No Certain Doom for Egyptian Wheat Business

February 5, 2011 09:57 AM

Protests and violence in the world's biggest wheat importing nation are getting the market's attention, but how developments in Egypt will affect trade and prices is an open question. 

"I think it has had some impact," says Darrell Holaday, analyst at Country Futures, Inc., Frankfort, Kansas, but he says the impact has been minimal. Initial news of protests in Egypt supported commodity markets. "Everything tagged along with oil because of the corn to oil connection," says Holaday.
However, as the days passed, wheat traders started to get concerned about whether Egyptian buyers would get letters of credit. "We got toned down, too, by the announcement of dollars issued to the Egyptian government buying agency to buy commodities," says Holaday. "When we added it all up, if they used it all to buy wheat, it would buy only 450,000 tons. And we know it would not all go to wheat."
Egypt's appetite for U.S. wheat has been growing in response to reduced supplies from other exporting countries and food supply developments within Egypt, particularly Eastern Europe. In late December a report from the USDA Foreign Agricultural Service post in Cairo predicted that Egyptian wheat imports from all sources would increase this marketing year to 10.2 million metric tons, up 13% from last season and up 3% from two years ago.
FAS said the government buying agency, the General Authority for Supply of Commodities (GASC), was building reserves "in the face of an uncertain domestic and foreign wheat situation." The Cairo FAS report projected Egypt would import 3.5 million tons of wheat from the United States this year, more than double from two years ago and more than five times last year's volume.
Last summer's drought in Russia and neighboring countries, followed by wheat quality damage caused by heavy rains in Canada and Australia, raised Egyptian buying from U.S. exporters.
"They use basic No. 2 soft red winter wheat from the United Stats as their standard for quality," says Steve Mercer, communications director at U.S. Wheat Associates, the wheat export promotion organization based in Arlington, Va., which has an office in Cairo. Price is first priority for GASC buyers, followed by quality. If they can buy a similar quality and class of wheat from Russia, Kazakhstan, or Ukraine at similar prices, they will buy there. U.S. prices for milling wheat are high, but they still are among the lowest in the world, says Mercer.
Egyptian water and rice policies added to wheat demand. The country's rice production is down an estimated 14% this year, and anticipated acreage for the next harvest is down 30%. The Egyptian government discouraged planting when it reduced producer price supports and imposed water restrictions. To compensate for reduced rice supplies for domestic food program, and to reduce rice demand enough to help millers and merchants export rice, Egypt planned to substitute macaroni for part of the rice.
While wheat trade prospects are up, shipping access to the Suez Canal has been a concern in energy markets. However, Mercer says most wheat imports enter Egypt through Mediterranean ports. "The canal is not a huge impact on wheat imports," he says. However, news reports suggest that supplies of diesel fuel used to unload and haul wheat from ports to mills may be a challenge. "The government has told us they are doing all they can to move wheat into the supply system," he says.
U.S. Wheat Associates has not seen a disruption in wheat sales and shipments to Egypt, says Mercer. The latest weekly sales report from USDA showed that for the week ended Jan. 26, Egyptian buyers bought about 115,000 metric tons of wheat through commercial transactions.
Holaday at Country Futures figures the Egyptian developments raise questions in the grain trade about whether GASC will continue to exist and how Egypt will buy wheat. Long-term, if a transition of power leads to more efficient markets in Egypt, changes could be bullish.
"I don't want to make Egypt out to be more than it really is," adds Holaday. "I don't think anybody believes they're going completely away. In the end I think they will buy the next 300,000 to 400,000 tons soon."


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Spell Check

2/7/2011 10:14 AM

  Egypt whined about wheat prices being too high when it was $2 a bushel.


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