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WORTH MORE THAN GOLD
Last spring, international food prices reached record highs, threatening to topple governments and push millions of people into poverty. In Egypt, the impact was severe. Soaring local food prices provoked riots and protests. Today, the situation is calmer, but the question remains: how should Egypt respond to the global food crisis?
BY GEOFFREY CRAIG
It has been called the worst food crisis in decades. Over the first three months of 2008, international prices of major food commodities leapt to a 30-year high. Experts warned that it was just the beginning. A period of high food prices could last for years.
Back in 1972, simultaneous harvest failures due to drought in China, India and the Soviet Union caused a massive shortfall in grain production. Prices shot up by 78 percent until production returned to prior levels three years later.
The current global food crisis will last even longer, believes Ed Estes, a professor of agricultural economics at North Carolina State University. “There seems to be little likelihood that commodity prices will return to pre-2007 world price levels because of developing world income growth and expanding world demand,” he says.
There are several deep-rooted reasons behind the higher food prices, he told Business Monthly. “If you think of factors that contribute to higher food costs as part of a continuum of short-term to long-term contributing factors, then temporary factors include poor weather in Australia, export bans and speculative buying by importers; and longer-term factors include biofuel production diverting from food production, increasing middle-class buying power for meat and cereals in China and India, and population growth in poorer countries.”
These factors are likely to continue to push up international food prices. For example, the price of wheat over the first four months of 2008 was an average of $430 per ton, compared to $207 for the same period of 2007, an increase of 108 percent. The International Monetary Fund’s food index gained 52.7 percent from January 2007 to July 2008 alone, versus only 32.7 percent from 2002 until 2006.
Exporters gain from higher international prices, but importers face a rising food bill. Making matters worse, it happens to be that most poor countries are also net food importers.
The world’s poorest people are spending upwards of 80 percent of their income on food, according to the United Nation’s Food & Agriculture Organization, while the rich spend only 20 percent.
Therefore, the potential for a humanitarian crisis is great. “For 2 billion people, high food prices are now a matter of daily struggle, sacrifice and, for too many, even survival,” World Bank president Robert Zoellick told attendees in April at a United Nations conference in Switzerland. “We estimate already some 100 million people may have been pushed into poverty as a result of high prices over the last two years. This is not a natural disaster. Make no mistake; there’s nothing natural about it. But for millions of people, it is a disaster.”
This year, protests over food prices broke out in at least 25 countries, from Haiti to Senegal and the Philippines to Mexico. In Egypt, a shortage of subsidized bread, which sells for five piastres a loaf, caused people to riot in front of bakeries across the country. And for many poor Egyptians, rising prices made basic items, such as rice, pasta and milk, suddenly unaffordable.
President Hosni Mubarak referred to the food price hikes as “unprecedented” and “dangerous.” In response, the army was ordered to help with the baking and distribution of subsidized bread. Bakeries introduced higher-quality bread sold for 10 piastres in order to ease demand on five-piastre loaves. The government purchased 2.4 million tons of wheat from Egyptian farmers in the latest harvest, from April to June, up 33 percent from 2007, and imported 6.5 million tons of wheat in the 2007-08 fiscal year, compared to 6 million tons in FY 2006-07. It raised the price paid to local farmers as an incentive to plant more wheat. The government also instituted a six-month export ban on rice in order for traders to sell more rice on the local market.
These initial measures may have succeeded in the short run. Prices cooled and the panic that gripped much of the country in the spring has subsided. But experts say the government must still implement a long-term policy to combat the global food crisis.
A global challenge
Egypt alone won’t be capable of bringing down food prices. Local food prices are influenced by supply and demand on international markets. Decreasing prices, therefore, will mean increasing supply on a global scale. UN secretary-general Ban Ki-moon recently called for a 50-percent increase in world agricultural production by 2030.
But meeting this goal will require fresh funding in agricultural research and development. Some experts are calling for a new Green Revolution, similar to the one that introduced intensive farming techniques to Asia, Latin America and the Middle East, and boosted food output considerably over the last four decades of the 20th century.
Those techniques included distributing hybrid grain seeds, mostly wheat, rice and corn, combined with intensive use of fertilizers and irrigation. Egyptian farmers benefited from these innovations, utilizing techniques such as drip irrigation and high-yield seeds. As a result, yields for wheat, rice and corn were 80, 25 and 36 percent higher, respectively, in 1990 compared to a decade earlier.
The higher yields and output have been particularly important considering Egypt’s population gains. For example, wheat production nearly doubled from 4.3 million tons in 1990 to 8 million tons last year, but demand increased during the same period by over 50 percent, from 10.3 million to 15.8 million tons.
Fortunately, experts believe that Egyptian farmers can boost yields and output. They predict that the pattern of behavior that will emerge will mimic that of the 1960s and 1970s during the Green Revolution.
“Many of the technologies from the Green Revolution were adapted first by wealthy farmers, especially in the Nile delta,” a local expert told Business Monthly. “They began using techniques such as drip irrigation, but the problem has been that small farmers still cannot afford them. It’s happening little by little. The focus is now turning to these small-time farmers, especially in Upper Egypt.”
Drip irrigation minimizes the use of water, and is relatively inexpensive at $1,000 per acre. But even that fixed cost is too much for a sharecropper.
“There is still a lot of room for increasing output if more farmers use higher yielding seeds, or they can stagger planting dates to better capture higher crop prices,” the local expert says. “A lot of farmers also plant the same crop every year. But this depletes nutrients [in the soil]. They can increase yields by rotating crops.”
Farmers would also benefit from better infrastructure in order to take advantage of Egypt’s year-round growing season. For example, there aren’t enough post-harvest cold-storage facilities, which are used to contain fruits and vegetables before export.
Meanwhile, Egyptian scientists are working to develop new hybrid varieties that require less water, land and have a shorter growing cycle, such as SK 2034 and SK 2046, two rice hybrids developed by Egypt’s Agricultural Research Center.
“Through our work, we are reaching the optimum agriculture techniques,” says Ahmed Taher, an adviser at the Agricultural Research Center. “We have discovered how to increase yields, as well as cut the duration of the growing time from between 130 and 150 days, to between 90 and 110 days. It means we cut one-fourth to one-third of the water usage, and then we can use this water in cultivating other areas.”
The results have been impressive. Egypt has achieved the highest rice yield in the world. The research center is still exploring other ways to increase agricultural efficiency, Taher adds. For example, scientists are developing special varieties suited for saline soil. “If I’m using a source-tolerant variety then I can get the maximum [return] from cultivating the north part of the Delta, even though the soil is relatively saline and I’m using saline water. Instead of losing 50 percent of the production, I lose 20 percent because this variety is salt tolerant.”
Alternative solutions
Even with technological gains, development keeps swallowing large swatches of prime agricultural real estate. The amount of fertile land is dwindling fast. Egypt, for example, loses an estimated 60,000 acres of its best farmland to urbanization each year.
“You have [limited] agricultural land in Egypt,” says Taher. “There are currently 8.4 million acres, and the maximum you can reach is 11.4 million acres because you’re controlled [by] water availability, which is coming from the River Nile. So you have limits that you [can’t] exceed. On the other hand, the problem is that you have an increase in population, which amounts to about one million per year.”
This trend prompted the Egyptian government in the late 1980s to begin desert reclamation and irrigation projects, with the dream of transforming barren, rock-strewn land into a new “bread basket.”
Other Middle Eastern countries, such as Saudi Arabia, have also launched large-scale agriculture projects in the desert, hoping to achieve self-sufficiency. Most of these were eventually stopped because they proved too costly.
Some efforts get started, but struggle to realize their expectations. Egypt’s most ambitious project, called Toshka, was launched in 1997. It aims to irrigate 540,000 acres of arid soil in the south with water from Lake Nasser. Construction slowed for years. A series of irrigation canals and a major pumping station have been constructed. Total expenditure on the project thus far is estimated at LE 5.9 billion, according to government figures. But, the project has failed to gain steam with only 30,000 acres planted to date. Government officials insist that Toshka can succeed with enough water and fertilizer, though at a steep cost. Despite sky-high international food prices, some economists believe that desert reclamation projects aren’t justified.
“It is easier to continue digging a hole that is started than to dig a new hole,” says economist Estes. “By that, I mean I would focus on efforts to increase yields of existing farmland through adoption of intensive existing production technology. I’m not sure I could envision circumstances where a [wise] economic course of action would be moving to less productive soil or areas such as reclaimed desert.”
And while it is theoretically possible for countries to have yields through reclaimed deserts, it’s essential to consider the cost versus the profit. “My concern is that [while] Egyptian, or Saudi or UAE growers could produce a crop on this marginal land, the cost will exceed its crop value. Domestic and international buyers would not want or [be able to] afford the output because lower-cost alternatives are available,” he adds.
Sure, Egypt may produce more tomatoes, for example. But if those tomatoes cost $10 per kilogram, while the world market price is closer to $8, then Egyptian farmers won’t be competitive on the domestic or international markets, making the whole production process irrelevant.
Instead, economists urge countries to produce goods with a comparative advantage, and then use the proceeds to trade for other goods. In the case of rice, for instance, a country should consider whether it has sufficient land, water, and labor, as well as suitable weather patterns, before deciding whether to focus on rice production, according to Rod Rejesus, an agricultural economist working at the International Rice Research Institute.
“If not, then it may be cheaper to simply buy rice from other lower-cost producers,” Rejesus advises. “If a country without comparative advantage in rice production decides to really grow its own, [but] by providing subsidies, it will be at a higher overall cost to the country and would distort the proper functioning of the markets.”
That doesn’t mean Egypt shouldn’t grow rice, he adds. Other mostly arid countries, such as Iran and Iraq, also grow rice. But since water availability is a constraint, none of them are nor are likely to become major players, like Thailand or Vietnam.
Instant remedies
Comparative advantage may provide the rationale for a country to grow a certain crop, but a farmer’s decision about what to plant and how much, is influenced by relative prices. When international food prices rise, supply should also increase until demand is satisfied, at least in theory.
In practice, Egyptian farmers, most of whom are sharecroppers, don’t have easy access to market data. Nor are they paid international rates for their crops. Instead, they sell to middlemen who pay “farmer gate” prices, which are usually below international prices.
As a result, Egyptian farmers haven’t responded to the surge in international prices by planting more seeds. So the government decided in March to guarantee a higher “farmer gate” price for wheat in order to encourage greater production. It more than doubled the price paid to LE 390 per ardeb, equivalent to about $472 per ton, up from LE 180 per ardeb. The average price of US wheat in March stood at $509 per ton, and $341 per ton the first three weeks of August.
Agriculture minister Amin Abaza said that he expects a 13-percent increase in plantings this season, which runs from October to May, from 3.1 to 3.5 million feddans as a result of the higher prices guaranteed to farmers. This means production of wheat could rise from 8 million to 9 million metric tons.
The same logic holds that farmers would react to lower prices by planting less. Using this reasoning, economists have argued against export restrictions, which governments often use in an attempt to slow domestic price increases. Consumers might benefit at first, but reduced supply actually makes food more expensive in the long run.
Nonetheless, Egypt, along with other rice producers, such as Cambodia, India, Indonesia and Vietnam, restricted rice exports over the past year. This ban remained in effect until earlier this month.
“I understand the political motivation to ban exports,” says Estes. “You increase domestic supply availability and perhaps contain domestic prices, but it avoids economic reality and is not an economically sound decision. World market prices for many commodities such as rice have increased and hoarding simply pushes them even higher short-term and makes them more volatile.”
In September 2007, Egypt’s Ministry of Trade & Industry slapped a LE 200 per ton export tax on rice, but this failed to translate into lower domestic rice prices. So the export tax was raised to LE 300 per ton in March of this year, before the ministry decided the following month to ban exports entirely until October.
The better policy, says Michael Walden, an economics specialist with North Carolina Cooperative Extension Services and published author, is not protectionism but open agricultural markets. “Trade is a way of alleviating shortages, not creating them.” He adds, “the best way to ensure supply reaches users is to allow for unimpeded production and trade.”
Cash in hand
There are other specific steps that can address some of the underlying causes of the food crisis, experts advise. Farmers must raise grain inventories, which act as a buffer against price fluctuations. Prior to the food crisis, grain inventories relative to total demand had declined to their lowest level in decades. Low inventory stocks allowed prices to soar, instead of insulating global prices from sharp spikes in food prices.
There is also growing consensus that governments should remove biofuel requirements, which have diverted production away from food for human consumption. For example, the US has a mandate to utilize 9 million gallons of ethanol by the end of 2008 as part of its alternative energy policy. Already, as much as 30 percent of the domestic corn crop is used as a fuel rather than as food or feed. The EU has also set a high target of a 5.75-percent mix of biofuels with fossil fuels by 2010.
On an individual level, eating less red meat would help because much of the rising grain demand goes towards supporting meat consumption.
In Egypt, the extremely low cost of subsidized bread has led to wasteful habits, such as using bread for animal fodder. People would be less wasteful if prices were higher, in theory, but this is an unlikely scenario considering the potential backlash it would cause.
“Bread is essential for everyone,” Taher says. When it comes to meat, he says those who can afford it, buy it. “But bread, it’s considered a critical food. Our history tells us that the government must secure it.”
This commitment to bread subsidies is getting more expensive. Egypt budgeted LE 21.7 billion for bread subsidies in FY 2008-09, equal to 5.7 percent of its total spending, and a 50-percent bump over the previous year.
Moreover, food prices are expected to remain well above the levels of the past decade, according to a report issued last May by the UN Food & Agriculture Organization and the Organization for Economic Cooperation & Development.
But economists tend to discourage food subsidies, which, they say, distort market mechanisms. The “Asian Development Bank 2008 Outlook Report” stated: “Though governments may be tempted to resist commodity price increases through administrative measures, these are likely to come with a high fiscal price tag, which may add to future inflation. Artificial restraints on prices and inflation today that blunt market incentives are only likely to lead to higher prices in the future.”
Instead, the report advises governments to provide direct income support for the poor. Other economists agree, noting that the problem is a matter of high prices, not shortages. Raising the wages of the world’s poor may be the only way to divert a catastrophe.
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Policy evolution
Egypt’s crop yields and output have improved drastically over the last two decades. Part of the reason is that farmers have begun utilizing better technologies. But another factor has been the gradual liberalization of the sector, which discarded some price controls and production quotas in favor of free market principles.
The government’s motivation came out of necessity. For years, agricultural output was insufficient to meet demand, but the government could purchase imports on relatively stable international food commodity markets. But when these markets became volatile in 1972, high prices and currency devaluations made the food import bill too expensive.
At first, rather than boost domestic output, the government looked to the West for help. Following the signing of the Sinai Agreement in 1975, the US began offering Egypt assistance. US food aid alone was worth almost $1 billion between 1975 and 1981.
This handout also discouraged government spending on the agricultural sector. The government was earmarking only 6 percent of its expenditure for agriculture. And by the 1980s, it was apparent that the status quo was untenable. Egypt would have to devote more resources to agriculture and reform the sector.
The government has loosened its grip, allowing for private enterprise to become involved. Farmers have responded to market incentives by increasing their crop output. Wheat, for example, has seen a four-fold increase in production since 1985, which has been vital for feeding Egypt’s growing population.
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