Guest Post: How Egypt and Iran may lose out on Wheat prices

Guest post by William Moloney, a defence and political analyst based in Abu Dhabi. 

Some of the Middle East’s biggest wheat buyers are scrambling to ensure an adequate supply of wheat, in an attempt to beat the rising price in the open market.

Limited supply because of smaller than expected wheat harvests has pushed up the price of wheat and maize.

Now high prices have placed great pressure on the grain importing governments of the Middle East and North Africa, with Egypt, the world’s biggest net importer of wheat, and Iran, the 15th biggest, among the most extreme cases.

Not only are the political consequences dire as food prices, especially in bread, prompt thousands of people to take to the streets, but economically these wheat price increases will place even more stress on the weak finances of subsidizing governments.

Some of the rush to buy wheat is partly because MENA countries did not purchase wheat in advance at a set price (otherwise known as forward contracts) as all forecasts pointed to a world-wide bumper harvest.  

Now these countries are having to face a bigger bill for wheat purchases and these countries, including Egypt and Iran, will be forced into action now, or very soon. 

The Food and Agriculture Organization of the United Nations has said that this year’s cereal crops will not cover next year’s demand, after lower harvests in in Russia (-29%), Ukraine (-37%), Kazakhstan (-47%) and Australia (between -12-20%).

Prices for wheat and maize have surged this year, hitting highs in July and spiking again last week.

In the futures market, the price for wheat was recently just lower than the historical high reached in 2008.  The price of maize last week hit the highest point in 8 years.

But despite the record prices, countries that rely on supplying subsidized bread for political stability are increasing their wheat purchases.

The Egyptian Agricultural Export Council has said they need to import 10.5 million tons of wheat in the year from July 1st, up from 9.8 million tons the year before.

Egypt said in September it bought more than a million tons of wheat, or 7 months supply.

This is at a time when many countries in the MENA region have seen their economies shrink due to recession, revolution or sanctions.  Many countries have seen sharp falls in their foreign currency reserves in the last two years.  They are also facing sharply falling currencies, all of which will make purchasing wheat on the open market, which is priced in US dollars, increasingly difficult.

[caption id="attachment_783" align="aligncenter" width="580"] Major Importers from the MENA region. Source: USDA FSA. Amounts are in Millions of Metric Tons.[/caption]

In Egypt, the Morsi government is in a situation where they will either need to reform subsidies, which is another way of raising prices, on items that millions of Egyptians rely on to survive, or face a widening budget deficit, even with the billions in aid that has been pledged.

All of this will occur within the increasingly stalled political process, and the rising price of wheat on the open market. It is a dire situation.

Iran is in a similarly serious situation, but with few friends who can or are willing to help. 

The Iranian Rial has been in free-fall: losing at least 59% of its value last week and 300% since the December 2011 imposition of sanctions.

The market for exchange of the Rial to the $US is still frozen due to the large gap between the “official” rate and the market rate. The causes of the fall in value are multitude: poor economic management, sanctions cutting into oil sales (and the loss of access to the US dollar) and the introduction of a new government currency exchange agency.

Sanctions are starving Iran of oil revenues, which in 2010 made up 80% of their income.

One estimate had Iranian exports of $2.9bn for July 2012 against $9.8bn in July 2011.  Starved of income with a falling currency and apparently spending $10bn propping Bashar Al-Assad in Syria, the Iranian regime is under astonishing economic pressure.  So much so that it has been reported that they have had to bring back the Unit 400 of the Quds Force from Syria.

Still, some commentators have pointed to the record oil revenues that Iran has enjoyed over the last seven or so years as a counter to the “pressure” argument.

While wealthy Iranians buy gold as a hedge against the hyper-inflationary effect on prices, the average Iranian is not immune to steadily rising prices.

The removal of subsidies has meant an increase in the price in many staples, including chicken and bread.  The price of medical care and housing continues to be high relative to wages.

Tied to a free-falling currency the average Iranian is much worse off than they were just two years ago.

As Iranian people continue to lose their economic power their risks are reduced; they literally have nothing to lose. Whether this draws them onto the streets, similarly to Egypt’s 1977 bread riots, and with the harsh crackdown on the 2009 Green movement fresh in their minds, is unknown.

But it must be remembered that the overthrow of the Shah was tied to economic factors from his failed industrialization policy rather than solely religious motivations (only after the protest momentum had been built up did Khomeini step in and lead).

Over the weekend, to attempt to forestall protests and create nationalist feelings, the Iranian regime, including senior clerics, started calls for national strength and unity in the face of this “economic war”. 

The only certainty now is that if wheat price rises are sustained then the political uncertainty, and potential for violence, in the MENA region will continue. 

One Comment

  • Wayne Bacon
    Posted October 10, 2012 at 4:18 pm | Permalink

    “The Iranian Rial has been in free-fall: losing at least 59% of its value last week and 300% since the December 2011 imposition of sanctions”.

    It is impossible to lose 300% of the value as at 100% loss you are down to zero value

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