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The Russia-Ukraine conflict poses big challenge for Egypt

07 April 202211 min reading

As the war between Russia and Ukraine is causing major disruptions of wheat supplies, Egypt is not isolated from these catastrophic events. Egypt relies on Russian and Ukrainian wheat due to competitive prices, lower freight costs, and less time reaching Egyptian ports compared to other origins. Egypt’s imports of wheat over the last five years amounted to 62.6 MMT, with 59.7 percent from Russia and 22.3 percent from Ukraine.

The Russian–Ukrainian conflict has disrupted the flow of wheat from the Black Sea and caused great ambiguity in the global wheat trade. Ukraine has suspended port operations for commercial activities and banned wheat exports. Russian wheat movement through the Black Sea was also affected by remarkably high insurance premiums for freight. In addition, current economic sanctions have made commercial transactions difficult. In response, wheat prices have surged almost 40 percent, hitting their highest levels in 14 years.

As the war between Russia and Ukraine is causing major disruptions of wheat supplies, Egypt is not isolated from these catastrophic events, which is already affecting its imports of wheat from both countries. 

Wheat is a key food item for Egypt, representing between 35% and 39% of caloric intake per person in the last few years. Egyptians on average consume about 145 kg of wheat per capita annually—double the global average. Egypt is the world’s largest importer of wheat. Wheat imports usually account for about 62% of total wheat use in the country. It imports a total of 12-13 million tons annually. With a population of 105 million growing at a rate of 1.9% a year, Egypt has become increasingly dependent on imports to meet food needs. Wheat imports have been steadily increasing over the last three decades at a rate higher than that of domestic production. The Egyptian government has been spending about $3 billion annually for wheat imports. The recent price increase could nearly double that to $5.7 billion.

EGYPT RELIES ON RUSSIAN AND UKRAINIAN WHEAT

In its latest report released on 28th March, the U.S. Department of Agriculture’s (USDA) Foreign Agricultural Service (FAS) post in Cairo forecasts Egypt’s wheat imports in MY 2022/23 (July – June) at 11 MMT (million metric tons), down by 9.1 percent from Post’s MY 2021/22 import estimate figure of 12 MMT. 

Despite the government’s efforts following the global food crisis in 2007/8 to diversify sources of grain imports, the vast majority of the increase in wheat imports came from Russia and Ukraine. Egypt’s imports of wheat over the last five years amounted to 62.6 MMT, with 59.7 percent from Russia and 22.3 percent from Ukraine (82 percent combined). Egypt relies on Russian and Ukrainian wheat due to competitive prices, lower freight costs, and less time reaching Egyptian ports compared to other origins.

The following are highlights from report issued by the USDA FAS post in Cairo:

Egypt’s 2021 wheat imports from Russia and Ukraine amounted to almost 77 percent of total wheat imports. Private sector imports represented 60 percent of total imports and government imports were 40 percent in 2021. Private industry became a major player in the wheat market in Egypt during the past five years, gaining more market share every year in the wheat trade.

The General Authority for Supply Commodities (GASC) is the government agency that implements wheat tenders for Egypt’s bread subsidy program. From MY 2015/16 through MY 2020/21 (July-June), GASC’s largest foreign suppliers have been Russia (20.14 MMT) and Romania (4.92 MMT), followed by Ukraine (3.14 MMT) and France (1.8 MMT).

MY 2021/22 (June - Feb) government imports were 43 percent from Romania, 29 percent from Russia, 23 percent from Ukraine, and the remaining 5 percent from France. Romanian wheat was offered at more competitive prices in government tenders than the Russian and Ukrainian origins.

As of the last quarter in 2021, wheat prices increased by an average of $100/MT. This meant an additional cost to the government budget allocated for the importation of wheat for the bread subsidy program in the current fiscal year ending in June 2022. The Prime Minister of Egypt said during a recent press conference that Egypt has enough wheat reserves for the bread subsidy program to last until the end of 2022, pointing out that Egypt’s current strategic wheat reserves are sufficient to cover the coming four months and with the local wheat supply season, Egypt will cover five more months’ worth of stocks. The Prime Minister has also stressed that the country will not be conducting any tenders to buy wheat from the global market until the end of 2022.

GASC had to cancel its last two tenders due to limited offers and very high prices from traders of French and U.S. hard red winter wheat. Traders did not offer any wheat from the Black Sea in the last two tenders amid the ongoing conflict between Russia and Ukraine, which resulted in port closures in Ukraine and a disruption in shipping from the Black Sea.

GASC has already secured 126,000 MT of French and Romanian wheat on March 5 and March 7, and is set to receive another 189,000 MT from Russia, Ukraine, and Romania (63,000 MT from each) by the end of March.

Total wheat imports during the first two and a half months of calendar year (CY) 2022 amounted to 1.78 MMT. As of March 1-15, public and private imports of wheat that reached Egypt amounted to 460,272 MT, from Russia (181,773 MT), Ukraine (124,552 MT), Romania (91,000 MT and France (63,723 MT). These purchases were made a month before the conflict erupted.

Currently, there are 17 origins approved by GASC to participate in its international tenders – United States, United Kingdom, Canada, France, Australia, Germany, Argentina, Russia, Ukraine, Romania, Poland, Bulgaria, Serbia, Latvia, Hungary, Paraguay, and Kazakhstan. The largest four origins supplying wheat to GASC via its international tenders during the last five marketing years are Russia, Romania, Ukraine, and France.

WHEAT PRODUCTION 

FAS Cairo Post forecasts Egypt’s wheat production in marketing year (MY) 2022/23 (July – June) to reach 9.8 million metric tons (MMT), up by 8.9 percent compared to 9 MMT in 2021/22. Post attributes the rise to an increase in total area harvested which is set to come in at 1.53 million hectares (HA) compared to 1.4 million HA the previous year. The government announced its wheat purchasing prices ahead of the planting season and the government plans to increase wheat harvested areas by 420,000 HA in the next three years. 

Wheat procurement season started on April 1, 2022, instead of April 15, and will last until the end of August instead of mid-July. FAS Cairo foresees Egypt in MY 2022/23 (July-June) procuring some 5 to 5.5 MMT of locally produced wheat. The amount of locally-produced wheat purchased by the government of Egypt was 3.5 MMT in calendar year (CY) 2020 and 3.6 MMT in CY 2021.

Amid the escalating conflict between Russia and Ukraine, the government took additional measures to secure the target of procuring at least 5 MMT of local wheat from farmers in CY 2022. On March 15, the government approved an additional incentive of EGP 65/ardeb on the prices it will pay farmers to purchase the local harvest. After this increase, the government payments to farmers will range between $366.10/MT to $374.60/MT based on quality and moisture. This represents an increase of 22 percent from last season’s procurement price. Wheat farmers also receive fertilizers at a subsidized price, more than 50 percent less than market prices.

CONSUMPTION

The Ministry of Supply and Internal Trade (MoSIT) also issued a ministerial decree requiring every wheat producer in the CY 2022 season to sell a minimum of 4.28 MT per hectare to governmental wheat purveyors. The decision stressed that if quantities of the crop are sold before the issuance of this decree, the buyer must deliver what he bought to the government authorities on the same terms. The decision also prohibits the sale of the remainder of this season’s wheat to non-governmental agencies, unless a permit is obtained from MoSIT. It is also prohibited to transfer wheat from one place to another except with a permit as well. The decree stipulated that large farms (25 acres or more) should sell 90 percent of their wheat production to governmental wheat purveyors and such farms will receive subsidized fertilizers for their summer crops.


FAS Cairo forecasts Egypt’s wheat consumption in MY 2022/23 at 20 MMT, down by 2.43 percent from the MY 2021/22 estimate of 20.5 MMT. The post attributes the decrease to a 2.6 percent decrease in food, seed, and industrial use (FSI) consumption. The decrease in FSI wheat consumption is attributed to an increase in the price of European and white flat bread (non-subsidized) as well as baked products, cakes, biscuits, wafers, croissants and pastries, etc. MY 2021/22 wheat consumption is also revised down by 2.38 percent from the USDA official estimate as a result of higher prices of flour, baked products, and non-subsidized flat bread.

On March 16, the Egyptian government mandated MoSIT to take the necessary measures to develop a mechanism for setting a fixed price for non-subsidized bread to be applied for a period of three months. This comes after prices of flour and private bread inflated in local markets, driven by producers hoarding large quantities of flour amid the conflict in Ukraine. The move also comes before the month of Ramadan to prevent any further price hikes, especially with increased demand.

THE BREAD SUBSIDY SYSTEM REMAINS UNCHANGED

Egypt allocates 150 loaves of subsidized bread per month to recipients (i.e., five loaves of bread per day). Baladi bread is sold at a subsidized price of EGP 0.05 per loaf ($0.01 per loaf), this is less than one tenth of the actual cost. The government compensates bakeries for the difference in production cost. The current cost of subsidizing one loaf of baladi bread is EGP 0.60 ($0.03).

The Ministry of Supply and Internal Trade is always trying to raise the efficiency of the bread and food subsidy system management to prevent any type of leakage (waste of subsidy resources) in addition to increasing the effectiveness of the system so that it has a positive impact on the subsidy recipient. Better targeting could reduce inefficiencies in the wheat sector and reduce consumption. 

MoSIT has been studying several options to improve its bread subsidy program, such as the potential of switching to a conditional cash bread subsidy. Unfortunately, the current ramifications of the Russian– Ukrainian conflict put the implementation of these reform measures on hold for the time being.

This system would have enabled beneficiaries to buy their actual bread needs, reducing consumption, and reducing the cost of the bread subsidy program as a whole. The subsequent savings could then be invested in more targeted food security and nutrition interventions, in addition to improving the efficiency of bread production and increasing competition between bakeries which will in turn enhance bread quality.


In fiscal year (FY) 2021/22 (June – July), the government allocated $5.5 billion for bread and food subsidies. Of this amount, roughly $3.2 billion is earmarked for the bread subsidy program. Another $2.3 billion is allocated to the supply commodities (i.e. rice, cooking oil, sugar, chicken, and beef). The Egyptian Ministry of Finance estimates an additional cost of $761 million - $952 million above the current fiscal year’s budget as a result of surging global wheat prices.

MILLING CAPACITY

The Baladi bread program uses both imported and locally grown wheat. In practice, the two types of wheat are blended together before milling. As a result, blending with imported wheat is important to achieve the right quality of flour.

Egypt currently has more than 410 public, public/private, and private sector mills with total investments of more than $1.5 billion. Public mills and public/private mills produce 82 percent extraction flour, which is used for making the subsidized Baladi bread. They produce 70 percent of all the flour going to the Baladi bread subsidy program, while private mills produce the remaining 30 percent.

WHEAT STOCKS

FAS Cairo forecasts Egypt’s ending stocks in MY 2022/23 at 4.36 MMT, up by 7.4 percent from Post’s MY 2021/22 estimate which remains unchanged from USDA official estimate. This is due to higher production and lower consumption. GASC normally keeps a four to six month supply of stocks (including wheat) in the import pipeline, with an additional one-month supply of wheat in transit to Egypt. Over the course of several years, Egypt raised its capabilities to store wheat from 1.6 MMT to 4 MMT in modern silos, as well as modernizing old storage facilities with 1.5 MMT capacity, and as a result, increased its strategic stockpile of wheat from three to six months. This enables the state to deal with any rise in global commodity prices as this reserve secures food demand by the Egyptian market for a period of time until prices resume a downward trend.


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