Egypt's government 'to lose $80m' on wheat purchases this year

26.03.2018

Often, the biggest buyers can wrangle the biggest discounts.

Especially when there is plenty of what they are purchasing to go round.

But not so in the wheat market, where Gasc, the grain authority for Egypt, and the world’s biggest purchaser of the grain, will this season fork out an extra $80m for wheat compared with what other buyers would pay.

And this despite exporters crying out for orders of the grain, with world wheat stocks widely expected to end 2018-19 at a record high.

Extra shipping costs

Gasc’s problem is the conditions that Egypt applies to wheat imports, boosting costs for exporters – expenses which merchants in turn add on to their quotes, meaning that the authority, ultimately, foots the bill.

While the country has, on the face of it, rescinded the zero tolerance policy on ergot which surfaced in 2016 – prompting cargo rejections and large costs for merchants, with wheat very difficult to guarantee as free of the fungal contaminant – its quarantine office, CAPQ, still operates an unusually strict standards regime.

“Traders have begun to complain of increased delays in port clearance and an increase in the shipments facing mandatory sieving to remove foreign material, including ergot,” the US Department of Agriculture bureau in Cairo said.

“Shipments containing any level of ergot, or other foreign matter, must now be sieved under CAPQ supervision at a cost of $3.00 per tonne,” up from $2 per tonne last year, and which “most any exporter to Egypt should expect”.

(This quarantine precaution comes despite the fact that wheat millers typically sieve purchases anyway, “meaning that Egyptian authorities are mandating and charging for a process that would be carried out by processors regardless”.)

‘Increased demurrage charges’

On top of that, merchants report delays in shifting cargos at Egyptian ports, meaning “increased demurrage charges for shippers”.

Although Gasc has capped these at $12,000 for 12 days, meaning a ceiling of $144,000 per cargo, “delays created by sieving are causing shippers to be forced to renew their performance bonds for shipments”, a process which also carries charges.

“The bonds generally expire after 60 to 90 days, while delays last “up to 120 days”, the bureau said.

‘Additional risk premium’

The outcome is add-on costs which the bureau calculated at more than $5 per tonne.

“Obviously, traders and shippers will include these additional costs in their offers at the Gasc tenders.”

In fact, on the bureau’s estimates, Gasc has been paying an “additional risk premium” on top of that.

“In the nine Gasc tenders held between October 18 2017, and February 2 2018, Egypt paid an average of $10.26 per tonne more than other buyers.

Given a USDA forecast that of government imports totalling 7.8m tonnes this year, “if this average premium holds in 2018, Egypt will pay $80m extra for public wheat purchases.”

Protein concession

Ironically, Egypt is fighting back against the extra charges not by reducing import red tape but by lowering quality thresholds, in terms of current the protein hurdle, apparently in an effort to attract extra bidders and, through increased rivalry, trim add-on costs.

“In theory, the lower requirement will allow a greater number of bidders to participate in government tenders, increasing competition and potentially cushioning price increases,” the bureau said.
 
If that is indeed the intention, the policy appears to have failed.

Gasc attracted offers of only six cargos to its last auction, on March 15, 2 fewer than the last auction before the protein threshold was lowered, and indeed the smallest offering to a Gasc auction in eight months.


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