VZCZCXYZ0000
RR RUEHWEB

DE RUEHEG #2588/01 2321358
ZNR UUUUU ZZH
R 201358Z AUG 07
FM AMEMBASSY CAIRO
TO RUEHC/SECSTATE WASHDC 6603
INFO RUEATRS/DEPT OF TREASURY WASHDC
RUEHRC/USDA FAS WASHDC
RUCPDOC/USDOC WASHDC 0319

UNCLAS CAIRO 002588 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
STATE FOR NEA/ELA, NEA/RA, EB/TPP/ABT 
USAID FOR ANE/MEA MCCLOUD AND RILEY 
USTR FOR SAUMS 
TREASURY FOR MATHIASON AND HIRSON 
COMMERCE FOR 4520/ITA/ANESA/OBERG 
 
E.O. 12958:  N/A 
TAGS: ECON EAGR PGOV EG
SUBJECT: WHEAT SHORTAGE? 
 
REF:  A. CAIRO 2200 
  ¶B. CAIRO 2111 
 
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Summary 
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¶1.  (U) Shortfalls in wheat and flour have lead to rising prices and 
fears of a bread shortage in the coming weeks leading up to Ramadan. 
 Media reports claim wheat reserves will not last through August, 
but GOE officials counter that supplies are sufficient to last until 
January 2008.  Minister of Social Solidarity Moselhy claims the real 
problem is a black market for cheap GOE-subsidized flour.  Local 
grain traders believe, however, that shortages of imported wheat 
have allowed local farmers to command a higher price for their wheat 
than the GOE is willing to pay.  Many GOE officials maintain that 
the real problem is the subsidy system, which needs reform in order 
to ensure that the subsidy reaches those most in need. 
 
 
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Fears of a Shortage 
------------------- 
 
¶2.  (U) Diminishing stocks of wheat and flour have lead to rising 
prices and fears of a severe bread shortage just before Ramadan. 
Press reports claim that sources in the flour milling sector believe 
Egypt's current wheat reserves will not last through the end of 
August.  Ali Moselhy, Minister of Social Solidarity, denied these 
claims, saying that he estimated reserves at 1.9 million tons of 
imported wheat (sufficient for four months), and 1.9 million tons of 
local wheat, sufficient for consumption through January 2008. 
Moselhy said the real problem is bakeries re-selling subsidized 
flour provided by the government on the black market.  The GOE 
charges bakeries LE 16 ($3) per sack of flour.  The same sack 
fetches approximately LE 150 ($26) on the black market.  Without the 
capacity to monitor all bakeries receiving subsidized flour, the GOE 
is helpless to control the black market.  Moreover, press reports 
indicate that black market flour dealers sometimes bribe GOE bakery 
inspectors, who work for low public sector wages. 
 
¶3.  (U) Hany Khafry, a grain trader with Misr for Grain, told 
econoff that the problem originates earlier in the bread production 
chain.  A shortage of imported wheat, exacerbated by rejection of 
the large shipment of allegedly bug-infested U.S. wheat (Ref A), has 
driven up prices of domestic wheat.  In the months following 
rejection of the U.S. wheat shipment, international wheat prices 
have skyrocketed, jumping from $200/metric ton in June 2007 to 
$340/metric ton currently.  Local farmers, aware of higher 
international prices, refuse to sell their wheat to the GOE at the 
low prices the government demands.  Moreover, press reports indicate 
that this year's domestic wheat harvest was less than the previous 
year's.  Without an increase in the budget allocation for higher 
cost wheat, the government has had to dip into strategic reserves, 
lowering overall stocks.  Decreased stocks have not reached 
critically low levels, however, according to Khafry. 
 
¶4.  (U) Although stocks have not reached critically low levels, on 
August 14, Egypt's General Authority for Supply of Commodities 
(GASC) bought 415,000 tons of U.S. wheat, marking one of the highest 
single day sales of U.S. wheat to any country in several years. 
Delivery is set for September/October 2007.  Since 1 July, GASC has 
bought 1.76 million tons of wheat (about two-thirds from the U.S., 
the remainder from Russia), three times as much as purchased in the 
same time frame last year. 
 
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It's the System 
--------------- 
 
¶5.  (U) Some local analysts believe the problem is not low wheat 
stocks, but the subsidization system itself.  In the current system, 
wheat purchased by the GOE (the Ministry of Trade and Industry 
purchases imported wheat and the Ministry of Agriculture purchases 
domestic wheat) is sold to public mills, which produce flour sold at 
subsidized prices to bakeries, primarily in low income 
neighborhoods.  The bakeries then produce low-priced and generally 
low-quality bread, which in theory is purchased by those who can not 
afford higher-priced, higher-quality bread.  Any customer can buy 
the subsidized bread, however, and frequently demand for subsidized 
bread outstrips supply at the bakeries, leaving poor bakery 
customers with no option but to buy higher-priced bread, or some 
low-cost substitute. 
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Potential Reform 
---------------- 
 
¶6.  (SBU) Minister Moselhy is one of the Cabinet's most vocal 
advocates of reforming the bread subsidy system (Ref B).  Moselhy 
told Acting USAID Acting Director John Groarke that he envisions 
removing the GOE from the bread production chain and providing the 
subsidy in the form of a cash payment to needy families, which could 
be used to buy bread at market prices.  Moselhy told Groarke that 
his ministry was working on a system to categorize families 
according to need.  By 2008-2009, the GOE will begin the transition 
to a cash payment system directly to families meeting certain need 
criteria.  Moselhy believed opposition to the change would come not 
from the poor, but from the public mill managers and 
suppliers/distributors benefiting from the current system. 
 
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Comment 
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¶7.  (SBU) Whether Egypt faces a true shortage of wheat and flour or 
not, the existence of a black market points up market-distorting 
forces at play.  As is the case with many of its reforms, the GOE 
has not adequately articulated its plan to change the subsidy 
system, or made any effort to co-opt groups with entrenched 
interests in the current system.  The lack of a clearly articulated 
plan allows forces opposed to the reform to play on public fears and 
attempt to sabotage the reform effort. 
RICCIARDONE