Inreasing agricultural sustainability and effectiveness in Egypt

Characterised by the predominance of smallholders, Egypt’s agriculture sector is currently witnessing greater investor interest, including capital injections for large-scale projects and a nationwide emphasis on land reclamation for agricultural development. With small-scale farming accounting for around 90% of the country’s active farmers, according to the UN Food and Agriculture Organisation (FAO), and industrial-scale farming comprising just 5-7% of production, some within the sector have urged the creation of cooperatives to assist in marketing products and to bolster technological improvements.

Indicators

Accounting for 15.6% of GDP in 2014/15, according to the Central Bank of Egypt, agriculture, which includes fisheries and irrigation, plays a key part in the economy. In 2013 the sector made up 29.2% of the labour force, according to the most recent UN data. The sector recorded an average annual growth rate of 3.45% during the 1990s, and then accelerated to 4% in 2008/9 before declining again to 3% following the global economic crisis.

Agriculture value-added per worker reached $2562 in constant 2005 US dollars in 2014, according to the World Bank, which represents a steady rise from $2470 in 2013 and $2384 in 2012. By way of regional comparison, this is below Jordan’s $4848, but above neighbouring Sudan’s $1390. According to the FAO, Egypt’s available land for agriculture totals some 3.76m ha. Out of this, 1.36m ha are used to grow wheat, according to the US Department of Agriculture (USDA). Arable land amounted to 3% of the country’s total land in 2011, the latest year for which data is available. While recent irrigation projects have raised the level of arable land, permanent crops accounted for just 1% of land use in 2013.

Support

The government’s Sustainable Agriculture Development Strategy 2030, which receives backing from various international agencies such as the FAO and International Fund for Agricultural Development, aims to increase agricultural sustainability and effectiveness. The objectives of the programme include: improving productivity of land and water units; shoring up food security, especially in terms of “strategic commodities”; increasing competitiveness in Egypt’s agriculture sector domestically, as well as internationally; enhancing the economic climate for investing in agriculture; and creating job opportunities, especially for Egypt’s youth. The strategy also calls for stronger producer associations and support for smallholder marketing. Strengthening laws and regulation on quality and standards, as well as increasing the role of the private sector, are also key attributes of the strategy and have achieved some success, notably in terms of the quality of products.

Cereals

The FAO reported in October 2015 that the cereal harvest for the year totalled 21.8m tonnes, which was in line with 2014 levels and just above the five-year average, with wheat registering 9m tonnes, similar to 2014 and 7% higher than the five-year average. The FAO attributed additional plantings in part to “high government procurement prices”, which have remained set at LE420 ($57.25) per ardeb (a dry measure equal to 198 litres), since the 2013/14 season. However, Reuters reported in November 2015 that Egypt would buy local wheat from farmers at the average global price during the 2016 season.

With corn offering much larger profit margins for farmers than wheat, domestic producers are increasingly focused on corn. Egypt imports 80% of its corn to meet remaining demand, with resulting variation in price and quality. The production of maize increased to 5.96m tonnes, according to the USDA’s preliminary figures for 2014/15, from 5.8m in the two previous years. Rice (paddy) is another important crop for the country, and FAO data shows that rice production declined by 2% to an estimated 6m tonnes in 2014 from 6.1m tonnes the year before, but above the 2009-13 average of 5.6m tonnes. The FAO expected rising costs and marketing difficulties to depress rice plantings and production. Much, but not all, of the demand for wheat will be met by Egyptian farmers. The government is expected to buy 4.25m tonnes of wheat directly from local farmers, up from 3.7m tonnes in 2013-14. At 21.42m tonnes, Egypt’s total cereal harvest in 2014 was comparable to levels seen in 2013, and just above the average for 2010-14, at 21.34m tonnes (8.4m tonnes of which was wheat). This was estimated to rise to 9m for 2015.

The USDA also estimated in October 2015 that the 2015/16 season would see a 7% decline in planted area used for wheat production, owing to farmers opting for more profitable crops. However, yield levels are still expected to increase due to the improved quality of the land used for wheat production relative to that used for other crops. The Foreign Agriculture Service (FAS) and USDA’s preliminary statistics for 2014/15 indicate that wheat production yields averaged 6.15 tonnes per ha. This is up marginally from 6.11 tonnes the year before, but significantly higher than the 1.67-tonne average in Morocco, 2.44 tonnes in Ethiopia and 1.12 tonne averages in Algeria.

The FAO noted the role of the government’s project of constructing silos to raise storage capacity, along with other infrastructure improvements to help reduce post-harvest losses. Another factor of note is the Principal Bank for Development and Agricultural Credit’s new programme for financing cooperatives for accessing funds prior to the wheat supply season.

Wheat Imports

Egypt continued to rank as the world’s top importer of wheat in 2015. The USDA reported that total wheat imports for 2014/15 reached 11.5m tonnes, with preliminary estimates for the 2015/16 season at 11m tonnes as of late 2015, which is consistent with the average over the last five years. Total cereal imports for 2015/16 are expected to reach 19.1m tonnes, which is consistent with the previous year, but 9% higher than the last five years.

Citrus Fruit

Oranges account for approximately 30% of Egypt’s overall fruit production and 65% of its citrus output. The country is the sixth-largest producer and second-largest exporter of oranges in the world, according to the US Department of Agriculture’s FAS. The country’s main export destinations for orange crop remain Russia, Saudi Arabia, the UAE and the Netherlands. Its primary competitors in the market are Spain, South Africa and Morocco Current average yields are 4.2 tonnes per ha, while more advanced farms can achieve 7.5-8.5 tonnes per ha. Yields are expected to rise in 2014/15, while the total planted area remains consistent with the previous year. This has been driven by orange production, which was forecasted to see an increase of 2.3% to 2.63m tonnes due to favourable weather conditions and an increase in total bearing trees by 150,000 to 9.25m bearing trees, according to the FAS.

The Sustainable Agriculture Development Strategy 2030 includes an emphasis on drought-prone areas by utilising modern irrigation methods, especially when it comes to the country’s primary fruits, such as citrus and oranges (see analysis). The government is also financially supporting the Fruit Fly Resistance Project in order to control the spread of these insects, which have impacted production and exports.

Improvements at the export level have also led to improved storage, packing stations and post-harvest practices, most of which are on par with international standards, along with greater adherence to maximum residue levels, the development of new markets and the increasing role of the Agricultural Export Council (AEC) in adopting new regulations and policies to support exports. The AEC has carried out trade talks to promote the expansion of Egyptian citrus exports into Asia, for instance, made regulatory improvements facilitating trade and implemented quality control requirements. The FAS has estimated that Egypt’s orange exports would increase by 4.5% over the course of 2014/15, largely due to a Russian ban on imports from the EU. Russia is expected to account for 30-35% of exports in 2014/15.

Sugar

Egypt produces around 2m tonnes of sugar each year. But with annual domestic consumption of approximately 3.2m tonnes, around 1m tonnes need to be imported. Following a drop in the international sugar price in 2014, the Egyptian market experienced a significant rise in imports in the first quarter of 2015. Sugar produced domestically is priced at LE5.15 ($0.70) per kilogram, compared with LE4.50 ($0.61) per kilogram for imports. In response, the Ministry of Industry, Trade and Small and Medium Enterprises implemented “temporary anti-dumping tariffs” of 20% on cost, insurance and freight, with a minimum fee of LE700 ($95.41) per tonne, in order to protect the local sugar industry. The tariff was set for a 200-day maximum period while the government looked into what Mounir Fakhry Abdel Nour, former minister of industry, trade and small and medium enterprises, called an “unjustified” increase in the import of sugar, as the USDA FAS reported in April 2015.

Cotton

In an effort to improve the quality of Egyptian cotton after recent decline, the government will now be the sole producer and supplier of cotton seeds. The policy was signed into effect by Adel El Beltagy, former minister of agriculture and land reclamation. Daily News Egypt reported in January 2015 that the Ministry of Agriculture and Land Reclamation (MALR) revised its subsidy policy, requiring cotton farmers to have contracts in place in order to receive seed and fertiliser subsidies.

While the consumption of lint will remain stable at 650,000 bales, prompting an increase in imports by 30% to a record 450,000 bales, exports are expected to decline by 13%. The government ceased subsidising cotton at LE350 ($47.71) per qintar (160 kg), or around 40% of the domestic market price. Farmers are now being encouraged to only grow cotton once they have acquired contracts. The government’s position is that farmers will benefit from the removal of subsidies through the coordination of contracts between farmers and buyers, which would eliminate price volatility and ensure farmers a profit margin.

Subsidies for the cotton sector in 2014/15 amounted to LE1.025bn ($139.7m). However, the government’s new cultivation and marketing policy ends cash subsidies for farmers and spinners and means a reduction in total area and production. The expected total area of harvested land for 2014/15 is thought to reach 155,000 ha, with an anticipated decline over the coming three to four years. The targeted area for cotton cultivation for the 2015/16 period is 105,000 ha, which is in direct proportion with the fall in production of 40% of bales for the same period.

Reception to the new policy among farmers has been cool, however, with spinners, weavers and traders showing reluctance to sign contracts. They have argued that by doing so they will be taking on undue risk, let alone the uncertainty of international pricing in 2015 and on into 2016. In February 2015 Mohamed Farag, head of the Independent Farmers Union, told the Financial Times, “After the statements by the ministry [last month], farmers will choose to plant anything else.” With only state-owned mills, under the Holding Company for Spinning and Weaving, entering into contracts in the first quarter of 2015, by June 2015 Bloomberg was reporting that production was expected to tumble by 35% in 2015/16.

Livestock

Forecasts for Egypt’s 2015 beef production were down from the year before, due to the expectation that the UAE would end its cattle donation. In 2014 the government of the UAE donated 100,000 live cattle to the Egyptian government. Additional factors expected to dampen output are the presence of foot-and-mouth-disease and a high calf slaughter rate for 2015/16. Nevertheless, consumption of beef was expected to be higher than in years as the Egyptian government is participating more in the marketing of beef in line with new initiatives to provide affordable beef through its government-owned co-ops and subsidy system. Improvements have also been made in disease control and slaughter policies. Constraints on the expansion of cattle production are mainly high input costs, such as feed, fertiliser and fuel, along with the poor levels of veterinary care available, especially in remote locations. For these reasons the FAS expects many farmers to avoid breeding cattle altogether.

Egypt remains highly dependent on imported ingredients for its livestock feed and production of beef. It imports around 60% of the corn and soy used for feed. As the FAS noted, the increase in world feed prices along with the depreciation of the Egyptian pound against the US dollar have pushed up the prices of imported feed ingredients over the last couple of years. In addition, the 2013 changes in government policy have meant that the prices for corn, wheat and rice (which make up grain miller’s bran) are set by market forces, instead of being set by the government through indicative prices.

Infrastructure

Inefficient port infrastructure is recognised by the European Bank for Reconstruction and Development (EBRD) and others as an obstacle to improved handling and distribution of exports, particularly grain. Since 2012 the EBRD has committed more than €742m for 23 projects, which have included the facilitation of direct technical assistance through the bank’s small business support programme. Support from the EBRD will boost capacity through $20m in loans for improving Egypt’s grain storage capacity. The money will go to financing construction of a facility for grain storage and handling for Medsofts International Holding, a major player among Egyptian grain traders. The terminal, which is near the Alexandria port, will benefit from an improved utilisation rate and more efficient handling.

Egypt’s storage and loss-prevention capacity for its critical wheat supplies will be significantly improved through a multi-billion dollar, foreign-backed grain silo construction project due to come on-stream in early 2016. In late 2013 the UAE announced that it would build 25 silos for storing 1.5m tonnes of wheat to prevent loss. By June of 2014 the UAE granted the contract for the multi-billion dollar project to the state-owned Arab Organisation for Industrialisation. The UAE’s silo construction project is a part of its larger $4.9bn aid package to Egypt announced in 2013. The silos to be funded by the UAE fit within a larger 60-silo complex called the Global Logistics Centre for Grain, which includes another 25 silos receiving Saudi financing, and 10 that are Italian-backed.

Progress appears to be on track, with Khaled Hanafy, minister of supply and internal trade, telling Daily News Egypt in September 2015 that the entire project was due for completion by January 2016. Hanafy said the UAE and Saudi-built storage facilities have capacities of 50,000 tonnes and 30,000 tonnes, respectively. According to FAO, overall storage capacity is expected to rise from 1.5m tonnes to 5m tonnes.

Subsidy System

The government’s new ration card system for food subsidies progressed in early 2015. The new system was introduced in 17 out of Egypt’s 29 provinces, providing for 20 private and government procured products meant to enable access to balanced diets for poor Egyptian citizens by extending the choice of commodities and helping to reduce the government’s deficit.

A Heavy Burden

Egypt’s long history of subsidisation has taken its toll on the country’s fiscal position. With around one-third of public spending going to subsidies in 2013, approximately 13% of GDP has been allocated to subsidy spending, and subsidised imports have eaten away at the government’s foreign exchange reserves. Energy and food have for decades topped the list of subsidised areas of the Egyptian economy. In 2012/13, $3.8bn was spent on food and more than $10bn on fuel.

Following the election of President Abdel Fattah El Sisi in 2014, the government began working to rationalise its subsidy system. Food subsidies, which have traditionally operated through either the baladi bread programme or a food ration programme, underwent reform in 2014/15. As part of that, a new electronic smartcard system for food rations came on-line in 2014. The number of subsidised items available was increased from 10 to 32 commodities, and beneficiaries were given a monthly allotment from which they can draw down on items of their choice. Consumption levels in areas with the new smartcard system in place saw reductions of between 15% and 35%, according to the FAO. Bread subsidies remain at LE0.05 ($0.0068) per loaf, compared to the market price of LE0.35 ($0.05), and a cap of five loafs per person. However, bakers are now prohibited from buying wheat flour at subsidised rates. Instead, the government will reimburse them based on smartcard data.

Investment

Investment in the sector has been increasing in the past few years. Bank Audi Egypt’s figures show that implemented investment in agriculture grew from $894m in the 2012 fiscal year (FY) to $1.3bn in FY 2013 and $1.6bn in FY 2014. In March 2015 domestic and international investors gathered in Sharm El Sheikh for the Egypt Economic Development Conference (EEDC). During the conference the MALR signed protocols on cooperation with 26 firms to invest in an area totalling 282,030 ha. These include an 80,000-ha land reclamation project by the Egyptian-Emirates Group in Kom Ombo, Aswan. Local firms make up 16 of the total investors and will invest in a total of 80,600 ha. Arab and other foreign-owned companies accounted for the remaining 10 companies signing the deals, for a total of 188,000 ha.

Gulf investors continue to be the most active backers of Egyptian industry, and agriculture is no exception. Saudi dairy company Almarai is planning to invest $500m to expand its operations in the country, and was reportedly interested in acquiring other agriculture and food companies, including Egypt’s Dina Farms, with a number of investment banks said to have offered consultation to Almarai for the acquisition process. The Saudi firm Beyti, in which Almarai has a 52% stake and PepsiCo the remaining 48%, has also announced its plan to invest LE4bn ($545.2m) into a juice plant and two milk farms. Beyti currently holds 20% of the market share for juices, dairy and yogurts, with the company intending to raise this to 35% over the next five years.

The UAE has also been active, with a notable announcement by UAE-based agricultural company Al Dahra following the EEDC that it would invest some $300m in Egypt over the course of five years. This is on top of Al Dahra’s $100m investment in the Toshka project, which entails transferring water from Lake Nasser behind the Aswan Dam, to the western desert. Another UAE-based firm, Al Zahera, had also invested LE750m ($102.2m) in Toshka by September 2014, with plans to develop 12,141 ha over 2015 for phase one of an ultimate 40,469 ha. The UAE company also had 7082 ha in East Owaynat.

Focus On Value Addition

There are also calls within the sector for emphasising the production of higher-value crops to better maximise the returns on expensive inputs. Egypt’s competitive advantage in agriculture is in fruit and vegetables, leading some local experts to call for greater concentration on producing higher value crops in this segment. And with as much as 40-50% of produce being lost post-production, improvements in cold chains, trucking, road infrastructure and overall supply chain logistics are also priorities going forward.

Challenges & Opportunities

High input costs stem from the rising cost of pumping necessary well water, and transport and fertiliser prices affected by subsidy cuts. Pumping costs in reclaimed areas are higher than in the traditional Nile Delta region. The government drive for greater equity will mean that sustainable development and investment in rural communities will be promoted, requiring more research and development and location-specific development. In this lies an opportunity for the private sector. Meanwhile, the high cost of land for use by agriculture remains a constraint on expansion. The relative high cost of land is a key reason companies rent land, so that they are able to plant and not have the need to invest in infrastructure to develop it. At the same time, many investors view investment in Egyptian agriculture as a double investment, due to the anticipated appreciation of the value of land, in addition to adding value to that land for the future, such as for reclaimed land (see analysis).

Outlook

Constraints on Egypt’s agriculture sector over 2015 include evolving subsidy reforms ( beginning in July 2014), which has meant a rise in fertiliser prices of between 33% and 50%, along with the impact on distribution due to the higher cost of natural gas, leaving domestic production of fertiliser unprofitable. Inconsistent Customs procedures add to inefficiencies and delays. Insecurity, though improving, has also added to delays. However, high-quality exports are expected to lead the way. The agriculture export sector has come out healthy following the political unrest beginning in January 2011 and is still standing on its feet. It remains well positioned within the wider Egyptian economy as a sector that commands a competitive advantage and significant future potential.