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Egypt’s wheat policies sow market confusion
 
 
Bread from a Cairo bakery - Courtesy: www.shutterstock.com
 

A series of back-and-forth announcements by Egyptian authorities has roiled global wheat markets and, if left unresolved, could potentially threaten supplies of the country’s most crucial food commodity.

In the past week, Egypt had to cancel two wheat tenders as traders either shied away completely or demanded higher prices due to inconsistent policies over the permissible levels of ergot — a common grain fungus that is harmful in large amounts.

For years, Egypt has been the world’s largest wheat market. Unable to produce enough wheat domestically, the country relies heavily on imported wheat to meet massive local demand. In the 2015-16 trading year, Egypt is expected to import 11.5 million metric tons while only producing 8.5 million, according to the US Department of Agriculture.

In addition to supplying the private sector, a share of this imported wheat is mixed with the domestic crop to produce bread for the heavily subsidized bread program, a lifeline for millions of Egyptians and a vital program for maintaining social welfare and social stability.

Wheat shipment rejected

The General Authority for Supply Commodities (GASC), part of the Ministry of Supply, purchases wheat on behalf of the government. Among the authority’s requirements is a 0.05 percent allowance for ergot, widely seen as the international standard for wheat imports.

Enter the Ministry of Agriculture.

In December, the Agriculture Ministry’s Quarantine Authority — which inspects agricultural imports — rejected a shipment of French wheat that contained trace amounts of ergot. Saad Moussa, the head of the authority, announced that he was enforcing a zero-tolerance policy for the fungus.

“Any wheat that we inspect that has any level of ergot will be rejected. I am obliged to do this as it would be very harmful if any level of contamination reached plants in Egypt,” he told the Reuters news agency.

The announcement became international news. A requirement that all wheat imports contain zero traces of ergot was decried by traders around the world as impossible.

Messages remained mixed through most of January. GASC maintained that nothing had changed — its policy was still to allow wheat shipments containing up to 0.05 percent ergot. The Agriculture Ministry, however, held that any trace of the bacteria would be grounds for rejection. Unable to guarantee that their wheat would be ergot-free, sellers backed away.

On February 2, the Supply Ministry called for bids to sell wheat to Egypt, and received no responses.

“No one offered wheat because you cannot find 0 percent,” says Mohab Moussa, a risk analyst with commodity import firm Medsoft.

The following day, the ministries sought to clarify the message, stating that Egypt would accept wheat containing trace amounts of ergot up to the standard 0.05-percent level. But traders were not entirely convinced — on February 5, the tender was attempted again, and again was cancelled. Only four bidders participated in the auction, and they offered prices much higher than GASC expected. Trading houses felt the need to add a risk premium due to uncertainty over ergot requirements.

On February 7, the government once again felt the need to reassure wheat suppliers, with the ministers of supply and agriculture holding a joint press conference to say Egypt has not changed its standards and would continue to accept wheat with ergot levels of 0.05 percent or below. However, Supply Minister Khaled Hanafy noted that the controversial French shipment was nonetheless rejected. It contained ergot at levels above the allowable 0.05 percent, he said.

How wheat suppliers will react to these assurances is yet to be seen.

A dangerous gamble

In addition to attempting to reassure wheat traders, Hanafy also addressed the public at Sunday’s press conference, saying that wheat reserves are sufficient to last until mid-May.

In the local dialect, the same word means both “bread” and “life,” and history shows that the public will not tolerate officials who mess around with the bread supply. The infamous Egyptian Bread Riots of 1977 were the result of massive discontent when former President Anwar Sadat’s government tried to cut bread and other food subsidies. In a rare mobilization at a time when protests were infrequent and dangerous, Egyptians rose up again in 2008 when bread prices rose and subsidized outlets ran short on supplies. “Bread, freedom and social justice” famously became the motto of the 2011 revolution.

Even as the government slashes other subsidies, inexpensive bread remains a seemingly untouchable part of the Egyptian social contract. The government has modified the distribution system by introducing smart cards, but so far it has reassured its citizens that they will continue to be able to purchase loaves of bread for 5 piasters.

These subsidized loaves become even more important when food prices rise. Research by the World Food Program shows that when Egyptians are unable to afford products like fresh vegetables or eggs, they increase their consumption of bread and beans to compensate for the lost calories. Egypt has faced soaring food price inflation over the past year.

Imported flour is a key ingredient in these subsidized loaves, literally holding them together. According to figures from 2013, the most recent year that data was available, a quarter of the flour that goes into subsidized bread comes from imported wheat. Industry insiders say it is tough to reduce the percentage, since imported wheat produces a better-quality flour necessary for binding together the rougher local crop.

Wheat shortages or price increases would also come as a blow to the private sector, which relies on imported wheat to produce bread and other baked goods.

And while self-sufficiency in wheat is a long-cherished goal of successive governments, it is still a distant dream. It may become even more distant now that the government plans to scrap a crop subsidy system that encourages farmers to produce wheat by buying local grain at above-market prices. In a measure announced in November and re-stated in Sunday’s press conference, the ministry says it plans to purchase this year’s crop at global market prices, offering farmers only a small subsidy.

Trouble brewing

Despite Hanafy’s assurances that wheat imports are under control, the stark reality is that Egypt has failed to purchase any wheat in its last two tenders, and has reportedly delayed payment for other wheat shipments this winter.

Why would the ministries risk placing wheat shipments in jeopardy? Money — or at least hard currency — is one possible answer.

“It wasn’t confusion,” says Mohab Moussa to explain the government’s seemingly inconsistent policy on wheat shipments. “We have a dollar problem in Egypt, and this was a way to postpone the payment in US dollars until the government was ready.”

Facing a shortage of dollars, for years Egypt has delayed payments for oil and has reportedly started doing the same thing for wheat. European wheat traders told Reuters that multiple shipments have been delayed in their home ports, waiting for GASC to provide the letters of credit that serve as payment guarantees. GASC blames the delays on administrative issues, not liquidity — but either way, it indicates a problem.

The government may be counting on its clout as the market’s largest buyer to smooth over any difficulties, or is hoping to cruise through on reserves until the domestic wheat harvest in the spring. But if the government is indeed sending mixed messages to wheat traders in order to conserve dollars, it is a major gamble in a country where bread literally means life. 

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Robert Barron