“Egypt is not only the largest importer of wheat but also the largest wheat consumer and bread eater per capita in the world. A key component of government policy in this regard is the provision of low-priced bread to the population. This is achieved through a number of government subsidies at the various stages of the value chain. The reform of the bread program is a high priority for the Egyptian government. However, there is a strong sense of entitlement to subsidized bread in Egypt and reforms are very politically sensitive.”

Dr. Mahmoud RİYAD - Egyptian Milling Association Secretary General, Flour Milling Consultant

Egypt the most populous country in the Arab World is also by far the largest importer of wheat globally. For centuries, wheat has been a central component of the typical diet of the country’s inhabitants. Per capita consumption of this cereal is amongst the highest in the world. The domestic wheat industry provides an important contribution to employment and value added in the agrifood sector. At the same time, assuring access to this important staple food by all Egyptian citizens, a quarter of whom live under the poverty line, has also been a central aspect of the country’s social policies. The strategic importance of the wheat sector has resulted in a strong involvement of the State at all levels of the wheat value chain. Egypt is not only the largest importer of wheat but also the largest wheat consumer and bread eater per capita in the world. The heavy dependency on wheat has some negative effects on the country’s economy as it strains the national reserves required to import wheat from foreign nations. Also, excessive reliance on wheat triggers problems of obesity and provides a less than ideal nutrition despite high caloric intake.

THE IMPORTANCE OF WHEAT FOR EGYPT Wheat is the most important grain crop in Egypt and grains are, in turn, the most important crop group. Wheat represents almost 10 percent of the total value of agricultural production and about 20 percent of all agricultural imports. Egypt is also the world’s biggest wheat importer and the General Authority for Supply Commodities (GASC) of the Ministry of Supply and Internal Trade of Egypt alone is the world’s biggest wheat purchaser. It is thus understandable that wheat is a product of paramount importance to Egypt and wheat policy is a priority for the government. The importance of wheat policy is reinforced by Egypt’s specific social realities: with over a quarter of the Egyptian population living under the poverty line, assuring the food security of all citizens is a key challenge for the government. A key component of government policy in this regard is the provision of low-priced bread to the population. This is achieved through a number of government subsidies at the various stages of the value chain: from subsidized fertilizers to subsidies of the price of the final product, “Baladi bread”. Under the Egyptian ration card system, 65 million Egyptians (around 80 percent of the population) are able to purchase a form of flat bread called Baladi at a heavily subsidized price of 5 piastres compared to the free market price of 50 piastres.

The subsidized price has been fixed since 1989. The Baladi bread program is the single most important food subsidy in Egypt, accounting for over half of the total cost of Egypt’s extensive ration card system. A growing population, weaker currency and high world wheat prices mean that the cost of the program has escalated over the past decade. In 2010/11, the cost of the Baladi bread subsidy amounted to an estimated 0.8 percent of Egypt’s GDP. In addition, the government has occasionally had difficulties securing foreign exchange to purchase imports of wheat, placing the country’s food security at risk. The former Minister for Supply, Khaled Hanafi, has also noted that there are leakages and wastage in the program. The reform of the Baladi bread program is therefore a high priority for the Egyptian government which is facing increasing difficulties funding the program. However, there is a strong sense of entitlement to subsidized bread in Egypt and reforms are very politically sensitive.

WHEAT IMPORTS TO EXCEED 12 MILLION TONNES In April 2014, the government launched an ambitious reform to the Baladi bread programme in order to decrease waste and corruption. Bakers no longer purchase flour at a heavily subsidized price but are compensated by the government based on their sales of Baladi bread. Consumers have been issued smart cards that can be used to buy up to five loaves of bread per person per day or, if this allocation is not used, converted into credits to buy other subsidized foods. It is understood that, in January 2015, the smart card system was already rolled out to 19 of the 27 Egyptian governorates. Advantages of the new system include that bakeries have an incentive to improve the quality and availability of baladi bread, consumer choice is increased and the removal of the flour subsidy reduces the incentive for unscrupulous operators to sell subsidized flour on the black market. It also starts to address the issue of improving the targeting of Egyptian food subsidies to those most in need. The country faces problems with high unemployment, and an unstable currency, with its main foreign exchange earning industry, tourism, having suffered a sharp fall in revenues. That has created a need to reform Egypt’s subsidized bread program.

Grains are the most important crop group in Egypt and wheat is the most important grain. Wheat is grown throughout Egypt, in the Delta region, along the banks of the Nile, as well as in the newly reclaimed areas. In 2012, wheat was grown on 4.3 million farms and it alone accounted for USD 3.7 billion, around 9 percent of the total value of agricultural production and over one-fifth (22 percent) of the total value of field crops (USD 17.3 billion). Wheat is grown as a winter crop and occupies close to half of the winter crop area. The government offers a high procurement price for domestic wheat above the import parity price i.e. the world price for wheat adjusted for the cost of delivery to Egypt.

RUSSIA IS DOMINANT SUPPLIER OF WHEAT TO EGYPT The International Grains Council (IGC) forecast Egypt’s 2017-18 total grains crop at 15.3 million tonnes, which compares with 15.5 million the year before. Wheat production is forecast unchanged at 8.6 million tonnes. The IGC forecasts Egypt’s 2017-18 grains imports at 21.9 million tonnes, up from 20.5 million the year before. The figure includes 12.1 million tonnes of wheat, up from 11.6 million in 2016-17.

In recent times Russia has been the dominant supplier of wheat to Egypt. The Russians basically are very strong in the Egyptian market. Egypt is likely to remain a major wheat export target for the Black Sea countries (Kazakhstan, Ukraine and Russia), particularly as Black sea wheat production is forecast to increase by up to 20% by 2025. Ukraine and Russia seem to be forming closer relationships with Egypt around grain logistics and investments, which could further strengthen their ties with Egypt. The other countries that exports wheat to Egypt are Romania, France and Poland.

The 2017 wheat and barley harvest was completed by early June. Some 1.26 million hectares were planted with wheat in the current season, about the same as average, yielding 8.8 million tonnes of wheat.

The Egyptian government is the only major purchaser of domestic wheat from farmers. The government also encourages the domestic production of wheat by providing high domestic procurement prices for wheat, as well as subsidized fertilizers.

After the country floated the pound, which depreciated by over 100%, farmers became much more competitive relative to foreign producers. The Egyptian government is believed to be the world’s single largest importer of wheat. According to GASC, it accounted for 43 percent of all of Egypt’s wheat imports over the past three years, as shown in Table E.2.

The Egyptian government operates all large-scale inland storage. The majority of government storage consists in a system of traditional flat storage called “Shona”. The poor quality of this storage causes significant qualitative and quantitative losses from exposure to weather and pests. In addition, wheat is handled manually in bags, adding further impurities and losses (bags tear apart easily and are easy to steal). While there are no official estimates available of the losses at the Shona, they are believed to be in the range of 10-20 percent.

The government has around 3 million tonnes of inland storage capacity, of which 2.1 million tonnes are in a traditional system of flat storage in jute bags called shona. The remaining public storage is in silos operated by Egyptian Holding Company for Silos and Storage (EHCSS) and the General Company for Silos and Storage (GCSS). In addition, the government operates 400 000 tonnes of port storage through the GCSS in the ports of Alexandria, Damietta and Safaga. The government operates almost all inland wheat storage.

STORAGE CAPACITY FOR WHEAT TO BE INCREASED The GCSS has two silos to serve the greater Cairo area. One has a capacity of 100 000 tonnes and the other has 60 000 tonnes of capacity. The EHCSS have 25 silos with an average capacity of 30 000 tonnes each, distributed throughout Egypt. These were built as part of a project to build 50 silos in Egypt and, despite the long overrun on the project; there are still plans afoot to complete the remaining 25 silos.

The private sector has much greater port-storage than the government. The latter secured funding for a silo construction program, supported by the United Arab Emirates, aimed at increasing total government storage capacity for wheat (internal and at ports) by almost half - adding 1.5 million tonnes of capacity. Of this additional capacity, 120 000 tones will be at ports. In addition, it was reported that GCSS has begun work on a further 420 000 tonnes of additional capacity. While the government has taken steps towards improving their wheat storage capacity, they could also lower costs by drawing on private sector expertise and storage.

WHEAT MILLING The Egyptian government operates 6.6 million tonnes of milling capacity directly and uses another 4.3 million tonnes of private sector facilities through tolling contracts. In both cases, it is widely believed that large volumes of flour and wheat are resold on the black market. This is particularly true for public mills which receive the wheat at a subsidized rate (private mills by contrast are paid a fixed tolling fee).

“Public mills and public/private mills produce 82% extraction flour used for making the subsidized Baladi bread, producing 70% of all the flour going to the bread subsidy program, while private mills produce the remaining 30%”. “Private sector mills producing 82% flour for the government’s bread subsidy program are not allowed to produce the 72% extraction flour produced by other private sector mills in an attempt to avoid leakages. The 72% extraction flour is sold to around 20,000 private sector bakeries that produce higher quality bread and pastries. Cakes, pastries and baked goods consumed in Egypt witnessed a reduction in their consumption rate in the second half of 2016-17 due to a 100% increase in prices compared to the first half of the marketing year, as 72% flour increased from EGP 3500 per tonne to EGP 5500 per tonne. Private bakeries and in-store bakeries at large retailers and hypermarkets also have increased their prices, driving consumers to substitute their consumption to cheaper, unsubsidized Baladi bread.”

The Baladi bread program uses both imported and domestically grown wheat. In practice, the two types of wheat are blended together before being milled. As a result, blending with imported wheat is important to achieve the right quality of flour. The wheat for the Baladi bread program is milled in both public and private mills. Close to two-thirds of the wheat is milled in public sector mills and the remainder in private mills. As a result, the average capacity utilization is higher (72 percent) in the public than in the private sector mills (63 percent).

Egypt now has more than 410 public, public/private, and private sector mills with total investments of more than $1 billion. Egypt has an excess milling capacity of more than 30%, creating many inefficiencies in this economic subsector, the most recent annual report on the sector said. “Public and public/private milling capacity ranges between 50000 to 55000 tonnes per day while the capacity of private sector mills is estimated at 20000 tonnes per day. Some major mills include Middle and West Delta Flour Mills Co., North Cairo Flour Mills, Alexandria Flour Mills and Five Star Flour Mills Co. Last year many private mills operated at 40% capacity due to shortages of imported wheat, caused by limited foreign currency and delayed letters of credit.

References: Egypt Wheat sector review - Food and Agriculture Organization of the United Nations -Rome, 2015 Egypt’s local wheat procurement policy increases farmers’ profits- World Grain - February, 2017 FAO GIEWS Country Brief on Egypt - www.fao.org/giews/countrybrief/country.jsp?code=EGY Focus on Egypt | World Grain - September, 2017 www.world-grain.com/Departments/Country-Focus/Country.../Focus-on-Egypt.aspx