Fighting high food prices at retail level misses deeper causes of price spikes
 
 
Courtesy: shutterstock.com
 

With food prices soaring, Egypt’s government has vowed to take action. “Don’t think that the issue of inflation has passed me by,” President Abdel-Fattah al-Sisi said, in a speech last Sunday. “I tell all needy people that, God willing, by the end of this month, the state will have lowered prices.”

Addressing merchants, Sisi added, “Those who have goods should put them on the market as soon as possible.”

Within days of the speech, Egypt’s Supply Ministry distributed food to 4,000 outlets to be sold at 20 percent below market prices, and officials reportedly met with heads of commercial grocery chains to discuss how to lower food prices.

However, people in the food trade say any approach that focuses on retail outlets is far too simplistic, at least when it comes to fresh produce, which has been the main driver of recent food price inflation. In September alone, vegetable prices shot up by 19.2 percent, helping to bump up annual inflation to 9.2 percent according to Central Bank figures.

Greedy vendors and hoarding traders are reliable scapegoats when food prices rise, and this isn’t the first time the Egyptian government has tried to fight price inflation by forcing vendors to lower their prices. Even the post-June 30 government has tried this strategy before. In September 2013, the Supply Ministry announced plans to control inflation by issuing a mandatory pricing list and capping vendors profit margins at 25 percent — a plan that quickly fizzled into obscurity.

An examination of how vegetables are priced in Egypt finds that price increases can be traced back to a combination of failed agricultural policies, rising costs for farmers, seasonal dips in production, and a complex and, at times, arcane supply chain. Any policy that fails to take this into account is unlikely to be more successful than previous attempts.

To understand how prices are set, you have to begin in the fields, says Hisham al-Sawy, who manages accounts and supervises the weighing and selling process for one of the largest traders at Oboor market, which supplies fresh produce to Cairo and is the biggest wholesale market in Egypt.

The majority of farmers and wholesale traders operate in a sort of patronage system, in which a trader lends capital at the beginning of the season to cover a farmer’s planting costs in exchange for a cut of the profits and exclusive right of sale of all the farmer’s crops.

By the end of the season, the trader expects to have recouped his loan, in addition to a share of the crop’s sale price — 7 percent is standard, Sawy says — as well as a flat fee of LE4 for each 20-kilo sack of vegetables. In addition to supplying the capital, these merchants handle transportation and resale of the produce in wholesale markets like Oboor.

The cash-poor farmers assume almost all of the financial risk in this arrangement; if a crop fails, they are still responsible for paying their debt to the trader. Farmers’ profits vary according to what crops they plant, how much land they hold and how successful a harvest is. In a typical year, Sawy explains, a farmer would hope to see a profit of 15 to 25 percent on each kilo of vegetables they sell.

The retail vendors who sell produce in Cairo’s souqs enter the scene at Oboor, where they purchase the goods wholesale merchants bring in from the countryside. The sale price in Oboor depends on supply and demand as well as the quality of a particular batch of produce.

On top of the price vendors pay for vegetables at Oboor, Sawy says loading and transporting goods into the city costs vendors at most LE1 per kilo. He calculates that after deducting the cost of goods damaged in transportation and storage, the average profit margin for retail vendors reaches around 50 percent.

If a kilo of tomatoes sells for LE4 in a market like Sayeda Zainab, it’s likely that about LE1 went to the farmer, whose overhead costs likely exceeded 75 piastres. 50 piasters of profit likely went to the wholesale trader and LE1.5 to the market vendor, with combined expenses of LE1 for those two parties.

Comparing the prices of vegetables in Oboor market and souqs in Cairo found figures that are generally in line with Sawy’s calculations, since most vendors sell a variety of profitable goods. For example, in late October, the price of a kilo of tomatoes in the Oboor market ranged from LE2 for low quality fruit to LE3 for high quality. In the market in working-class Sayeda Zainab, tomatoes of average quality sold for LE4 per kilo. In the wealthier Mounira and Garden City districts, high-quality tomatoes sold for LE5 to LE6 per kilo. With a generous allowance for transport costs and spoilage, this makes an average profit around 30 percent in both markets.

Other crops have a higher profit margin. Cucumbers which were sold at Oboor for 50 piastres a kilo were resold in Sayyeda Zeinab for anywhere from LE1.25 per kilo to LE4 per kilo — the latter eight times the wholesale price. Even accounting for the fact that fixed costs like transport and labor can make up a large percentage of the sale price of cheaper items, profits on the most expensive cucumbers likely exceed 70 percent, while more middle-of-the-road cucumber prices yield a profit slightly below 60 percent. The numbers look similar for peppers and potatoes. Eggplants and zucchini are on the lower end, with estimated profits for mid-price zucchini at around 25 percent, and for eggplant around 40 percent.

Prices in the market vary depending on the season and the quality of goods. However, Sawy explains that vendors expect to maintain the same profit margin regardless of whether prices are high or low. “When the vendor buys a good for LE3, the rate of profit a merchant can achieve will result in a price somewhere between LE4 to LE5.  This increase is reasonable,” he says. “If he buys it for LE8, that means that the same rate of profit will result in a market price of around LE12, giving the impression that the increase in price is higher than usual, which is not the reality. The profit rate is the same in all cases.”

This suggests that while price mark-ups by vendors do make up a large chunk of retail prices, they do not explain, in and of themselves, why prices jumped up in recent months. Price hikes by vendors simply magnify price increases earlier in the supply chain.

Some of the jump in recent prices can be explained simply by the seasons, Sawy says. As the summer harvests end, Egypt enters the “inter-season,” when the crops of one agricultural season start to disappear from the market before the new harvest comes in. This drop in supply inevitably signals price increases.

Sawy also attributes higher prices to increasingly extreme weather, coupled with a lack of preparedness for these changes. For example, higher temperatures not only affect harvests, but also mean crops are more likely to spoil on the way to market. Poor infrastructure means that road transport is inefficient and little technology is available to keep crops from being damaged, further driving up prices.

However, Mahmoud al-Mansy, the general coordinator of the Egyptian Society for Collective Rights, says the rise in prices has to do with the agricultural process itself rather than any changes in climate or inter-seasonal concerns.

Mansy explains that the Egyptian government’s policy of agricultural liberalization, which began in the 1990s, gutted the state’s support for and regulation of agriculture.  “Before that, agricultural cooperatives working for the state used to supply the seeds, market the crops and organize the agricultural season by specifying the spaces assigned for each crop,” he says.

Now, farmers are increasingly left to fend for themselves. Mansy explains that the rise in value of the dollar increased the prices of seeds and fertilizer, which usually have to be imported, hitting farmers hard this season.

Mansy adds that the increase in the number of intermediaries between farmer and consumer causes a big jump in prices. Instead of farmers’ cooperatives bringing goods to market, individual farmers sell to traders at the farm gate. Instead of being provided with seeds and fertilizer, farmers have to take out loans from traders to buy them on the open market. All of these costs are eventually passed along to consumers.

The state’s effort to lower prices should start with protecting farmers and insuring that their goods are sold at the market with as few middlemen as possible, Mansy says. “We are in a free market, the government cannot impose a mandatory price on the goods. However, it should regulate the market and control the crops,” he says. “As long as the state has no tools to protect the market, there is no way to control the prices.”

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Mohamed Hamama 
 
 

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