Tuesday, January 31, 2012

What a Renewed Global Food Crisis Could Mean for the Egyptian Wheat Market

Back in 2007, before terms like subprime mortgages and credit default swaps entered our vernacular, the world's policymakers found themselves facing a far more basic, if equally complex global crisis-oneinvolving food.

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

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

Now, however, the specter of another food crisis has reared its ugly head, once again.
In recent months, a plummeting US dollar has increased the cost of foodstuff imports for many nations, while severe climate and natural disasters in Russia and Pakistan have jolted global supply chains. Kenya, Uganda, Nigeria, Indonesia, Brazil and the Philippines have already warned of impending food shortages in the next year. In the matter of a few months, grain prices jumped so precipitously that, in late September, the Intergovernmental Group on Grain, sponsored by the UN's Food and Agriculture Organization (FAO), called an emergency meeting.

When the session concluded, the FAO announced that the chances of slipping into another international food crisis remained slim, but warned that import-dependent countries would likely see a substantial increase in commodity prices. A month later, World Bank president Robert Zoellick echoed and expanded upon this sentiment, saying that food price volatility would likely last for another five years.

"There is growing concern among countries about continuing volatility and uncertainty in food markets," Zoellick told the Guardian in late October. "These concerns have been compounded by recent increases in grain prices. World food price volatility remains significant and in some countries, the volatility is adding to already higher local food prices."

For all this uncertainty, today's commodity market tumult has yet to metastasize into a full-blown international crisis. Food price indices, while high, are still well below the per-bushel levels of 2007 and 2008. And, aside from a brief outburst in Mozambique, the political seas of consumer discontent have been relatively placid.

Nevertheless, some economies have already begun to feel the pinch. And perhaps none more acutely than Egypt's wheat market.

Egypt's Wheat Worries

In July, a monumentally severe heat wave struck much of Russia, inciting widespread fires and droughts, and devastating the country's wheat crop. In the wake of the disaster, Russia implemented an export ban on wheat in the hopes of securing a healthy domestic supply through the end of the year.
The news came as something of an alarm to Egypt, the world's largest wheat importer and scheduled recipient of 540,000 tons of Russian wheat, due for delivery by the end of this year. With this order suddenly cancelled, Egypt found itself scrambling 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 void, and, in mid-September, Egyptian trade minister Rachid Mohamed Rachid confirmed that the country had secured enough supplies of wheat to avoid any immediate shortages.

That should come as a major relief to the average Egyptian consumer, who, according to the country's General Authority for Supply Commodities (GASC), consumes about 180 kg of flour per year. This import diversion will also ease the concerns of Egypt's politicians, who were no doubt skittish after the recent death of a 25-year-old in a bread queue revived memories of 2008, when similar violence broke out among protesters and police in the city of Mahalla.

Ultimately, though, this game of mercantile musical chairs is nothing more than a stopgap measure that masks a more insidious, if less obvious malady-Egypt's wheat subsidy program.
Sub-par Subsidies

Each year, the Egyptian government devotes some $3 billion to food subsidies-a third of which goes to buoying the country's bread supply. Under this system, the state procures wheat from foreign suppliers at a fixed price. In a country where roughly 16 million inhabitants are classified as poor, guaranteeing a constant food supply certainly makes political sense.

There's an economic logic to the country's subsidies as well. By devoting so much capital to the wheat market, Egyptian authorities are essentially attempting to protect the domestic market from the often violently sinusoidal tremors that can rattle international grain prices.

In September, when the GASC announced that it had secured sufficient imports to feed the Egyptian population, deputy chairman Noamani Nasr Noamani pointed out that the government had also secured enough money to increase the budget for its wheat subsidies. This increased budget, Noamani claimed, means "the Egyptian consumer and the Egyptian citizen will not feel the pain of the increase of prices globally."

The problem for Egypt though, is that today's market conditions couldn't be less favorable to such a massive-and often misdirected-subsidy program.

In October, Minister of Agriculture Amin Abaza promised that the government would not allow local procurement prices for the new harvest season to fall below LE300 Egyptian pounds per ardab (measuring unit for crops). Abaza's proclaimed threshold is roughly 20 percent higher than last season's, but Egyptian wheat farmers say it's still not high enough.

With the cost of fertilizers having risen over the course of the past few years, Egypt's agrarians had been hoping for a guaranteed price of at least LE350 per ardab. Today's wheat farmer, according to estimates from Cairo-based investment firm CI Capital, has to spend roughly LE2,000 to cultivate a single feddan (1.038 acres). Without a higher guaranteed price, farmers will likely devote their arable land to more profitable crops, thus exacerbating an already grim outlook.

There are, of course, several 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 urbanization and large-scale, agro-industrialization can only be harnessed through global, cooperative efforts; and, of course, there's no telling when the next drought or heat wave might decimate international harvests.

The one thing Egypt can control is its domestic production chain. Yet thus far, governmental subsidies have only resulted in an underperforming market and distorted prices.

This is not to say that the country must abandon its subsidy program altogether. Some 60 million people benefit from subsidized foods, and, with a parliamentary election on the horizon, calling for an end to subsidies would be tantamount to political suicide. Rather, Egypt must look to reform the program, with an eye toward creating very real incentives for farmers to plant wheat. Setting a simple price threshold, in today's protean economic climate, clearly won't be enough.

Fortunately, the state seems well aware that domestic wheat production needs to be reinvigorated. In August, the agricultural ministry proclaimed its goal to achieve 70 percent self-sufficiency by 2020 with the help of a new, higher-yield strain of seed. It's certainly a step in the right direction, but if Egypt wants to avoid shortfalls in 2011, it must set about implementing higher-yield subsidies as well.