Monthly Archives: March 2013

Egyptian government’s role in wheat

The Egyptian state has a long history of collecting and distributing grain. Beginning with the earliest dynasties 5,000 years ago, farmers paid one-fifth of their output as tax. The Bible recounts how Joseph, after a dream, advised the pharaoh to hold in reserve a part of seven bountiful harvests against the
seven lean years that would follow.

Today, Egypt’s government still plays a central role, especially when it comes to wheat, accounting for over half of the incoming volumes in the world’s number one wheat importing country. A large share of the domestic wheat crop is bought by public bodies as well.

State organizations account for more than half of the incoming volumes in the world’s number one wheat importing country

A generous subsidy on bread is the main reason for these purchases. Up to 8 million tonnes of wheat and half a million tonnes of corn are baked into loaves of traditional “baladi” bread from 82% extraction flour blended with corn flour. By some estimates 50 million Egyptians benefit from regular access to the traditional staple, selling for five piasters, or less than 1¢ per piece of 130 grams officially, but less in practice. The cost of this food subsidy to the national budget varies with international wheat prices, but could be around $3 billion in recent years.

State control spans only the middle ground of the wheat market. At the lower end is up to 3 million tonnes of consumption by rural farmers after village grinding. At the upper end is a buoyant and still expanding private milling sector that buys all of its own wheat from abroad, 4 to 5 million tonnes per year, and mills it mainly into 72% or 76% extraction flour for high quality flat bread, European-style breads or other baked goods.

General Authority for Supplies and Commodities

Grain traders these days describe GASC as the largest “single structure” buyer of wheat in the international market. Its purchases vary from year to year depending on the amount of wheat available internally but in recent years have been in the range of 5 million tonnes.

GASC buys wheat steadily and sometimes opportunistically throughout most of the year. It tenders on average every two to three weeks and may conclude contracts for one to several cargoes with each market entry or none at all.

Tenders go quickly. They are announced in the late evening Cairo time after Chicago Board of Trade trading ends. Most often GASC goes on the market when Chicago wheat prices have closed lower. Bid deadlines are 11 a.m. the next morning and a GASC committee decides its purchases that day.

Offers come from a core group of 10 to 15 mainly international grain traders who keep bid bonds permanently in place. In addition to the major trading houses like Cargill, Bunge, Toepfer and Glencore, specialized firms like Solaris Commodities focus on certain origins such as Russia. All get a regular chance as Egypt sources wheat from around 10 countries in most years. Besides the Black Sea countries, Australia, France, Canada and the U.S. are perennial suppliers. India and Pakistan are excluded on phytosanitary grounds due to the carnal wheat bunt.

Delivery is usually set for 30 to 60 days from the tender date. For example, a tender opened on Feb. 2 called for delivery from March 1-10.

The whole system depends on GASC’s ability to quickly open Letters of Credit following tenders. Declines in foreign currency reserves have made this difficult, particularly since the beginning of 2013 and state wheat purchases have fallen to half the level of a year before. Recently there have been reports of GASC considering other purchasing options that would rely more on stocks held by private importers in Egypt.

International tendering is put on hold by GASC for a two- to three-month period every year while the Egyptian wheat crop is harvested and delivered to government buyers from May to July.

To ease pressures on foreign currency reserves and to support farmers, Egyptian policy is to encourage higher domestic wheat production through a guaranteed support price. Well before sowing of the annual wheat crop in the winter, GASC is involved in fixing the price at which government will buy from farmers.

This year Egyptian farmers will receive a generous 2,500 Egyptian pounds (LE) per tonne for wheat deliveries, or approximately $371, even after taking into account recent sharp devaluations of the Egyptian pound.

Highlighting its direct line to the national budget, GASC is part of the Ministry of Supply and Domestic Trade whose Minister also holds the title of Chairman of GASC.

Though GASC is a food commodities procurement organization best known for wheat, it also buys through affiliates other heavily subsidized foodstuffs like vegetable oil, raw sugar, wheat flour, rice, pasta and corn, for distribution or to furnish to state-owned processors and to private processors.

GASC depends primarily on a number of other state enterprises to receive, store and transport imported and domestic wheat, and to mill it into the subsidized flour. It relies to some extent on private companies as well given capacity constraints in the former group.

General Company for Silos and Storage

The General Company for Silos and Storage (GCSS) owns and operates five grain terminals at Mediterranean, Suez Canal and Red Sea ports with total capacity of 350,000 tonnes. Inland silo facilities add another 320,000 tonnes.

GCSS handles the millions of tonnes of wheat imported by GASC annually. Its services include the onward transport of wheat from its terminals to the government mills.

In addition, depending on spare capacity, it may provide ship unloading and port storage to private sector wheat importers or to importers of maize and soybeans.

There are a number of private operators of major grain terminals at Mediterranean ports and several smaller ones. The National Stevedoring Company, a Cargill subsidiary, operates a grain discharging terminal in Alexandria’s Dekheila port zone on the Mediterranean. GCSS is a publicly listed company. While the government retains a controlling interest through FIHC, a minority of its shares are traded on the Cairo stock exchange, lending transparency to
its operations.

Food Industries Holding Corporation

Most of the wheat imported by GASC is supplied to the state milling sector, mainly for production of the high extraction (82%) flour for baking of subsidized baladi bread.

Workers at an Egyptian flour mill.

Workers at an Egyptian flour mill.

Food Industries Holding Corporation (FIHC) is an umbrella organization that encompasses most state-owned food processing companies including about nine regionally based wheat milling enterprises with names like North Cairo Flour Mills, East Delta Flour Mills and Upper Egypt Flour Mills. Most have around a dozen or more milling plants. Total grinding capacity approaches 7 million tonnes, nearly sufficient for all wheat used for baladi bread. The largest enterprises can process 1 million tonnes of wheat per year and the smaller ones just a quarter of that.

Under reforms carried out in the 1990s, these milling companies were all converted into publicly listed companies. Today, the Egyptian government through FIHC still retains a controlling share in each of them. Public banks and workers unions also hold shares and there are some cross share-holdings among them. Finally, a minority of shares are freely floated on the Cairo Stock Exchange for individual investors. These companies, with their volumes guaranteed from government orders, have been able to pay good dividends to shareholders.

They also produce 76% extraction flour for a second type of whiter subsidized traditional flat bread called “tabaki,” as well as 72% extraction for commercial sales. In this category they face much competition from dozens of new private millers that have sprung up since the sector was liberalized in the 1990s.

Indeed, private companies have accounted for almost all of the capacity expansion needed to keep up with population increases and to make up for the declining share of wheat ground by farmers at the village level as urbanization increases. Rising incomes in Egypt have meant greater demand for higher quality wheat flour at market prices, the lion’s share of which the private millers have captured.

Egyptian Holding Company for Silos and Storage

A relatively new organization for procurement and storage of the government’s share of Egypt’s domestic wheat production is the Egyptian Holding Company for Silos and Storage (EHCSS). Since its founding about eight years ago, EHCSS has built and now operates in various wheat production zones 25 steel silo storage facilities with 30,000 tonnes of storage capacity each.

EHCSS receives wheat from farmers and traders at collection points which it transports in bulk to its silo facilities. All movement from the storages to government mills is also in bulk.

EHCSS is only about halfway to its goal of building steel silo storage capacity for 1.5 million tonnes of wheat. It expects to tender again in 2013 for an additional eight sites. Another tender for the final seven sites is planned for mid-2014, according to a spokesman.

Two large government construction companies, Petrojet and Arab Contractors, have executed the turnkey contracts to build the 25 facilities to date, with the steel silos and handling equipment sourced from a number of manufacturers mainly in Europe.

Funding for the completed facilities has been provided through international development organizations like Danida (Denmark) the Saudi Development Fund, the Kuwait Fund and OPEC.

Principal Bank of Development and Agricultural Credit

Another major player in domestic wheat is the Principal Bank of Development and Agricultural Credit (PBDAC). As the country’s main agricultural bank and the largest provider of financial services to farmers, it also takes wheat from farmers in repayment of annual crop loans.

This wheat is mostly received on behalf of GASC for delivery to the government mills producing flour for baladi bread.

PBDAC took in 1.8 million tonnes of wheat in 2012 through its network of warehouses and outdoor storages, known as “shonas,” in 4,000 Egyptian villages.

PBDAC’s holding period for wheat used to be a maximum of just six months, but it has extended to as long as 14 months since mills favor the cleaner more homogenous wheat imported by GASC.

Because the government minimum support price for wheat is higher than the international price, PBDAC officials must be constantly vigilant against illegal delivery of imported wheat by unscrupulous traders to domestic wheat purchasing stations.

PBDAC’s practices are the least modern among government organizations. It relies on bagged storage in warehouses and in the open. Ministry of Supply specifications call for the use of 100-kg jute bags which are procured via tenders.

The Future

The need to reform the costly and fraud ridden system of subsidized baladi bread is a perennial subject of national policy debate. A plan to replace poorly targeted direct subsidized food distribution by regionally phasing in cash payments to the poor through national identity cards was announced in 2009 but seems to have fallen by the wayside in the tumult of the last two years.

Streamlining the system and reducing the total volumes has taken on renewed urgency due to the budgetary and foreign currency constraints faced by the
present government.

The case for reform seems clear based on anecdotal evidence that over one-third of baladi bread goes to feed domestic animals, creating distortions in the rational use of cereals across the entire food and feed industry.

But many, if not most ordinary Egyptians, view what amounts to free bread, even when generously shared with household ducks and chickens, as a sacrosanct entitlement to which they have become accustomed over generations. Previous attempts to reduce the subsidy, dating back to the 1970s, have resulted in mass demonstrations.

Today’s democratically elected government probably has little appetite to give citizens yet another cause to take to the streets. Thus, the dominant position of GASC and other state-owned entities in the supply of Egypt’s number one food staple is unlikely to be diminished anytime soon.