Absorbing the shock

Niveen Wahish , Saturday 3 Sep 2022

Egypt’s wheat stocks are being replenished but at a price.

Absorbing the shock
Absorbing the shock

 

Six months after the war began concerns Egypt’s wheat supplies could run low have receded. Minister of Supply Ali Moselhi recently announced that four million tons of local wheat had been purchased.

Egypt wraps up its local wheat purchases at the end of August, and strategic stocks now cover seven months.

According to one trader, who spoke anonymously, “Egypt’s wheat purchases should be fine, with no risk of shortages of the grain.”

The General Authority for Supply Commodities (GASC) has also been buying wheat since the outset of the war in Ukraine, sometimes at over $500 a ton, though prices have now cooled to around $350 a ton, the average for January, a month before the war.

In the face of fluctuating price levels the government, which imports around 12 million tons annually, has changed its purchasing tactics. Instead of international tenders, the route traditionally followed by GASC, wheat is now being sourced via direct deals.

Traders say GASC is buying wheat without issuing international tenders because it is more efficient and faster. But it is a double-edged sword, said one: while the new modus operandi circumvents the possibility of sellers forming cartels to keep prices high, it does not provide the same transparency as international tenders and raises the possibility, at some point down the line, of GASC having to explain why it chose one seller over another.

Most of the wheat recently purchased by Egypt has been Russian, the trader said. Reuters reported that GASC directly bought 240,000 tons of Russian wheat on 22 August. While the price and supplier were not announced, traders estimate the cost at $368 per ton.

Before the war, Russia and Ukraine supplied more than 80 per cent of Egypt’s wheat imports. Combined, the two countries supply a quarter of the world’s wheat imports, according to the US Department of Agriculture.

While wheat supplies from Russia have continued to flow to Egypt some banks did impose their own sanctions until Washington clarified that agricultural products were not included in its list of proscribed commodities. Supplies from Ukraine, however, were held back by Russia’s naval blockade. This could start to improve following July’s agreement, brokered by Turkey and the UN, to allow ships to use a safe corridor through the Black Sea though, as the trader points out, the deal only covers three ports, none of which can accommodate the largest ships. And after a period of forced storage, it is likely the quality of Ukrainian wheat will have deteriorated.

While countries like France and Romania supply a small portion of Egypt’s wheat imports, extreme heat and heightened demand within the EU mean they are unable to compensate for the shortfall in global supplies caused by the war, says Steven Burke, economist and commercial manager at CRM AgriCommodities, a UK-based advisory services company specialising in the grain and oilseed market. The same is true of India, the second largest global wheat producer, where heat waves continue to hamper supply and in mid-May the government placed a ban exports. Egypt had already agreed to import 180,000 tons of Indian wheat at $400 per ton before the ban came into force and Egypt’s minister of supply says the wheat would still be delivered.

Other candidates for sourcing wheat, says Burke, include Australia, the US, Canada and Argentina. But given heightened demand globally, and increased shipping costs, none of them will provide cost savings, leaving Egypt “to absorb higher import costs until supply and demand conditions normalise, likely sometime in early 2023”.

Burke also believes Egypt will need to keep its export ban on wheat products in place. In March, Egypt’s Ministry of Trade and Industry placed a temporary ban on wheat exports and other food staples, including fava beans, lentils, pasta and all kinds of flour, to preserve strategic stocks. The Egyptian government should also look to start what Burke calls “a rainy-day fund” that protects the domestic economy from external shocks that threaten its wheat imports by allowing the government to cover periods of shortages with times of surplus, and continue to lower inspection requirements on wheat and supplement wheat fodder for animal use with other grains like barley, which could help cool prices.

It remains difficult to predict future levels of Ukrainian wheat production and the longer-term impacts of uncertainty caused by the war. According to Burke, the revenue Ukrainian farmers receive for their crops has nose-dived due to slow exports while the costs of energy, fertilisers, seeds and farm machinery and equipment have skyrocketed due to the war and the overall state of global supply chains, leaving Ukraine’s farmers in the unenviable position of having to assess the risks associated with investing in next season’s harvest without having a clear idea of how they can get the harvest to market.

*A version of this article appears in print in the 1 September, 2022 edition of Al-Ahram Weekly.

Short link: