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Cablegate: Wheat Shortage?

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

-------
Summary
-------

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.


-------------------
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.

---------------
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.
----------------
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.

-------
Comment
-------

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

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