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COMPETITORS EAT INTO U.S. WHEAT SHARE

BY MAHA EL-DAHAN

American wheat farmers have always seen opportunity in Egypt’s demographics. A population of more than 70 million growing at nearly 2 percent per year means 1.3 million more mouths to feed each year. And with baladi bread a staple to the local diet, the country represents enormous potential for any wheat exporter.

Egypt is the world’s second largest wheat importer after China. Egyptian farmers are only able to supply half of the 14 million tons required annually. About 70 percent of the rest is purchased through government tenders.

Until 2001, US wheat dominated the local market, accounting for nearly 80 percent of all imported wheat. Since then, the US share has withered against competition from traditional rival suppliers in Argentina and France, as well as new suppliers in Ukraine and Russia.

The US market share stood at 26 percent of the imported wheat market in February 2005, the US Department of Agriculture reported. Depite the rapid and significant loss of market share, US embassy officials remain optimistic that wheat sales will soon recover. “We’re not at all worried about the Egyptian market share. It’s just an indication that the mechanisms of free market are working,” a US embassy official told Business Monthly. “We will continue to sell US wheat varieties, as their quality is needed in the market.”

However, a meeting held on March 6 between Minister of Supply Hassan Khedr and representatives from the US Wheat Council would suggest that the Americans are deeply concerned about diminishing sales. The meeting’s aim was ostensibly to strengthen trade relations and technical cooperation between Egypt and the US. But behind the official press releases, say industry observers, it’s clear that the Americans – who give Egypt more than $1.8 billion in aid annually – would like to see some gratitude in the form of wheat purchases.

“The Egyptian market is one of our top three markets in the world and so it is really important for us, but there is a limit as to what we can do,” says Dick Prior, regional vice president of US Wheat Associates, the export market development organization that represents the US wheat industry.
Traders say part of the reason why the US has been unable to offer competitive prices over the past few years is because the wheat market is mostly price driven. To the detriment of American suppliers, China’s increasing demand for bulk carriers to ship its goods has led to a rapid increase in world shipping costs. Freight rates from the US to Egypt have climbed from $12 per ton in 2003, to the prevailing rate of $45 per ton.

China itself, with a population of 1.3 billion, carries enormous weight on the global wheat market. “China is always a swing factor for the market,” says one Cairo-based trader. “Some years we see no demand whatsoever and then in other years, it can buy up to 10 million tons of wheat, which always has an effect on the market.”

While the costs of shipping US wheat have climbed, prices on Argentinian wheat have fallen due to an exceptionally good harvest in 2004. The General Authority for Supply Commodities (GASC), the state’s main wheat buyer, purchased 1.4 million tons of Argentinian wheat in FY 2004-05.

Argentinian wheat has also received a boost from currency devaluations in the wake of the country’s economic crisis. The falling Argentinian peso has increased the profit margin of export wheat sales, so farmers can afford to sell at relatively low prices to secure foreign markets.

Prior writes off Argentinian competition as a temporary setback. “They are almost out of wheat as they have to sell it all quickly due to lack of good storage facilities,” he says. “They were aggressive during December, January and February but I don’t think they will make any more sales.”

He is also unconcerned by Ukraine’s recent foray into the Egyptian market. Ukraine, once the bread basket of the Soviet Union, has begun exporting its wheat surplus at good prices with sizable discounts to new markets such as Egypt. Prior expects transport costs will eventually force prices up. “They deliver their wheat in what we call ‘feluccas.’ These are little boats of 3,000 tons capacity, whereas most of what GASC is buying is in 60,000-ton Panamax vessels and the rates are lower for the bigger vessels per ton,” he says.

Prior also insists Ukranian wheat does not measure up to US standards. Being new to the market, the quality of the product is inconsistent and delivery is unreliable. He likens buying wheat to shopping for a specialty product at either a multinational hypermarket or the local mom-and-pop shop. At the hypermarket “you know you won’t have to make two trips to buy the product and you know the price they have is the market price and they won’t gouge you,” he says. “The little shop may give you a good deal one time but not on a steady basis.”

The real competition seems to lie in France. “GASC is the biggest importer and their preference is French wheat,” insists the US embassy official. “Most of the Russian sales have been in the private sector but France is our biggest competitor.”

Despite having pledged to phase out all forms of export subsidies on its farm products to comply with World Trade Organization rules, the EU has increased its subsidies on wheat by z4 per ton. Subsidies now total z10 per ton, encouraging French farmers to grow wheat for export. “The price of French wheat was competitive anyway, but now with z10 in restitution, it is even more lucrative to sell French wheat,” one trader notes.

Other challenges may come from British wheat following GASC’s decision in March to put the UK on its list of potential sources. The decision comes following two years of negotiations between the government and Britain’s Home Grown Cereals Authority (HGCA). British farmers say their wheat has a distinct advantage in that, unlike some US varieties, it is grown without genetic modification. Egyptian traders have expressed reluctance to purchase GM wheat.

Yet the US has a few advantages of its own when it comes to the Egyptian market. Cash transfer programs designed by the United States Agency for International Development (USAID) have given the Egyptian government an incentive to buy American wheat. While the programs do not stipulate how USAID funds must be spent, the funds must be used to purchase US products at market prices. Wheat is a favored commodity. In June 2004, for instance, Egypt used $300 million provided through the program to purchase 60,000 tons of American wheat.

The US government also offers various technical cooperation programs through its promotional arm, US Wheat Associates. The programs benefit millers by providing training on technologies and techniques for milling American varieties of wheat. Other countries offer similar programs, which aim ultimately at boosting their wheat sales. “We bring technical milling experts [to Egypt] on a regular basis and we had a milling course last year in which we shared technology and experiences on how to mill and the get most out of Australian wheat,” explains Nicholas Gomersall, regional manager of the Australian Wheat Board (AWB).

Prior admits that cash transfer programs and technical cooperation will not be enough to restore the US share of the market. He says the emphasis now is on the quality and reliability of American wheat. “We are currently at a price disadvantage, but what we have to do is stress the quality and reliability of American wheat as a supply source. Others do not have that same advantage.”

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