Egypt’s new grain security strategy put to test as Ukraine war enters second year
Al-Monitor Pro Members
Journalist covering Egypt and Sudan
March 31, 2023
In mid-February, Cairo notified UN Secretary General Antonio Guterres of its decision to withdraw from the Grains Trade Convention, set up in 1995 to improve cooperation between exporters and importers. The exit from the group, of which Egypt had been a member since its establishment, was prompted by what authorities see as its inability to control the grains market amid high volatility and to stop paying its dollar-denominated fees at a time when the country is facing serious liquidity issues. Yet the move also comes as part of the new strategy on grain security that is being pursued by the government in the wake of Russia’s war in Ukraine, which prior to the invasion supplied almost half of Egypt’s total wheat needs. So far, the country has managed to navigate the storm, but external and internal risks remain that could jeopardize its fragile balance. The next big test will be the local grain harvest season, which is set to begin this April.
- Before Russia’s invasion of Ukraine, Moscow and Kyiv were the world’s first and fifth largest exporters of wheat, and together accounted for 30% of global exports.
- Egypt is one of the world’s largest wheat consumers and the world’s largest wheat importer, as local production covers less than half of demand. Between 2016 and 2020, the country sourced 58% of its imports from Russia and 18% from Ukraine.
- Wheat imports provide half of the flour allocated to the state’s bread subsidy program, which in turn accounts for almost half of the country’s entire wheat consumption, benefiting around 70% of the population (over 70 million people).
- Ensuring the scheme’s continuity is considered a matter of national security, as bread is a cornerstone of the Egyptian diet and wheat accounts for 39% of caloric intake per person, according to the International Food Policy Research Institute.
- The disruptions caused by the war in Ukraine to the global grain supply chain have dealt Egypt a sharp increase in the import bill, amid acute dollar shortages, capital flight, and a tight debt repayment schedule.
- The dollar shortage was one of the main reasons prompting Cairo’s decision to exit the UN Grains Trade Convention by the end of next June. Officials also stated that the group, set up in 1995 to improve cooperation between exporters and importers, has failed to control the market.
- Egypt’s strategy to ensure its grain security has been based on four main pillars: increasing local wheat production, diversifying suppliers and shifting from open tenders to direct purchases, reducing consumption, and securing external funding.
- For the 2022 harvest, which ran from April to August, Supply Minister Ali Al Meselhy set a target of procuring 6 million tons of local wheat for the state, well above the previous year’s 3.6 million tons. By the end of the season, the government only secured 4.2 million tons.
- In 2023, Cairo aims to secure 4 to 5 million tons of local wheat, over half of what it needs for the subsidized bread scheme. To incentivize farmers to sell their crop to the state it raised procurement prices by more than 40% compared to last year.
- After Russia and Ukraine, Egypt’s other main wheat supplier in recent years has been the European Union, especially Romania and France, which were key in covering the country’s immediate needs following the outbreak of the war.
- In the last year, Cairo has also considered expanding its list of suppliers to include countries such as India, Serbia and Pakistan, but few purchases have followed.
- The General Authority for Supply Commodities, the state wheat buyer, has preferred instead to largely shift from buying grain through international tenders as it did before the war to direct purchases, mostly of Russian wheat.
- In parallel, the government has increased the extraction rate of wheat for subsidized bread (the amount of flour that is produced as a percentage of total wheat ground) from 82% to 87.5%, which could reduce 2023 imports by an estimated 10%, according to the US Foreign Agricultural Service (FAS).
- In June 2022, Egypt secured a $500 million loan from the World Bank to help cushion the impact of the war on its food security, and the funds have gone mainly to cover wheat imports.
- The Black Sea Grain Initiative, an agreement between Russia and Ukraine signed in Istanbul in July 2022 to resume food and fertilizer exports from designated Ukrainian seaports, has been key for Egypt because it has helped to cool wheat prices from the peaks reached after the onset of the war. The initiative was last extended for at least 60 days on March 18.
- In the current FY 2022/2023, which runs until June, Egypt’s wheat consumption is expected to reach 20.6 million tons, up 1.4% from the previous year, according to FAS forecasts, which attributes the increase mainly to population growth.
- In parallel, Egypt’s wheat production will grow by 8.9% to 9.8 million tons thanks to the increase in total harvested area, according to FAS, which projects imports to fall by 4.3% to 11 million tons mainly due to the higher wheat extraction rate.
Scenario 1: New external shock compromises Egypt’s grain security
Global grain trade could suffer new major disruptions if at some point Moscow decides not to extend the Black Sea Grain Initiative. Meanwhile, world wheat production in 2023 is set to be the second-highest on record, but it will be lower than last year and much of the decline will come from Ukraine and Russia, two of Egypt’s main suppliers.
Egypt’s short-term options in the face of such shocks are limited. Increased procurement of local wheat is unlikely to meet the state’s most ambitious targets. Looking overseas, if the government wants to further diversify its suppliers, it will have to turn to more distant countries and assume higher costs at a time when it is facing serious liquidity problems.
However, at the beginning of March Egypt had enough strategic wheat stocks to cover just over 4.5 months of demand, and this year’s local harvest, which runs from April to June, is set to increase, providing the country with a solid short term buffer.
Scenario 2: Domestic financial troubles compromise the country’s grain security
Food subsidies, in particular for bread, and the purchase of wheat and other grains from abroad are putting increasing pressure on Egypt’s coffers at a time when the country is in the midst of a financial crunch. For the next FY 2023/2024, the government has already announced that it will have to increase food subsidy allocations by 20% in order to sustain the scheme.
The economic crisis unleashed in Egypt by the war in Ukraine, which has pushed inflation to five-year highs, has led the government to shelve previous plans to reduce or remove bread subsidies, seen as a matter of national security. But if its financial position does not start to improve soon, the state will find itself increasingly struggling to shoulder the cost. Still, Cairo has proven very adept at securing outside funds to sustain the scheme for now.
Egyptian authorities will stick to the strategy they have pursued in the past year to ensure the country’s grain and food security in the short term. This is based on increasing local wheat procurement, shifting to direct foreign purchases, securing external funds to help finance them, and maximizing the use of available wheat. Egypt entered 2023 with comfortable wheat stocks, which would allow it to momentarily insulate itself from the global market if prices spike, and the outlook for domestic and global production remains positive. Cairo will also avoid cutting bread subsidies at all costs to prevent social unrest.
Marc Español has been reporting on Egypt since 2017, with a focus on the economy and the human rights situation in the country. He has been a contributor to Al-Monitor since 2018 and his work has appeared in other publications such as El País and the think tanks Fundación Alternativas and the European Institute of the Mediterranean (IEMed).
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