Thursday, January 10, 2008

Trouble ahead

Food subsidies soar as wheat hits high

Published: 21 December 2007
Author: Will Hadfield. Staff Writer

Middle East Business Intelligence

"Egypt and Morocco, the region's biggest wheat importers, face rising debts unless cuts are made elsewhere

Egypt and Morocco face soaring bills for food subsidies after the price of wheat reached a record high on international markets in mid-December. Egypt is the largest importer of wheat in the world, while Morocco is the second largest in the region.

Both countries will become more indebted unless they reduce government spending in other areas as neither can afford to let consumers bear the cost of rising wheat prices, according to a senior official at the UN's Food & Agriculture Organisation (FAO).

"They will not let [domestic] wheat prices rise, so I expect them to import what they need, and they will try to finance it through their own export earnings," says Abdolreza Abbassian, secretary for the intergovernmental group on grains at the FAO. "Egypt just makes sure it pays for its food subsidies. It will use aid to jack up those subsidies."

Egypt will import 7.5 million tonnes of wheat between July 2007 and June 2008, making it the world's largest importer of the grain, according to the UN organisation's estimates.

The Egyptian government increased subsidies for the retail price of bread to almost 52 per cent in September, following the steady rise of the price of wheat on international markets since May. As a result, bread subsidies are now thought to cost the government $2.47bn a year.

The price of hard red winter wheat, a benchmark price for the crop, increased from $203 a tonne in May to $332 a tonne in November. Wheat prices have already increased by 19 per cent since the middle of November, after cold weather damaged the harvest in Argentina, which is a key producer.

On 14 December, wheat for delivery in March 2008 reached a record high of $9.80 a bushel on the Chicago Board of Trade, the world's largest market for agricultural commodities.

Any other disruptions to supply caused by poor weather conditions could result in further price surges, according to the commodities outlook for 2008, issued by investment bank Goldman Sachs.

However, Egypt should be able to get the best prices because of its purchasing power in the market.The General Authority for Supply Commodities, a government agency, buys about 50 per cent of the country's imported wheat, but many in the international commodity markets say the government effectively controls almost all imports.

Morocco's government also risks becoming more indebted after a drought in January and February 2007 caused its production of wheat to collapse from 6.3 million tonnes a year to just 1.5 million tonnes for the 12 months to the end of June 2008.

The FAO forecasts that Morocco's wheat imports will climb from 1.8 million tonnes to 3.5 million tonnes because of the drought. After the drought, the government slashed its import tariff on wheat from 130 per cent to 2.5 per cent.

Only Iran and Syria are net exporters of wheat in the region."

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