What a new 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 found themselves facing a much more basic, yet equally complex, global crisis involving foods.

At the time, news of ration line riots flooded headlines, while pundits entertained apocalyptic visions of a malnourished future. Many nations erected monolithic trade barriers to protect domestic supplies, while rising oil prices and speculative investors only pushed up food indices even higher.

By the end of 2008, of course, the global financial crisis had dampened demand and lower oil prices allowed food markets to stabilize. The world’s attention was then focused on the financial sector and stimulus plans, and the once ominous specter of an international food shortage was suddenly pushed into the background.

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

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

As the session concluded, the 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 food price volatility would likely last another five years.

“There is growing concern among countries about the continued volatility and uncertainty in food markets,” Zoellick told The Guardian in late October. “These concerns have been compounded by recent increases in grain prices. Global food price volatility remains significant and, in some countries, volatility is adding to local food prices that are already Taller”.

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 2007 and 2008 bushel levels. And aside from a brief flare-up in Mozambique, consumer political unrest has been relatively quiet.

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

Wheat Concerns in Egypt

In July, a monumentally severe heat wave hit much of Russia, sparking widespread fires and drought and devastating the country’s wheat harvest. In the aftermath of the disaster, Russia implemented a wheat export ban in hopes of ensuring a healthy domestic supply through the end of the year.

The news was something of an alarm bell for Egypt, the world’s largest wheat importer and the scheduled recipient of 540,000 tons of Russian wheat, scheduled for delivery by the end of this year. With this order suddenly cancelled, Egypt found itself struggling to diversify its import portfolio to make up for its Moscow-sized trade gap.

Eventually the US, France and a host of foreign suppliers stepped up to fill the gap, 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 big relief to the average Egyptian consumer, who, according to the country’s General Authority for the Supply of Commodities (GASC), consumes some 180kg of flour a year. This diversion of imports will also ease the concerns of Egypt’s politicians, who were no doubt spooked after the recent death of a 25-year-old in a bread line revived memories of 2008, when similar violence broke out between protesters and police in the city of Mahallah.

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

Subsidies below par

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

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

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

The problem for Egypt, however, 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 LE. ardab (unit of measure for crops). Abaza’s proclaimed threshold is about 20 percent higher than last season’s, but Egyptian wheat farmers say it’s still not high enough.

With the cost of fertilizers rising over the past 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 roughly LE2,000 to grow a single feddan (1,038 acres). Without a guaranteed higher price, farmers are likely to turn their arable land over to more profitable crops, exacerbating an already bleak outlook.

There are, of course, various exogenous factors over which Egypt has little or no control. Commodity traders may continue to drive up international food prices through speculative investments; the inexorable forces of large-scale urbanization and agro-industrialization can only be harnessed through global cooperative efforts; and, of course, there is no telling when the next drought or heat wave could decimate international crops.

The only thing Egypt they can control is its national productive chain. However, so far, government subsidies have only resulted in a poorly performing market and distorted prices.

This does not mean 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 be tantamount 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 changing economic climate, will clearly not be enough.

Fortunately, the state seems well aware that domestic wheat production needs to be revitalized. 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 implement higher yielding subsidies.