Expensive wheat, but who foots the bill?

The physical market for wheat will rise irrevocably along with the level of the futures market. This means that buyers of wheat and other grains will have to dig deeper into their pockets. Especially compared to a year earlier. The average wheat quotation on the Matif over ten years is €195,81. The latest closing quotation is 46% higher. The financial resources to cover these higher amounts have to come from somewhere. This is becoming increasingly difficult now that the market is clearly heading for an exceptional year.

New Arab Spring
Once again, comparisons are made with the Arab Spring that started in December 2010. In many Arab countries, citizens took to the streets because of great dissatisfaction. This was partly due to the sharp rise in food prices after the grain harvest was very low, especially in Russia. Yet dissatisfaction about food was only a direct cause in a few countries, for example in Tunisia, Yemen and Algeria. In Egypt – the country that is now hit hardest – it was mainly about politics.

Egypt's disadvantage is twofold. On the one hand, the country relies heavily on the import of Russian wheat. This market in particular exports significantly less. More than 30% even compared to last year. On the other hand, the country is far from being able to feed its own population with its own grain. Less than half of the wheat requirement is met with locally grown product. Due to climate change, fewer and fewer agricultural areas are suitable for growing crops. Nevertheless, the government is encouraging farmers to grow more wheat. This is especially possible in the fertile Nile Delta. The fixed government price will increase by 20% for the coming season, which, according to the Egyptian farmers' organization, will certainly lead to more wheat being sown, says a spokesman. The wheat area is 1,47 million hectares. Good for 8,9 million tons of wheat.

Who pays the bill?
Egypt has already canceled four tenders prematurely due to increased prices. Last week the country bought 180.000 tons of Russian wheat in a new purchasing round. Egypt paid $5 more for this than a week earlier. The price of $326 free on board (FOB), equivalent to €281,70, is even $80 more than what the government took into account at the start of this season. The subsidy pot - which should provide Egyptians with bread - had already been increased to $3,3 billion. At the current price level, that is certainly not enough. An additional $1 billion in costs must be taken into account.

This money has to come from somewhere. The Egyptian government is therefore considering paying out less bread subsidy, which 80% of the population receives. Currently, a loaf of bread can still be bought for 5 piasters with a subsidy, while it actually costs 65 piasters. That is the equivalent of 3 euro cents. If the government actually reduces the subsidy, this would be the first time since 1977. Analysts expect instability and a popular uprising. In contrast to 2010, oil prices are now at sky-high levels, allowing more financial resources to flow in. At the same time, the country lacks important income from tourism.

Inflation
Another measure is better coverage of risks: hedging. The government would like to conclude long-term supply contracts for wheat but also other raw materials, such as vegetable oil. The question is whether companies want to go along with this given the volatile market at the moment. Meanwhile, inflation in the country is rising to the highest level in almost two years.

Egypt, but also other Arab countries and China, for example, continue to buy wheat and other grain raw materials. Better to be too expensive than not for sale, is the motto. This confirms stock traders that wheat remains relatively expensive this season. This is also reflected in the large number of net long positions on the futures market in both Paris and Chicago. Although the futures markets are currently slowing down, the long-term prospects remain as positive as ever.

Quality required
It is mainly baking and milling wheat with a high percentage of protein that is in high demand. China also buys a lot of feed wheat for its growing livestock. The European Union has a good buyer in this country, which has now purchased a significant volume. The new Australian harvest is cautiously arriving on the market. However, persistent rainfall in the east of the country is causing delays. With 100 millimeters or more of precipitation, analysts take into account a reduced quality of the wheat. This is particularly bad for the market right now.

It is also noticeable in Europe that prices of €300 per tonne or more are already being paid for baking wheat. In the EU, winter grains have been sown under relatively favorable conditions. It remains relatively dry in the Black Sea region, although growing conditions vary per region. There are also areas where sufficient rainfall has fallen. It is also dry in the US. According to preliminary government figures, the area there will expand significantly next season, by almost 1 million hectares. Especially because wheat requires less fertilizer than grain corn. Closer to home, the area is not expected to change significantly.