Slashed wheat subsidies leave farmers at the mercy of fluctuating global markets

The Egyptian government announced last Wednesday that it would purchase wheat from local farmers at international market prices, requiring it to remove state wheat subsidies. The decision comes after government authorities have spent two months working to determine the average price and equivalent exchange rate for wheat.

An agricultural economist tells Mada Masr that the decision is likely to have a negative impact on the country’s food security, while a representative from the Farmers Union says the move to international prices will not provide sufficient return for farmers given the high production costs associated with growing wheat in Egypt.

Until the April 2016 harvest season, the government bought wheat from local farmers at prices above the international market rate, which meant it was buying crops for LE420 per ardab (a unit of weight equivalent to 150 kilograms) at a time when the local exchange rate was LE8.88 to the US dollar.

According to international market prices as of January 5, one ton of wheat now costs US$154, a rate which is the equivalent of $23.1 or LE418 per ardab using the Ahly Bank’s present exchange rate of LE18.11 to the US dollar.

In a press conference held at the Cabinet’s headquarters on Wednesday, Agriculture Minister Essam Fayed said that price may increase to LE540.

While this is an ostensible increase in the purchasing price for domestically produced wheat, the liberalization of the exchange rate in November 2016 caused the value of the pound to plummet and inflation to soar. The cost of imported wheat necessary for domestic supply subsequently increased, and, to balance its budget, the state found itself under pressure to reduce the rate adjusted for inflation at which it subsidizes local wheat production.

After the Central Bank of Egypt floated the pound on November 3, the exchange rate fell from LE8.88 to 18.11 to the dollar. On the same day, the government slashed petroleum subsidies, driving the price of diesel from LE1.8 per liter to 2.35 per liter. Together, these decisions caused the inflation rate to spike, reaching 20.2 percent in November, which is the highest it has been since 2008. In addition to impacting the lives of ordinary Egyptians, steadily climbing inflation has driven up production costs for farmers.

Farmers face unstable prices

President of the Giza Farmers’ Union Magdy Abu al-Ela says that the liberalization of the exchange rate and the unstable purchasing price of domestic wheat has left farmers in the dark and unsure of what to expect. Even if the crop’s purchasing price surpasses Fayed’s estimations to reach LE600 per ardab, the additional returns will still be insufficient due increased production costs, he adds. Seed, diesel and fertilizer, in particular, have been subject to steep increases.

Zuhair Abdel Aal, a consultant in the agriculture industry, says a purchasing price of less than LE700 per ardab of wheat will fail to cover the production costs.

According to Article 29 of the Egyptian Constitution,“The state shall commit to providing the requirements for agricultural and livestock production, along with purchasing basic agricultural crops at suitable prices that provide a profit margin to farmers.”

While this language is meant to protect domestic wheat production, it is open to broad interpretation and lacks any clear mechanism to ensure adherence. It is not clear if the government’s recent fiscal policies violate this statute, but they have left Egyptian farmers at the mercy of international markets, which may sink below the cost of local production.

The state budget for the fiscal year ending on June 30, 2017 does specify the allocation of LE3.405 billion to subsidize wheat farmers for the costs they incur growing the crop.

Domestic production may also face other external pressures.

Reuters article published on December 30 highlights that, while the global wheat market has witnessed a sharp increase in production, “grain was poised to record annual losses of more than 13 percent as global production weighed on prices.” 2016 is therefore the fourth consecutive year in which the global market price for wheat has declined.

Furthermore, the annual report issued by EFG Hermes predicts that the Egyptian pound will strengthen by the end of 2017, reaching between LE14.5 and LE15 to the US dollar.

In light of the abundance of global wheat production, its decreasing market price and the projected decline in the dollar’s exchange rate against the pound, Egyptian wheat farmers will earn less than Fayed has predicted, particularly when the rising costs of production are factored in.

Supply Ministry spokesperson Ibrahim Amer affirms that the government will take these increased production costs into account when purchasing wheat from local farmers at the new prices.

Wheat, the pillar of food security

However, Professor of Agricultural Economics at Cairo University Gamal Siam says he believes that the state’s decision to cut wheat subsidies means that it is effectively “abandoning the mainstay of food security in Egypt.”

In order for the government to maintain its commitment to subsidizing bread for low-income households, it needs to purchase wheat from both local farmers and international suppliers, as the bread is kept affordable by blending subsidized domestically produced wheat with cheaper imports.

A report issued by the US Department of Agriculture highlights that Egypt’s wheat consumption is expected to reach 19.4 million tons in the current fiscal year, of which only around 8 million tons is locally produced.

Egyptian farmers typically sell their surplus wheat to the government, as it purchases their crops at prices above the international market average.

In 2016, the Egyptian government purchased over 5.3 million tons of wheat from local producers, importing the remainder of the required supply.

The state imports wheat via the General Authority for Supply Commodities (GASC), a subsidiary of the Supply Ministry. GASC announces public tenders for imported wheat, which companies may apply for in accordance with specifications determined by the state.

Siam points out that liberalizing the purchasing price for locally grown wheat will likely result either in Egyptian farmers favoring private traders over the government, or they will move to other crops which are more lucrative, such as clover.

He poses that wheat production in Egypt may currently face the same future as rice production.

Reuters report published in March 2016 revealed that local rice farmers had begun to sell their harvests to private traders who offered a higher buying price than the government, which had decided not to store or stockpile rice, believing that it could be purchased at the usual price at any time. This in turn caused private buyers to stockpile the rice they had purchased in hopes of fetching even higher selling prices. In this case, authorities failed to ensure the availability of a basic food item for domestic consumption, particularly for low-income households.

Translated by Jano Charbel


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