Thomas White Global Investing
Egypt Stamp
August 20, 2010
A Postcard from Africa
Egypt: Wheat Shortage Looms after Russian Wheat Export Ban

Stalks of wheat in a field

Bread is heavily subsidized by the government, making it one of the most affordable commodities in Egypt for the common man.

Egypt went into panic mode after Russia announced that it was curtailing wheat exports, with the European nation suffering from drought caused by record heat. Russia’s decision raises fears that international wheat prices may skyrocket in the next few months, but it has far more significance for Egypt, which is the world’s biggest importer of wheat.

Although the government has assured the Egyptian people that there is no reason to be alarmed as yet, the situation no doubt evokes painful memories of 2007 when wheat prices trebled, causing an acute shortage of bread in Egypt. The Egyptian diet is based on the flat round bread called the baladi, which is heavily subsidized by the government. That time, violent clashes forced President Hosni Mubarak to intervene with the military and restore order. Will déjà vu strike this time around? Bear in mind that the Egyptians love their bread. The nation is the world’s biggest consumer of bread with around 400 grams of bread consumption a day, easily eclipsing France at just 130 grams daily.

Egypt had bought 540,000 tons of wheat from Russia, its main supplier, with the delivery scheduled between August and September. The wheat ban, as announced by Russian Prime Minister Vladimir Putin, becomes effective from August 15, and would apply to contracts signed before the ban. However, in this case, after a request from Egypt, Russia has agreed to review its commitment to contracts signed before the ban. That should come as some relief to anxious Egyptians, but wheat prices have already escalated this year, hitting a two-year high, and have surged 50% since June alone. Record heat has also affected wheat production in the European Union, and it remains to be seen if prices of the commodity will cool down over the year.

All of this is worrying news indeed for Egypt. So far, the impact of a rise in wheat prices has not caused a substantial rise in urban inflation, which remained steady at 10.7% year-on-year in July. But the central bank is expected to take global wheat prices into account when it meets in September to review its monetary policy. So far, the bank has kept its benchmark interest rate unchanged at 8.25% since September last year. Crucially, the holy Muslim month of Ramadan begins this week, and consumption is bound to go up as Muslims traditionally break the day long fast with a huge feast.

Despite Russia’s assurances, Egypt is not leaving anything to chance, and is already making its own arrangements to meet any potential shortfall. It has bought 240,000 tons of wheat from France, and the U.S., Argentina, Australia and Canada also have buffer stocks to export. So far, the pinch has not been felt. But the danger is apparent. The painful experiences of 2007 are never too far away, but Egypt is doing its best to ensure that they remain a mere memory, and not a case of déjà vu.

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