Thursday,19 October, 2017
Current issue | Issue 1131, 17 - 23 January
Thursday,19 October, 2017
Issue 1131, 17 - 23 January

Ahram Weekly

The impact of the fall

The fall in the value of the Egyptian pound is likely to lead to domestic price inflation, but there are also other factors threatening the country’s food security, writes Nader Noureldeen

Al-Ahram Weekly

The Egyptian pound has slid to its lowest value in seven years and lost about five per cent of its value over the last two weeks. Foreign currency reserves have also fallen from $36 billion to only $15 billion through the two years up to January 2013. As a result, the country’s foreign currency reserves will be barely enough to cover three months of imports of essential goods, especially to cover the food shortage gap.
Factors affecting the pound include the Suez Canal, tourism, the relationship with the USA and the country’s geographical position. The currency’s loss of value will damage efforts to combat corruption, poverty and illiteracy. Around 40 per cent of people in Egypt’s cities and about 78 per cent in rural areas live on the poverty line of less than two dollars a day and depend on state-subsidies on staples such as bread, cooking oil, sugar, tea and rice.
Egypt is not self-sufficient in food, and it is considered a net importer, as imports of essential foodstuffs exceed 55 per cent of total needs. A weaker pound means a higher food bill, which is similar to the situation that occurred during the global soaring of food prices in 2007/2008, when Egypt suffered by losing one per cent or more of GDP. Over the last seven years, Egypt has kept its position at the top of the list of wheat-importing countries, with imports reaching 11 million metric tons in 2012. This amount represents about 70 per cent of the country’s total wheat consumption of 15 million tons.
Egypt is also the fourth-highest importer of maize at 5.2 million tons, representing 50 per cent of its consumption of dry animal and poultry feeds. Sugar imports stand at 1.5 million tons a year, in addition to 92 per cent of the country’s cooking oil, 70 per cent of its broad beans (medammes), 99 per cent of its lentils, 50 per cent of its milk powder and butter, 60 per cent of its red meat and 100 per cent of its tea.
Most recently, Egypt has had to contend with high and volatile prices for agricultural commodities, including basic foodstuffs, and high population growth at a rate of 1.7 per cent a year. Egyptians are very vulnerable to domestic currency falls, as they are to fluctuations in the international commodity markets, because they are heavily dependent on imported food. Heavy dependence on food imports raises concerns about food security, and reliance on international commodity markets raises both price and supply concerns.
In terms of price, high food prices, even due to the currency falls or soaring food prices, put enormous pressure on household and national budgets. In terms of supply, five exporters (Argentina, Australia, Canada, the EU, and the United States) supply 73 per cent of the world’s traded cereals (UN Food and Agriculture Organisation (FAO), 2008), making access to imported cereals heavily dependent on events in Egypt and on the Arab countries’ relationships with these exporters.
The weak pound and the dependency on imported food will lead to inflation, and this hits the poor. It is expected that the prices of imported goods will go up by a minimum of 30 per cent. It is known that about 80 per cent of the goods in the country’s supermarkets are imported, and the purveyors of imported goods will be inclined to increase their prices sharply for reasons including uncertainty about how far the pound will continue to fall. Thus, life in Egypt is about to get harder for ordinary people who will bear the brunt of the problem if inflation is caused by a decline in the value of the currency.
Though the prices of state-subsidised basic foodstuffs will stay the same (tea, sugar, cooking oil and rice) for the poor who have an ID card giving them access to subsidised food, the cost of other imported foodstuffs will go up, further stoking the anger and unrest that is never far from the surface and increasing the potential for public protest. People are almost in a state of despair. They are barely able to survive and feed their families, and now even their cup of tea is going to get more expensive.

WHAT FACTORS INCREASE FOOD-SECURITY RISKS? Supply and demand factors contributing to the price shock are best understood in structural and cyclical terms.
The recent food-price shock is widely acknowledged to be a result of the untimely convergence of multiple structural and cyclical factors. Recent commodity market projections by the FAO and the World Bank suggest a structural shift may prevent prices from returning to pre-crisis levels. While this may or may not be true, of greater concern for Egypt and other Arab countries is that structural and cyclical forces are creating a system that is very sensitive to supply shortfalls and ever-increasing demand, making future price shocks very probable.
The unexpected speed at which food prices can increase is especially problematic because of the inelasticity of both supply and demand. Households, especially poor ones, cannot quickly alter and reduce their food consumption in response to high prices. Instead, they must make sacrifices in other areas of their budgets. Agricultural producers cannot quickly ramp up production in response to high prices due to the seasonal time-cycle of agricultural production and the slow development of agricultural technologies.
Declining growth in global agricultural productivity will cause shrinking surpluses in supply. In order to keep up with food demand, global agricultural productivity growth needs to stay ahead of population growth. If not, demand will outpace supply and food prices will rise. This is partly because public support for agricultural research has decreased since 1990. Unless this trend is reversed, commodity markets will remain thin, and the likelihood of food-price shocks will increase.
Thin international cereal markets imply that relatively small shifts in supply or demand will lead to large shifts in prices. Only 18 per cent of world wheat production and six per cent of world rice production is exported; the rest is consumed domestically (FAO, 2008). At the height of the most recent shock, some major wheat and rice-exporting countries banned exports for fear of not being able to feed their own people.
These bans contributed to the rapid escalation of global market prices. The thinner the market, the sharper the fluctuation in international prices and the higher the likelihood of future price shocks.
The first policy consideration is that price spikes harm in proportion to the level of net food imports. The second is heterogeneity within farming. The poor are the smallest farmers, and most often they are net food buyers. Moreover, the rural poor, at least in middle-income countries, while having some income from farming (perhaps as labourers), more often rely on non-farm income, and so are unlikely to benefit directly from commodity price increases.
A third consideration is that price spikes hit major commodities generally and not just food. Even in the case of basic staples, the rapid transmission of price shocks to consumer sales is often limited both by policy buffers and by weak market integration. The differential impact on prices of commodities and food is coupled with the correlation of higher incomes with a more diversified diet, which puts less emphasis on basic commodities and more on the value-added activities of transport, processing and marketing beyond the farm gate. Hence, even in low-income countries, the concept of food self-sufficiency is today more difficult to define.
Recently, international prices of agricultural and food commodities have returned to their “spike” levels of 2007-2008. One might debate the degree to which these price increases are based on more fundamental changes in world supply and demand, or on the effects of currency depreciation, or both. The root cause of these changes, however, matters little for the short-run impacts of such spikes on the welfare of consumers, especially poor consumers, and the wherewithal of poorer countries to sustain large food-import bills.
The linkage between trade policy reforms and food security is of vital concern to many developing countries. Ensuring food for all also poses enormous economic, political and technological challenges. Many studies have summarised the results and have been designed to show how trade and associated economic policy reforms have affected the agriculture sector and food supply of farmers in a range of developing countries.

THE IMPACT OF BIOFUELS ON FOOD PRICES: The massive increase in the use of crops for fuel is also expected to increase food costs. While corn and soybean oil have been the primary ingredients used for biofuels, especially in the US and Brazil, as more land shifts towards those crops (especially corn and sugar) this will tend to increase the prices for other crops that compete for the same land.
The rate and speed at which higher crop prices are translated to higher food prices will vary by food product. Higher farm prices may be quickly transmitted to consumers in some food products, but can take multiple years for the full impact to work through the food-marketing system for others. The sector that may bear the largest adverse impact in the short run is the animal-production sector if higher feed prices cannot be immediately passed to food consumers. Over time, reductions in supply of some animal products may be needed, which will eventually result in higher farm and retail prices. Thus, the higher feed costs will ultimately be passed on to consumers.
In the longer run, food will be able to compete successfully with the use of crops for fuel, but probably with somewhat higher food prices and greater costs to food consumers. Not all food items will be affected in the same manner. Some adjustments are likely in where food is produced around the globe and even in the mix of foods consumers eat. The magnitude of these impacts will depend on a host of factors now unfolding, such as the ability of the world’s crop producers to expand output, advances in energy and biofuels technology, energy policy around the globe, and the level of growth of the world economy.
Policy-makers examining various biofuels alternatives are encouraged to consider broader implications, including the impact on consumer food budgets. The ultimate goal for world agriculture is to find a balance between how much of crop production can be used for fuels and how much is needed to maintain an adequate supply of food at acceptable prices.
Common food crops used to produce bioethanol to replace gasoline are sugar and starch crops, such as sugar from cane and beet, corn (maize), wheat, potatoes, sweet potatoes and cassava. Common food crops used to produce biodiesel to replace petroleum diesel are oil crops, such as soybean oil, sunflower oil, canola oil, coconut oil, cottonseed oils and palm oils.
In 2012, the US used about 140 million tons of its corn to produce bioethanol, representing 40 per cent of the total crop, while international trade from maize is only 135 million tons a year. The amount of US maize for export has decreased to only 11 per cent in 2011 instead of 30 per cent 10 years ago. Brazil now uses 55 per cent of its total production of sugar from cane to produce bioethanol.
The EU used all its production of canola oil to produce biodiesel, and the amount available for export fell to only two per cent, instead of the 29 per cent 10 years ago.

The writer is a professor in the Faculty of Agriculture at Cairo University.

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