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Under the system, wheat would be bought from farmers based on prevailing international market prices, derived from a moving average of prices paid by the Ministry of Supply’s General Authority for Supply Commodities (GASC) on its wheat purchases the previous two months, the U.S. Department of Agriculture’s (USDA) Foreign Agricultural Service (FAS) said in a Feb. 2 report.
In the past two years, as global wheat prices plummeted, the Egyptian government continued to maintain high procurement prices in an attempt to provide a safety net to over 2.5 million wheat farmers, while aggressively expanding its procurement targets from an average of 3.5 million tonnes to over 5 million tonnes in 2015 and 2016. However, this approach represented a substantial cost to the Egyptian government as high prices increased arbitrage opportunities, prompting many agents to mix cheaper imported wheat into the procurement channels, passing it off as having been domestically produced, the report said. It is estimated that in 2015 and 2016, at least 1 million tonnes of imported wheat were introduced into the procurement program, costing the Egyptian government an excess $110-$115 million on this operation.
On the face of it, the new pricing system seems attractive; however, it has angered some agricultural cooperatives and their first reaction was to demand that the government reverse its decision and set a fixed procurement policy, the USDA FAS said.
According to the report, Egypt’s wheat farmers average yields of 6.5 million tonnes per hectare. However, their small average production plots, averaging less than one hectare, are a key reason why the government maintained a high procurement price.
After the country floated the pound, which depreciated by over 100%, farmers became much more competitive relative to foreign producers. Although costs increased, they are not of the magnitude of the depreciation, averaging a total increase of 15%, as imported input pricing had already been factored by the much higher exchange rate to which importers had to resort in the parallel market. The higher cost increases are for services dependent on fuel: land preparation, irrigation, and harvest, which averaged an increase of 28%. The cost increases in these different components of production were expected as the government slashed costly fuel subsidies, aiming to reduce Egyptian government spending on fuel by 43%in 2017.
Therefore, under the new proposal, considering current prices, farmers’ incomes would increase by 25%. Although in dollar terms incomes suffered a reduction, because farmers largely consume locally-produced products, they would be largely spared price shocks faced, say, more by urban consumers.
With the changed approach in establishing the wheat purchase price, the USDA FAS does not foresee a marked shift in Egypt’s wheat production, supply and demand numbers. It also believes that the Egyptian government wheat procurement target from this year’s production will be around 4 million tonnes, more in line with the 3.5 million tonnes average that the Egyptian government procured over the past five years and well below the 5 million tonnes alleged to have been bought from farmers’ 2016 crop. The new pricing regime will diminish arbitrage and fraud opportunities, saving the country precious resources that can be utilized in supporting farmers with affordable inputs, know-how, and advanced technologies. According to the USDA FAS, these improvements in the wheat supply chain will facilitate investments, increase job creation, improve food security, and significantly reduce government waste.