State grain agencies still influential

by World Grain Staff
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What do Japan, Tunisia and Cuba have in common when it comes to wheat? Not only do these countries import most of the wheat they consume, but the government does nearly all the buying in each country, notwithstanding the big differences in their economic systems.

MAFF, Office des Cereales, and Alimport are names in the global grain trade without the high profile of the Canadian Wheat Board or Australian Wheat Board, their state enterprise counterparts on the export side. These government agencies are known mainly to the international traders who bid on their tenders. But domestically such organizations are often household names that flour millers and consumers equally depend upon, since their policies go a long way toward determining the supply, price and quality of most wheat flour and bread.

Despite decades of liberalization in international grain markets, there are still at least 10 countries that maintain state agencies responsible for wheat imports. They may take the form of near monopolies as in the aforementioned three countries, or they may operate in dual systems alongside private importers, as has been the case since the 1990s in Egypt and Algeria, and more recently in Iran and India.

Total wheat purchased by these government entities was around 26 million tonnes in 2006-07, or almost one quarter of all wheat traded internationally.

The biggest concentration is in the Middle East and North Africa, where per capita bread consumption is highest and oil revenues can fund generous subsidies of wheat flour and bread in many countries. Most governments go to great lengths to keep prices low and stable. A sole public agency for wheat procurement and supply is often the mechanism they employ. Outside of the Arab world, Japan and India have the most prominent government wheat purchasing organizations.

The decline of centrally planned economies and successive rounds of trade liberalization under the World Trade Organization (WTO) against a background of stable or declining world commodity prices had given governments the impulse and the confidence to steadily relinquish overt control of wheat and flour markets.

The granddaddy of government grain import monopolies was the Soviet Union’s Exportkhleb, which imported up to 30 million tonnes of grains and oilseeds annually in the 1970s and 1980s. Through its sudden purchase of millions of tonnes of wheat and maize over just a few days in 1974, following a disastrous domestic harvest, this state trader almost single-handedly triggered the last great round of global food price inflation. Now Black Sea wheat from the countries of the former Soviet Union is a major supply source to world markets. Among the remaining communist nations, only North Korea and Cuba still operate grain import monopolies, though the former depends mostly on humanitarian shipments.

During the 1990s, Morocco, South Africa and Israel turned over wheat imports to the private sector, as did the existing state grain agencies in Indonesia and the Philippines, which presently concentrate on importing just rice.

This liberalization followed the classic arguments against government grain imports:

• They prevent millers from obtaining the types of wheat they need to make the variety and quality of products that the market demands;

• They are inefficient and corruption prone, leading to needless bureaucracy and creating a drain on the state treasury;

• By allocating the same wheat to all mills under a quota system, they protect uncompetitive producers and keep them in business while preventing the expansion of better managed companies.

But when wheat prices soar past $400 per tonne, this reasoning tends to ring hollow to some, especially since it also supposes that consumers should pay market prices to achieve rational allocation of global food resources. Thus, the recent unprecedented rise in wheat prices is causing some wheat-deficit countries to reverse their policy of gradual movement toward laissez-faire and to go back to levels of government involvement in wheat markets not seen for at least 10 to 20 years. As a result, governments are increasing their share of the world wheat imports, or at a minimum putting on hold any plans to turn over more of the trade to the private sector.

Egypt partially liberalized its wheat imports in 1993. Since then, government purchases have been restricted to wheat for production of the 82% extraction flour used for subsidized baladi flat bread. At 4.5 million tonnes per year, this quantity is still over half the import total of 7.1 million tonnes, the second highest for any country after Brazil in 2006-07. During the last few years, Egypt’s state grain agency, GASCO, has even begun tendering for half of its wheat from domestic importers.

In the 1990s, Algeria began abandoning its form of socialism and adopted a dual system whereby the government cereals office (OAIC) retained control of most durum imports, but allowed a privatized milling industry to take over the major share of bread wheat imports. However, since April 2007 OAIC has accounted for almost 100% of the imported bread wheat and durum. This was not the result of a change in the purchasing system but simply a consequence of higher wheat prices.

The Algerian government has an implicit offered price to millers for bread wheat that has not changed. When world markets were below this price, the largest milling companies and private traders imported for their own account. Now all private millers are fully utilizing the quotas of subsidized bread wheat allocated to them by OAIC, which sells bread wheat to millers for $150 per tonne, and durum at $335 per tonne. Wheat quotas are set at 50% of the capacity of each mill based on five days per week of operation. This helps to keep even small inefficient mills in business. Though costing well over $1 billion, the total subsidy is just a fraction of the windfall that Algeria has received from the jump in world energy prices.

Neighboring Tunisia’s Office des Cereales keeps a strong grip on both wheat imports and domestic wheat supply, a cornerstone of the government policy to maintain stable food prices through tight regulation of the food industry. This is despite many years of pressure from larger milling companies as well as from international organizations like the World Bank to promote more efficiency in the sector by allowing mills to import directly and to buy directly from domestic wheat growers. In the 1990s, the Office des Cereales gave up its monopoly on soybean meal and maize imports destined for the feed sector. But despite much talk, wheat has remained in the hands of the 2,500-person Office des Cereales bureaucracy.

Keeping wheat prices artificially low is becoming a progressively greater drain on the Tunisian treasury. The country has recently imported wheat at $425 per tonne to sell to millers at $250 per tonne. Insiders say the government now spends $850 million per year to subsidize wheat, compared to $350 million a few years ago. This is substantial for a country of just 10 million people, that unlike some of its neighbors is without oil or gas wealth to fill government coffers. Nevertheless, such is the fear of popular unrest from higher food prices that further reform is unlikely unless world wheat prices drop significantly, according to leading millers.

Libya’s National Supply Corporation (NASCO) bought 1 million tonnes of wheat in 2006-07 and another 750,000 tonnes of wheat flour, down from over 1 million tonnes the two previous years. Currently, there is enough new milling capacity under construction to meet the national need. So wheat should increasingly replace wheat flour imports. NASCO sells wheat to private millers at market prices, buying flour back from these mills at market prices as well. It then sells the flour to bakers for $30 per tonne, thus recovering from bakers and consumers only 5% of the cost. In preparation for a greater emphasis on wheat imports, the Libyan government recently created the Libyan Grain Board, which will take over wheat importation from NASCO.

In Libya there is much talk about privatization and liberalization, including in the wheat milling sector. In principle, the new private millers could take over the wheat importing function, so long as the government was willing to tender for wheat flour locally at world prices for subsidized distribution to bakers and for food aid to Libya’s southern neighbors.

The Iraqi Grain Board survived the fall of the Saddam Hussein regime and the United Nations’ Food for Oil scandal but has new personnel since these changes. The war-torn country continues to rank among the largest international wheat buyers, with an annual import volume of 3.5 to 4 million tonnes, though some of this is by private millers. The domestic harvest of 500,000 to 1 million tonnes is significantly down from pre-war levels. The Iraqi government provides each individual with a ration of 9 kilograms of subsidized wheat flour per month. Since 2004 shortfalls in government wheat purchases created a huge demand for flour imported over land borders from Turkey and to a lesser extent, Iran and Syria.

Thanks to Iraqi demand, Turkey became the world’s top flour exporter in 2005-06. But as the Iraqi Grain Board increases its wheat purchasing, and domestic milling capacity is added, wheat flour imports are dropping. The Turkish Grain Board (TMO) still buys wheat from abroad when the domestic crop is short, but requires private millers to import for their own account when producing for export to Iraq, Libya and elsewhere.

Jordan, like Tunisia, has a sole government wheat buyer and private mills dependent on it. Saudi Arabia’s monolithic state flour milling company relies on massively subsidized domestic wheat, but is starting to tap world wheat markets to reduce the rapid depletion of the country’s aquifers.

Iran’s state monopoly, General Trading Corporation (GTC), is going against the recent trend in the region by moving gradually toward a dual system. In the past, Iran’s milling industry, all in private hands, had just one supplier and one customer — the government. In effect, all mills were toll operators. In the first stage of reform, GTC has allowed 10 of Iran’s larger and better managed companies to begin importing their own wheat in a trial program for 500,000 tonnes. By paying higher prices, the government has stimulated domestic wheat production in the last five years to the point where Iran is now self-sufficient in a normal crop year. Importing gives millers access to higher quality wheat and the ability to make specialty flours demanded by increasingly prosperous consumers. Iran is even beginning to export its own surplus of lesser quality wheat.

Another country that had moved toward a dual system of government and private wheat imports is India. The country, which is second in wheat production after China, only recently had to begin wheat imports after years of self-sufficiency that culminated in a government-held stockpile of 40 million tonnes, which was sold off in export markets in the early part of this decade.

The State Trading Corporation of India bought about 6.3 million tonnes in 2006-07 to replenish the buffer stocks held by the Food Corporation of India, which operates a system of subsidized food distribution for the poor.

At the same time, the government eliminated the import duty for private buyers to zero, permitting nearly 400,000 tonnes of purchases for milling in the southern part of India, where no wheat is grown.

Japan’s wheat system is an anomaly when compared to the aforementioned countries, where subsidizing wheat flour has been the focus. Monopoly imports of 5 to 5.5 million tonnes per year by the Ministry of Agriculture, Forests and Fisheries (MAFF) has traditionally been a means for the government to maintain high prices for wheat flour and to provide funds to subsidize domestic wheat growers.

Wheat used to be sold to mills at two or three times the purchase price. Now the imported wheat is sold at cost. By law, MAFF cannot set its prices lower than the average price of the last eight months plus freight and handling fees. MAFF is asking millers to accept a new system where wheat prices will be adjusted three times per year, but the milling companies are holding out for a twice-annual adjustment.

These are difficult times for Japanese millers, bakers and noodle makers as the MAFF system will no longer protect them from volatile world markets to the extent it has done in the past. In February, MAFF announced a 30% hike in its wheat price to $681 per tonne. Japanese mills do have the right to import wheat needed for production of wheat flour and its products that are exported, which is as much as 500,000 tonnes per year.

Cuba, like Japan is an anomaly, but in a different way, as it is the only country in the Western Hemisphere whose government is a monopoly food commodity importer. The state trading company, Alimport, buys 1 million tonnes of wheat and wheat flour as well as rice, beans and other staples for subsidized distribution to most of the inhabitants of the island nation of 11 million.

The wheat is distributed to government mills that supply government bakeries, whose loaves citizens obtain with ration cards. Ironically, suppliers from the United States (U.S.) have benefited from Cuba’s centralized system, as the U.S. share of wheat has steadily climbed to over 60% since the embargo was modified to exempt most food in 2000. Wider reform of Cuba’s economy will have to take place before state control of grain imports can be abandoned.

Will further reforms of wheat import policies take place in other countries? Surging world grain prices will probably have to subside considerably first. WG

David McKee is a grain industry consultant providing market research and other services to companies seeking to initiate business in new markets. He can be reached by e-mail at