US drought means Egypt may look elsewhere for wheat

Egypt might have to look beyond the world’s biggest wheat exporter to feed its hungry nation, after the worst drought in more than a decade has wilted US grain crops.

“Wheat is the biggest problem for food security. There’s a lot of vulnerability, given supply and demand sources,” said Magda Kandil, executive director of the Egyptian Center for Economic Studies. 
Egypt imports more than half of its wheat supplies, according to the center, and almost a quarter of that amount comes from the US.
But last month, the US Department of Agriculture revised its projections for US wheat, saying farmers would reap 60.8 million tons a year, reducing the harvest amount by 310,000 tons.
Though the amount is nine percent higher than the 2011 harvest, the cost is further compounded by the poor corn harvest in the US. Industries that rely on corn for everything from fuel ethanol to livestock feed will instead look to wheat, raising the price of both grains on the international market.
The rising cost of wheat could leave Egypt, which is the world’s top consumer of the commodity, scrambling to find affordable sources of it.
Dan O’Brien, an agricultural economist at Kansas State University, said the prices for corn and wheat are closely tied. “As US domestic prices for corn and wheat are pulled higher, it would have a negative impact on the affordability for US wheat as a foreign export, especially with domestic usage being such a strong component,” he said.
A variety of suppliers can step up if US wheat becomes unaffordable, said Nick Higgins, a commodity market analyst at Rabobank in London. But he said the US isn’t the only export market whose prices are impacted by extreme weather this year. “Russia had a drought as well, and it’s lost up to 6 million tons against the US [Department of Agriculture] estimates, which is the benchmark for grains,” he said.
Most of Egypt’s wheat is imported from the US, Russia and Australia, making the country particularly vulnerable to potential wheat price shocks caused by extreme weather this year. This problem was highlighted when Russia stopped wheat exports in 2010 after a drought and a series of wildfires devastated its harvest. About half of Egypt’s imported wheat comes from Russia. When Russia canceled its existing contracts, Egypt was forced to look elsewhere at a higher price on the global market.
According to a report by Oxfam looking at the impact of Russia’s 2010 export ban, it’s likely that replacing the grain over the course of six months — the government planned to do so gradually — cost the government US$78 million, which constitutes a 68 percent increase in price.
This year, Kandil said, it looks likely that the government has planned for the rising cost of wheat.
The year’s subsidy budget remains in limbo after a court dissolved the People's Assembly last month. With the current struggle between President Mohamed Morsy and the courts over whether Parliament would be allowed to continue, it seems unlikely any progress will be made in the near future.
However, the draft budget has almost doubled the allocation for food subsidies to allow for the higher cost of commodities, said Kandil. The change, she added, could be a reflection of a government drive to source more expensive wheat, allowing Egypt to be less reliant on the three major importers.
“The import bill has gone up, and it has squeezed down the amount allocated to fuel subsidies in the fiscal budget,” she said. “But that doesn’t change the overall budget at large, because what is saved on fuel will account for the higher price of food items.”
Kandil warned that the situation could worsen if people stock up on strategic commodities in fear of food shortages, making it difficult to ensure that wheat is available at the subsidized price.
The government has already begun new initiatives to bolster domestic production. In an effort to encourage farmers to grow more strategic crops, the government more than doubled the guaranteed domestic price. Previously, long-standing price controls on domestic wheat led farmers to plant higher-earning crops.
The efforts are earning results, Kandil said.
James Cassing, an economics professor at the University of Pittsburgh in the US who has studied Egypt’s food subsidy system, said that for the country to ensure the affordability of wheat, it must be able to increase the price of baladi, or local, bread.
“Egypt’s food policy has never been tenable, and the Egyptian subsidies could never be sustained,” Cassing said. “Wheat is the issue, of course, and the [2010] drought was only part of the problem.”
The real issue is: Can Egypt increase baladi bread prices by 50 percent? In the past, similar moves have led to food riots. A spike in global food prices in 2008 led to bread riots throughout Egypt that left at least seven people dead.
For Kandil, more than changing the price of bread, the government must fix its subsidy system. Nearly 80 percent of the population purchases subsidized bread, according to the economic research organization. But the number of people who rely on subsidized bread to survive is far less. The broadness of the system leaves it open for exploitation.
Instead, Kandil advocated a ration card system that targets only the most needy.
Because subsidized bread is so cheap and widely available, it is often used as animal and chicken feed. This must be stopped, Kandil said, adding that creating a coupon system would help alleviate misuse.
If only those who qualify for subsidized bread have access to it, it would drastically cut back on the cost of the subsidy.
“The fact is that our subsidization policies and growing demand aren’t helping to contain consumption,” said Kandil.
Another problem is the black market. Subsidized flour is sold to bakeries at LE160 a ton, but earns LE2,000 a ton on the black market, according to the Egyptian Center for Economic Studies.
Some estimate as much as a quarter of Egyptian flour is leaked out of the subsidy system through spoilage or on the black market. The government could substantially reduce its reliance on imports if it could stop flour from being sold through the back door.
“The subsidy system isn’t helping — it provides incentives for over-consumption of wheat,” said Kandil. “We need to channel the pricing of wheat into bread production and ensure that it is being subsidized at the end of the chain, not at the beginning.”
Kandil said the Supply and Domestic Trade Ministry is considering providing the wheat at market prices to mills and bakeries, buying the bread at market price, and then selling it at a subsidized cost to ration-card holders. But there has been little political will during the transition period to address problems with the subsidy, considered vital in a country where more than 40 percent of people live on less than US$2 a day.
“Increasing the price of wheat purchases for domestic suppliers is just a drop in the bucket,” said Kandil. “But with little progress in the transition government and ongoing issues with Parliament, there’s a lack of focus on long-term vision by the government.”
This piece was originally published in Egypt Independent's weekly print edition.

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