dollar has increased the cost of food imports for many nations, while severe weather and natural disasters in Russia and Pakistan have shaken global supply chains. Kenya, Uganda, Nigeria, Indonesia, Brazil and the Philippines have already warned of impending food shortages next year. In a matter of a few months, cereal prices skyrocketed so rapidly that, in late September, the Intergovernmental Group on Grains, sponsored by the Food and Agriculture Organization of the United Nations (FAO), convened a emergency meeting.

As the session concluded, FAO announced that the chances of falling into another international food crisis remained slim, but warned that import-dependent countries would likely see a substantial rise in commodity prices. A month later, World Bank President Robert Zoellick echoed and amplified this sentiment, saying that the volatility in food prices would likely last another five years.

“There is growing concern among countries about continued volatility and uncertainty in food markets,” Zoellick told The Guardian in late October. “These concerns have been compounded by recent increases in cereal prices. Volatility in world food prices remains significant and, in some countries, volatility is in addition to already higher local food prices. “.

Despite all this uncertainty, the current commodity market tumult has yet to metastasize into a full-blown international crisis. Food price indices, while high, are still well below the per bushel levels of 2007 and 2008. And, apart from a brief outbreak in Mozambique, the political seas of consumer discontent have been relatively calm.

However, some economies have already started to feel the rush. And perhaps none more sharply than Egypt’s wheat market.

Wheat concerns in Egypt

In July, a monumentally severe heat wave hit much of Russia, causing widespread fires and droughts and devastating the country’s wheat crop. In the wake of the disaster, Russia implemented a wheat export ban in hopes of ensuring a healthy domestic supply until the end of the year.

The news came as an alarm for Egypt, the world’s largest wheat importer and scheduled recipient of 540,000 tonnes of Russian wheat, to be delivered later this year. With this order suddenly canceled, Egypt found itself struggling to diversify its import portfolio to make up for its Moscow-sized trade gap.

Finally, the United States, France, and a host of foreign suppliers stepped up to fill the void, and in mid-September, Egyptian Trade Minister Rachid Mohamed Rachid confirmed that the country had secured sufficient supplies of wheat to avoid an immediate shortage.

That should come as a huge relief to the average Egyptian consumer, who, according to the country’s General Commodity Supply Authority (GASC), consumes about 180 kg of flour a year. This diversion of imports will also ease the concerns of Egyptian politicians, who were undoubtedly nervous after the recent death of a 25-year-old in a bread line revived memories of 2008, when similar violence erupted between protesters and the police in the city of Mahalla.

Ultimately, however, this set of mercantile musical chairs is nothing more than a stopgap measure masking a more insidious, if less obvious disease, Egypt’s wheat subsidy program.

Subsidies below par

Each year, the Egyptian government spends about $ 3 billion on food subsidies, a third of which goes to boost the country’s bread supply. Under this system, the state purchases wheat from foreign suppliers at a fixed price. In a country where approximately 16 million people are classified as poor, ensuring a constant supply of food certainly makes political sense.

There is also an economic logic to the country’s subsidies. By dedicating so much capital to the wheat market, the Egyptian authorities are essentially trying to protect the domestic market from the often violently sinusoidal tremors that can shake international grain prices.

In September, when GASC announced that it had secured enough imports to feed the Egyptian population, Vice President Noamani Nasr Noamani pointed out that the government had also raised enough money to increase the budget for its wheat subsidies. This budget increase, Noamani said, means that “the Egyptian consumer and the Egyptian citizen will not feel the pain of rising prices worldwide.”

However, the problem for Egypt is that current market conditions could not be less favorable for such a massive and often misdirected subsidy program.

In October, Agriculture Minister Amin Abaza promised that the government would not allow local purchase prices for the new harvest season to fall below 300 Egyptian pounds per ardab (unit of measure for crops). The threshold proclaimed by Abaza is about 20 percent higher than last season, but Egyptian wheat producers say it is still not high enough.

As the cost of fertilizers has increased over the last few years, farmers in Egypt expected a guaranteed price of at least LE 350 per ardab. Today’s wheat farmer, according to estimates by Cairo-based investment firm CI Capital, has to spend about LE 2,000 to grow a single feddan (1,038 acres). Without a higher guaranteed price, farmers are likely to dedicate their arable land to more profitable crops, compounding an already bleak outlook.

Of course, there are several exogenous factors over which Egypt has little or no control. Commodity traders can continue to raise international food prices through speculative investments; the inexorable forces of urbanization and large-scale agro-industrialization can only be harnessed through global cooperative efforts; And, of course, it is not known when the next drought or heat wave could decimate international crops.

The only thing egypt may control is your domestic production chain. However, so far, government subsidies have only resulted in an underperforming market and distorted prices.

This is not to say that the country should completely abandon its subsidy program. Some 60 million people benefit from subsidized food and, with parliamentary elections on the horizon, calling for an end to subsidies would amount to political suicide. Rather, Egypt should seek to reform the program, with a view to creating very real incentives for farmers to plant wheat. Setting a simple price threshold, in today’s protein economic climate, will clearly not be enough.

Fortunately, the state seems well aware that it is necessary to revitalize national wheat production. In August, the Ministry of Agriculture proclaimed its goal of achieving 70 percent self-sufficiency by 2020 with the help of a new, higher-yielding seed variety. It is certainly a step in the right direction, but if Egypt wants to avoid deficits in 2011, it must also start implementing higher-yielding subsidies.

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