Egypt makes unexpected US wheat purchase

ABDALLA F. HASSAN | Business Monthly | November 2002

What looked like a cynical quid pro quo was really a case of pure economic sense, Egyptian and US wheat traders insist. Amid speculation that US commodities were falling out of favor, Egypt made an unexpected purchase of 420,000 metric tons of US wheat on October 15, brushing aside a much lower French bid that would have saved $8.5 million.

 

This was the second time in six months that the General Authority for Supply Commodities (GASC), Egypt’s official wheat buyer, made a US wheat purchase, choosing the US soft red winter wheat at $149.97 a ton over French wheat offered at $120.69 a ton. The October 15 purchase pushed prices even higher on US wheat exchanges. 

 

Mohamed Abdel Razek, GASC’s vice chairman, stated in press reports after the decision was announced that the purchase of US wheat was not at all politically motivated. Nonetheless, rumors proliferated among traders at the US grain exchanges, some venturing that Washington might be offering sweetheart wheat donations in exchange for Egypt’s endorsement of an imminent Iraq war, hence offsetting the higher price paid for US wheat this time.

 

Driven entirely by market forces, US wheat prices fluctuate minute by minute on the grain exchanges of Minneapolis, Kansas City and Chicago. “US production is down 7 million tons compared to what was produced last year,” said a wheat trader at an international commodity company. “[US] production was 50 million metric tons. This year it will be something like 43 million metric tons.” 

 

While hard red winter, the standard US wheat, was selling for more than $190 a ton, France adopted an aggressive pricing strategy for its wheat, which was being offered at a 30 to 40 percent discount over comparable US wheat. 

 

But Egypt’s decision to purchase the pricier US wheat was economically, not politically driven, said Dick Prior, regional vice president for US Wheat Associates, a non-profit promotional company funded by US wheat farmers. He pointed to dollar shortages that are tightening exchange-rate pressures on the Egyptian pound. “Under a USAID cash transfer program, some cash comes to Egypt’s central bank, and this is used to buy American goods and services or pay American debt,” Prior said. 

 

This time, he speculated, Egypt may have used some of its roughly $200 million annual cash transfer from USAID to make the recent wheat purchase. Factoring in the hard-currency shortage, therefore, the more expensive US wheat may have looked like the better offer. 

 

Prior dismissed the idea of any political influence coming into Egypt’s wheat-buying choices. “We lost last year nearly 1 million tons of sales of our soft white wheat to the Australian standard white,” he added. “The Australian Wheat Board was 25 to 50 cents a ton underneath our lowest offer. There was certainly no politics involved there.” 

 

Worldwide, about 100 million tons of wheat is traded annually, with the largest wheat-importing countries being Japan, Brazil, Egypt and Iran. In theory, Egypt could produce all its wheat domestically, but that would come at the expense of higher value crops such as cotton, rice, mangos, strawberries and oranges.

 

In the past decade, about 65 percent of Egyptian wheat imports came from the United States. “This year it looks like it is going to be closer to 30 percent,” Prior said. 

 

Price, competition and market dynamics are the reasons for the decline. With the exception of Europe, the production of the major exporters—the United States, Canada, Australia and Argentina—is down considerably. In recent years, Ukraine, Russian, Kazakhstan, India and Pakistan have emerged as significant players in wheat export markets.

 

But overall, less wheat is being produced. “World wheat production has gone down this crop year about 20 million metric tons, which would account for 5 to 7 percent of total world production,” a wheat trader at an international commodity-trading company said. “Last year, world production was around 500 million metric tons. This year, it is lower than 480 million metric tons.”

 

Egypt’s total wheat consumption is about 13 million tons a year, with 5 million to 6 million tons grown domestically and another 6.5 million to 7 million tons being imported. GASC buys at least a third of the domestically grown wheat and half of the imported wheat for use in government-subsidized baladi bread. 

 

The public sector supply and commodity authority, with an annual import budget of £E 2 billion, enters the market every few weeks, tendering anywhere from 250,000 to 500,000 tons in wheat purchases, based on its evaluations of price and market trends. 

 

The process is straightforward enough. GASC usually offers a tender just after the close of the wheat exchanges in the United States. Bidders submit their best offers in sealed envelopes, with no negotiating allowed. A GASC committee chaired by Abdel Razek then looks at the bids and accepts an offer before the wheat exchanges reopen. International wheat prices typically rise following GASC tenders. 

 

When international grain traders bid on a GASC tender, they seldom have the whole supply on hand, so they have to buy what they do not already own. Essentially, they have to estimate how much the market will jump in response to the Egyptian tender offer. “In some cases [buying] a large quantity is not going to get you the best discount,” Prior explained. “But if you are buying big, you are going to attract a lot of offers, and the competition is going to be very stiff.”

 

Decision-making by committee is credited with being more transparent than the one-man-show, auction-style operation adopted by GASC’s former vice chairman Samir Shakankiri, who was replaced by Abdel Razek in January 2001. 

 

Yet with the tough competition and slim profit margins, not all wheat producers are attracted to the Egyptian market. “The government buyers buy 300,000 tons at a time, and any bump in the road can cost them a lot of money,” said Prior. For supplies offered to GASC, therefore, traders must put up a performance bond or bank guarantee totaling 10 percent of the contract order. The bond is held until the cargo is examined and meets import specifications.

 

Canada sells hardly any wheat into Egypt, choosing for now not to compete in an already competitive market. Its major client in the region is Iran, which avoids buying wheat from the United States. Australia, on the other hand, has traditionally been a heavy marketer in Egypt and the Arabian Gulf. 

 

But Australian wheat production is down by half compared to last year, the wheat trader said. “The Australians produced last year 24 million metric tons. They are now at 12 million metric tons because of bad weather conditions,” he said. 

 

Aside from GASC purchases, about 3.5 million tons of wheat is imported into Egypt by the “free” market, which comprises about 25 private flour millers as well as the public sector Holding Company for Food Industries, which includes seven milling companies plus a silo company. All the local flour millers are operating within thin margins, and in such a price-sensitive market many are opting for the cheaper Black Sea wheat, mainly from Ukraine. “It’s a survival game for a lot of these flour millers,” Prior acknowledged.

 

Free-market wheat is bought through Egypt’s half-dozen private domestic traders or else directly from the international traders, who sell wheat of any origin—except from Canada and Australia, whose grain exports are controlled by their respective wheat boards. Due to currency-devaluation risks, both private and public sector wheat buyers pay cash for their grain imports.

 

For strategic and economic reasons, GASC is tight-lipped about its purchasing patterns and wheat reserves. GASC officials say Egypt always has enough stock for six months.

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