Supply Picture Tightening Further
BMI view: The Egyptian government recently announced it has replenished stocks but we still expect the country's wheat stocks to remain below average in the coming months. The domestic wheat market will tighten over the coming months as the country's harvest is bound to coming below government's expectations and imports will continue to face difficulties linked to fleeting dollar reserves and fuel shortages. This tight domestic supply picture, combined with increasing food price inflation , could delay the ongoing reform process of subsidies to the sector.
Even though the government recently announced it has replenished stocks, we expect the country's wheat stocks to remain below average in the coming months. We do not exclude a dangerous depletion of stocks in the near term, especially as the local harvest has been sold out and imports are achieved with difficulty. In fact, stockpiles were down to 64 days of supply by April 28th, which is less than during the 2008 global food crisis that triggered riots. The local commodity procurement authority (GASC) indicated at the end of May that it had replenished stocks to about five months of consumption, mainly through purchases of the newly harvested supply. GASC purchased 3.2mn tonnes of the local harvest by the end of May, a dramatic jump from the 996,000 tonnes gathered by May 9. Nevertheless, the USDA still forecasts wheat ending stocks to reach 3.7mn tonnes in 2013/14; 34.0% lower than the five-year average.
|Imports Falter In Spite Of Depleted Stocks|
|Egypt - Wheat Imports & Ending Stocks ('000 tonnes)|
We believe the domestic wheat market will tighten over the coming months as the country's harvest is bound to disappoint and imports will continue to face difficulties linked to fleeting dollar reserves and fuel shortages. We have now revised down our forecast for wheat production in 2013/14 to 8.7mn tonnes as we believe the government objective to reach 9.5mn tonnes is looking more and more unrealistic. Disappointing output will be a result of lower yields on the back of a shortage in fertilizer and diesel preventing the use of irrigation equipment. Fuel shortages will make it harder to transport wheat to the nearest government collection point as well as from import terminals. Also, import demand could not be met because of payment issues. Foreign currency reserves plunged more than 60% in the past two years, reaching US$13.4bn by the end of March. The Egyptian pound also slumped 8.5% against the dollar since the end of December 2012, increasing import costs of dollar-denominated fuel and food.
In this context, we expect Egypt to import about the same amount of wheat in 2013/14 than in 2012/13, which will stay well below the country's production deficit. We forecast the country's production deficit to widen to 10.6mn tonnes in 2013/14, compared to 10.0mn tonnes in 2012/13. However, import capacity will remain similar to 2012/13 at 8.5-9.0mn tonnes in 2013/14.
|Front-Month CBOT Wheat (USc/bushel, weekly) & RSI (below)|
This tight domestic supply picture, combined with increasing food price inflation (at 8.1% year-on-year in April, compared to 4.4% in December 2012) will make it more difficult for the government to reform current price subsidies to the sector. In fact, food and fuel subsidies account 21.9% of government total expenditures in Egypt. Because of ongoing negotiations with the IMF, which include financial assistance dependent on the ability of government to trim their budget, subsidies will be targeted in the near term. Current tightness on the wheat market and the fear of protests escalating again as a result could delay the whole process, with government reducing fuel subsidies ahead of food subsidies.
|Notes: e BMI estimates. f BMI forecasts. Sources: 1 USDA.|
|Wheat Production, '000 tonnes 1||8,400.0||8,862.0||8,700.0||9,232.9||9,378.9||9,524.8|
|Wheat Consumption, '000 tonnes 1||18,600.0||e||18,938.4||19,310.3||19,770.4||20,324.5||20,979.3|