Bread rumours could lead to “mother of all crises”

Rumours are everything in the financial market. What can start as harmless speculation can quickly spiral out of control, sometimes causing a free-fall in company shares, or worse, an entire market.

In the last few weeks alone, hackers on Twitter spreading rumours of a White House attack sparked sudden sell-offs of stocks and bonds to the embarrassment of traders who believed the rumours, and news websites who were unknowingly hacked.

The big markets always recover, however.

In Egypt, it’s a different story where the economy is vulnerable to the slightest shock and rumours become dangerous.

The value of the domestic currency, the Egyptian pound, has fallen on the black market on speculation that the country’s government does not have a strong handle on the economy.  That is only putting extra pressure on foreign reserves at a time when the coffers are close to breaking point.

But there’s another worrying rumour brewing in the background: the shortage of wheat.

Hassan Massoud, a vice president at an Egyptian private equity firm, says Egypt “could face the mother of all socio economic crises: a shortage of bread”, if rumours about the wheat market are to be believed:

In an article for Shorouk, Wael Qandi, a highly regarded columnist, makes four shockingly erroneous claims on the economics of wheat in Egypt.

They are:

1.       Egypt’s wheat production in 2013 is 9.5-10 Million tons.

2.       The increase in wheat production is due to the patriotism of farmers. (a point made implicitly in his characterization of farmers increasing wheat production as “those who innovate in silence, playing a musical ode of dignity, unencumbered with the barons of speech and the planters of anger and hatred”)

3.       There exists a group of “gangsters” who buy wheat from farmers only to store and burn it, according to President Morsi.

4.       Increased wheat production in Egypt is a good thing.

But most of these “Facts” are merely rumour, Massoud says:

1.       The main Egyptian wheat crop is harvested in May/June.  9.5-10 Million tons is an estimate from the government for this year’s harvest and not an actual production figure.

Interestingly,  that estimate has been doubted by analysts local and foreign, including the United States Department of Agriculture.  Alarmingly, the government has scaled back its wheat imports this year in anticipation of this bumper harvest.  Should detractors prove correct, Egypt could face the mother of all socio-economic crises: a shortage of bread.

[caption id="attachment_1642" align="alignright" width="525"]Egyptian Picture Gallery Egyptian Picture Gallery[/caption]

2.       The increase in the local wheat harvest is not due to “patriotism” but because the Egyptian government has, for the past two years, been buying locally farmed wheat at a substantial markup to international prices.

Today, the international price of wheat is 2,100 EGP/ton (at official exchange rates).  However, the Egyptian government buys the ton at 2,666 EGP/ton: a 27% mark up.

When you factor in transport costs and quality differential (Egyptian wheat is of lower quality than wheat typically traded on international markets and would fetch a lower price) you realize that the Egyptian government has been buying wheat at almost a 40% mark up to its true price at international markets.

Naturally, Egyptian farmers are producing more and more wheat as they can sell it at artificially high prices.

Even more worrying, there is anecdotal evidence that unscrupulous traders are buying wheat on international markets, importing it privately into Egypt (a process that is perfectly legal) and selling it to the government as “locally grown wheat”  thus pocketing a profit in the difference between the international price and the artificially high price paid by the Egyptian government.

3.       Perhaps the only thing more alarming than a respected political analyst peddling the notion that a group of gangsters is out there buying wheat and burning it, is the President also peddling the notion.  It is absurd to believe that there exists a gang whose route to illicit riches involves buying wheat at artificially high prices and burning it.

4.       Most importantly, Mr Qandil implicitly assumes that the increase in local wheat production is a good thing.   Egypt is a famously water poor country (availability of water to the average Egyptian is expected to drop from a current 640 m3 to 370 m3 compared to a global average of 1,385 m3).  Meanwhile, wheat is one of the world’s most water intensive crops; best suited for “water rich” countries.  Perhaps Mr Qandil should reconsider the long accepted notion that Egypt should plant more wheat.

One Comment

  • Posted May 27, 2013 at 1:07 pm | Permalink

    I actually think fears of a wheat shortage are largely overblown. Yes, clearly, the government figures are inflated. But even if GASC only sources 3MMT of local wheat (as opposed to the 4.5MMT it’s predicting), that’ll carry the balady bread program through until mid-August. At that point, Black Sea wheat will be coming on the market, at lower prices than what GASC is paying for local wheat. Egypt might not be having a great harvest this year, but the world as a whole is, and ultimately that will give Egypt a safety net.
    The balady bread program needs about 750,000 tonnes a month, according to USDA figures. With global wheat prices at around $320/tonne and falling, that’s something like $240 million a month. Egypt is short on currency, but it’s not THAT short on currency. As long as the government comes to their senses and starts tendering for wheat in July, it should be able to avoid panic at home or in the markets.
    Obviously, it doesn’t excuse manipulating the harvest figures, but I don’t think we’ll run out of bread. Usually, I hope to be proven wrong when making economic predictions about Egypt, but in this case I really hope I’m right.

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