Latest GASC rule change draws cautious optimism from wheat trade

7 Feb 2018 | Tom Houghton

The ins and outs of buying wheat in Egypt are more complicated than they might sound at first.

While the story may be a familiar one to those in the industry, the abridged version is that Egypt – the world's biggest wheat buyer – rattled markets back in December 2015 when it rejected a cargo of French wheat sold by Bunge due to the presence of a hallucination-inducing fungus called ergot.

A series of cargoes from Romania, Russia, and the US were then held up for inspection, causing costly delays to the trade and sparking speculation of cash flow issues and interdepartmental rivalry within the government.

In the aftermath, GASC – the Egyptian government’s food procurement agency – went from having the trade queue up to do business with it to struggling to find just one seller interested in even talking to it.

Since then, a series of reforms and amendments have been passed which attempt to address the market’s concerns and aid its beleaguered buying arm.

After a few false starts, the latest of these introduced last week has seen a guarded optimism emerge, with the hope now that GASC’s convoluted tendering process is finally starting to head in the right direction.

Trading places

Last Friday GASC altered its protein specifications to permit lower quality wheat.

The idea was to bring down costs by diversifying origins, providing competition to Russian wheat which has dominated at GASC’s tenders this marketing year, responsible for 80% of this marketing year’s 5 million mt of imports.

The changes saw Russian, Romanian, Ukrainian and US HRW have minimum protein levels lowered from 12.5% to 12%, while US SRW and French wheat were lowered from 11.5% to 11%.

Demurrage costs were capped at $12,000 per day for a maximum of 12 days, while the cost of sieving a cargo was increased from $2/mt to $3/mt.

If looking for lower prices, the first change makes sense – a lower quality product should, in theory, cost less than a higher quality one.

The second part of the amendment, however, attempts to address an issue more unique to GASC’s predicament.

Unquantifiable uncertainty has been the trade’s major concern with selling to Egypt, with the tender process becoming cumbersome over years of addition and amendment.

The latest change has been designed to bring a degree of predictability to a process which has seen costly – and ostensibly arbitrary delays – to cargoes, creating back office headaches and eating into margins.

"Risk adds to price, this is universal,” one trade source said to Agricensus on condition of anonymity. “The trade makes its margin regardless, with the cost of delays passed on to Egypt.”

Sources range in their estimates, but back-of-the-envelope sums from the trade suggest the risk premium applied to Egypt has seen the country overpay from anywhere between $500 million to $1 billion over the past decade.

Not enough

While Friday's change may have had honest intentions, it was not enough to encourage lower prices on either an origin or destination basis.

Though the number of origins increased, with both Russian and Romanian cargoes offered, prices also increased.

Three cargoes – all Russian – were bought, with the average origin price $8.40/mt higher than at its previous tender a fortnight earlier, while delivered prices were up $7.52/mt.

Meanwhile, the average premium GASC paid above the Agricensus Russian wheat assessment almost tripled from $2.32/mt to $6.72/mt.

At these prices, that decade-long risk premium would come to a cool $739 million.

GASC was contacted but could not be reached for comment.

The market’s kneejerk reaction was that GASC’s plan has failed, but some had other explanations.

“The market is rising, that’s why [prices increased] … They expected to have Ukraine and France, but unfortunately it didn’t work,” a wheat trader who also declined to be named told Agricensus.

And with Russian March wheat now heard offered as high as $202/mt FOB Novorossiysk, the price increase might not look all that bad.

Reasons to be cheerful

While this is not the first time Egypt has tinkered with its import specifications, there was a cautious optimism from those who spoke to Agricensus following the amendment as a growing sense of political willingness has emerged.

And the consensus was that knowing there's a cap on any incurred costs is a good thing.

“Whether or not this will change anything remains to be seen,” a market source said, “but we now see a willingness to address barriers and inefficiencies.”

More than two years since that first Bunge cargo was seized it is little surprise the trade expects words to be backed up by actions, with predictability and quantifiable risk scarce commodities lately.