Feeding economic growth by focusing on farms and farmers

A major employer and contributor to GDP and export earnings, Egypt’s agriculture sector thrives despite limitations imposed by geography. The country has been one of the breadbaskets of a range of great empires, and the fertile Nile Delta is one of the region’s most important agricultural areas. As demand rises from Egypt’s growing population, the country – the world’s single biggest wheat importer – is working to balance the desire for greater self-sufficiency with increasing opportunities for exports of crops such as citrus fruit (see analysis), vegetables, and sugar. While other parts of the economy are still dominated by state firms, the agriculture sector is “almost totally driven by private entities’ activity”, as Bank Audi, a Lebanese bank, noted in a report in March 2014. Government- and army-led projects are an important part of the mix, particularly in desert areas, but local and foreign investors, as well as millions of Egyptians working farms, predominate.

Major Contributor

Agriculture, forestry and fishing reached 14.5% of GDP in 2013, making the sector the third-largest economic contributor after extractive industries and manufacturing, according to Bank Audi. Livestock farming – including poultry and fisheries – account for around 40% of agricultural production. As of 2013, some 6.28m Egyptians were employed in agriculture, 23.22% of the workforce, according to the UN Food and Agriculture Organisation (FAO). Many rely on agriculture directly or indirectly for their livelihoods, whether actually farmers or not.

Yet of Egypt’s 99.5m ha of land, only 2.8m ha is taken up by arable farming and 810,000 ha by permanent crops. This gives an average 0.05 ha of cultivated land for each Egyptian – considerably less than an association football pitch. With agriculture expected both to feed a large and growing population nearing 90m, and generate export earnings, increasing yields and expanding the area under cultivation are priorities.

Sherif Ayoub, head of registration and technical support at the agribusiness group Syngenta in Egypt, highlights challenges that the country’s agricultural sector must address to increase productivity, some of which present opportunities for companies with crop protection offerings such as his own. Water availability is the biggest issue, but farmers must also contend with the pH and salinity of the water supply, fuel scarcity, patchy transport links, an underdeveloped value chain and low profitability partly due to fragmentation.

Performance

The agriculture sector grew by 3% in the fiscal year 2013 (July-June), edging very slightly up from 2.9% in 2012, according to Bank Audi. The bank expects a similar figure for the 2014 fiscal year, once data are in, following 2.9% growth in the early months. The agriculture sector has expanded at roughly the same rate as the broader economy, retaining its share of around 14.5% of GDP. This suggests that it is not quite as resilient to the economy’s fluctuations as might be expected, but nor is it as vulnerable as tourism and real estate, for example, to political uncertainty.

While the sector grew steadily in output terms, investment surged 53.5% in the 2012/13 financial year, to $1.19bn – capital that should help enhance production value over the medium to long term. This was driven by increasing confidence and enthusiasm from the private sector, which contributed $780.9m, or 65% of the total. Some of this could be attributed to pent-up demand suppressed during the revolution and its immediate aftermath, as well as Egypt’s broader economic recovery, greater clarity about the country’s direction, and the then-government’s move to rely more on domestic production than imports. Government investment also rose to $397.4m from $365.6m in 2011/12.

Production

Egypt’s single biggest agricultural product by value by some margin was tomatoes as of 2012, the last year for which figures were available, with a crop of 8.63m tonnes worth $3.19bn, according to the FAO. Second was paddy rice, at $1.57bn (5.91m tonnes), followed by cow meat at $1.19bn (441,000 tonnes), chicken ($1.14bn, 800,000 tonnes), buffalo meat ($1.09bn, 405,00 tonnes), buffalo milk ($1.06bn, 2.65m tonnes), cow’s milk ($1.01bn, 3.22m tonnes), grapes ($788m, 1.38m tonnes), wheat ($763m, 8.8m tonnes) and dates ($751m, 1.47m tonnes). Other major products in the top 20 were potatoes, oranges, sugar cane, mangos (with mangosteens and guavas), dry onions, sugar beet, olives, strawberries, bananas, and chillies and peppers. Many of these are important for export-oriented agribusiness, particularly oranges, tomatoes, sugar crops and tropical fruit – the latter category having become a growth area for Egyptian agricultural exports in recent years, and a segment in which high-value business is being nurtured.

Bank Audi, using broader categories of produce and leaving out the livestock segment, estimates that Egypt produced 21.96m tonnes of vegetables and 9.55m tonnes of fruit in the 2012/13 fiscal year. It puts sugar cane and sugar beet output for the year at 15.9m tonnes and 9.92m tonnes, respectively.

Grain production grew strongly in 2012/13, with 9.6m ardebs (a unit equivalent to 198 litres) of wheat (up 22.6% from 8.458m ardebs in 2011/12) and 7.83m ardebs of maize (up 25.9% from 6.22m ardebs) harvested, while millet output was up 12% from 751,000 tonnes to 841,000 tonnes. However, rice production fell 13.3% to 5.13m tonnes from 5.91m in 2011/12.

Cultivated Land

The area cultivated for almost all major crops increased appreciably in the three years to the end of fiscal year 2012/13, in June 2013. The increasing use of former desert and other arid land for arable farming is one factor behind this. Grains particularly increased their spread, a result of successive governments’ policies to promote domestic production, as well as the price incentive of doing so. The area under wheat reached 3.35m feddans (a feddan being a traditional unit of land measurement equal to 1.038 acres, and thus often rendered “acre” in English) in 2013, up from 3m in 2012, while that under maize rose from 1.7m feddans to 2.35m feddans, under rice from 1.1m feddans to 1.25m feddans, and the land cultivated for millet from 337,000 to 373,000 feddans.

The area under vegetable cultivation grew by over a third in just three years – from 1.5m feddans to 2.08m feddans. Fruit farms shrank with fruit production, from 1.51m to 1.5m feddans, though fruit farming area has fluctuated considerably in general. The area under sugar cane cultivation grew only very slowly, however, from 317,000 to 320,000 feddans. This is partly indicative of the encouragement of considerably more water-efficient sugar beet farming – which accounted for 435,000 feddans in 2013, up from 386,000 in 2010. It is however worth noting that beet is not replacing cane to the extent that the farming of the latter is shrinking. Sugar cane production remains relatively high-value and profitable, so weaning farmers away from it has proved a challenge – and arguably counter to Egypt’s broader agricultural policy of increasing value added.

Exports

Egypt’s biggest agricultural export in value terms is citrus fruit. In 2011, the last year for which statistics were available, Egypt exported oranges worth $538m, the single most important crop by export value, according to the FAO. It was followed by cotton lint ($264m), refined sugar ($258m), cow cheese ($257m), potatoes ($251m), processed cheese ($225m), dried onions ($216m), grapes ($210m), sunflower oil ($155m), and frozen vegetables ($154m).

By far and away the biggest market for Egypt’s agricultural produce is Saudi Arabia, which imported a total of $612m in 2011. The kingdom is an ideal destination for Egypt’s products, lying just across the Red Sea, and with a market of 29m people and the MENA region’s biggest economy (the second biggest being Egypt itself). Saudi Arabia is a major agricultural importer, given its substantial and fast-growing population and the very limited availability of fertile land. The market is likely to grow due to demographic and economic expansion, as well as the kingdom’s scaling back of its own domestic agricultural programme.

The second-biggest market was Russia, which has historic ties with Egypt and imports worth $314m. It was followed by Syria, with $282m in imports from Egypt, a figure that certainly has fallen in the past three years due to the country’s civil war. Libya, Egypt’s western neighbour, imported $230m of Egyptian agricultural produce and the UAE $229m. Other export markets include Iraq, Jordan, the UK, Italy and Lebanon.

Traditionally, Europe and, to a lesser extent, North America have been core markets for Egyptian agricultural produce. These are large and affluent markets, but also demanding and competitive ones – the need to meet EU import regulation has driven up standards in export-oriented Egyptian farming.

Over recent years, Egypt has increased its exports to faster-growing emerging markets as well, particularly those in the Middle East and South-east Asia, which tend to have lower import requirements. This has broadened the range of Egyptian businesses which have access to export markets, and has provided welcome diversification for the sector. As well as regular export deals, Egypt is also able to capitalise on competitors’ production shortfalls. For example, when Morocco’s citrus fruit crop is smaller than expected, many importers turn to producers in Egypt to help maintain the supply.

Smaller Farmers

Exports are still dominated by large agricultural producers. One of the most pressing challenges that the sector faces is connecting its many millions of smaller farmers to broader markets – domestic and international. As the Brookings Institute, an independent research organisation, noted in a January 2014 working paper, “Improving Regional and Rural Development for Inclusive Growth in Egypt”, “The vast majority of small holders do not participate in export activities due to the lack of contractual arrangements between small holders and exporters as well as to the lack of attention to quality.”

Land holding is extremely fragmented in Egypt: around 40% of agricultural land is divided into areas of less than three feddans. The fragmentation is increasing as families grow and inheritance divides land further, and the market is not optimised to drive consolidation. Smaller farmers also dominate the livestock sector – some 93% of cows, 86% of buffalos, and 55% of sheep and goats are part of flocks of fewer than 10 animals, while landless farmers own 17% of cattle, 6% of water buffalos and 25% of sheep and goats, according to Brookings. Programmes like SUN, an NGO launched in Upper Egypt in 2003, aim to address this.

SUN organises small farmers into cooperatives gives them technical and marketing support, and exports much of the produce. But it is clear that much more could be done to encourage cooperatives and consolidation to help smaller farmers access broader markets in which larger Egyptian producers already flourish.

Long-Term Strategy

As the Brookings Institute remarked, “The challenges facing Egyptian agriculture and rural development, as well as the opportunities, are well known.” The Ministry of Agriculture and Land Reclamation (MALR) has adopted a comprehensive strategy for agricultural and rural development to 2030. It has six objectives: improving rural standards of living and reducing poverty; increasing the sector’s contribution to national food and nutrition security; using natural resources more sustainably; enhancing land and water productivity; increasing the agriculture’s competitiveness on global and national markets; and improving the climate for investments in agriculture.

Limited space is a major challenge for agricultural development. Egypt has an area of around 1m sq km, but 97% of this is desert. Nearly all the population lives on just 3% of the land, in the Nile Valley and its Delta.

Almost all currently available suitable arable land is already being cultivated, while urban expansion and lax implementation of planning regulations are seeing construction encroach on some of these areas, particularly in the crowded Nile Delta. A report by the MALR in September 2014 recorded a remarkable 1.25m cases of infringements onto agricultural land, covering 51,800 acres. Given these constraints, the government, the industry and foreign partners are focusing on two ways of boosting output: increasing yields and developing deserts and semi-deserts into viable arable land.

Egypt has several desert agricultural projects in various stages of development. Most well-known is Toshka, in Upper Egypt beyond the left bank of the Nile, a Hosni Mubarak-era programme with stop-start progress that the government is looking to revive; it is already home to some major Gulf investors (see analysis).

Other projects include East Oweinat, to the west of Toshka and often linked to it, and the North Sinai Agricultural Development Project (NSADP), which covers 168,000 ha in the Sinai Peninsula and has most infrastructure in place, but has been slowed by security concerns. “Egypt does not have any option but to develop agriculture in the desert, wherever there is water available,” Daniel Leroux, CEO of KADCO, a Saudi firm investing in Toshka, told OBG. “It is the only solution they have. Many people live in the Delta and housing is using a lot of agricultural land. In the Delta, the land gets taken.”

Yields

Crop production per ha of land in use has risen steadily over the past decade and a half, reaching $4801 in 2012, from $4615 in 2007, $3951 in 2002 and $3530 in 1997, according to the FAO. Both government officials and private sector businesspeople assert that it will be possible to build on these gains with modernisation – and indeed that modernisation is essential to offset erosion from higher costs. “Farmers are encountering various challenges from weather, to market prices, agricultural input prices, labour, and so on,” Nasser Abualrous, managing director of the agribusiness group Syngenta, told OBG. “Production cost is on the rise and the only way to have profitable farming is to adopt technology and adopt agricultural best practices to increase yields dramatically.”

Syngenta works in crop protection – a segment that includes all types of pest and weed control in agriculture, including development of seeds more resistant to pests and difficult climatic conditions, as well as other means of promoting yields. The government estimates that the crop protection market in Egypt is worth LE1bn ($142m), though the figure is likely to be significantly larger taking into account smuggled and counterfeit products. Syngenta develops seeds and products specifically suited to Egypt’s soils and climate and it has particular strengths in tomatoes, cereals and sugar beet – the yields of which Egypt is trying to increase.

Climate change and shifting patterns of cultivation, such as increasing use of pivot irrigation rather than flood or drip irrigation, are changing farmers’ crop protection needs. Late blight, or phytophthora infestans, has become more common, as have other fungicides, as the climate has become more humid. Fungicides are now as important as insecticides in the crop protection market, Syngenta’s Ayoub told OBG. Having previously been negligible, herbicide sales are on the rise now, particularly for cash crops such as wheat, rice and sugar beet. One of the issues crop protection providers and the sector as a whole faces is educating farmers about how to use the products. Farmers can use too much or too little, either damaging the ecosystem, or allowing a resistance to build up. Syngenta runs a programme training government agricultural officials to help advise on how to use crop protection.

Wheat

Egypt’s annual wheat consumption averages between 15m and 20m tonnes. The exact figure is hard to discern, partly because local growers often retain (as opposed to selling) up to half their harvest for their own consumption and seed stock. In its 2014 report on the Egyptian economy, Bank Audi estimated that Egypt’s wheat consumption was around 18m tonnes. State-owned General Authority For Supply Commodities (GASC), the major wheat buyer, expected to purchase 4.4m tonnes of domestic wheat from the 2014 harvest, around half total forecast production.

What is certain is that Egypt is the world’s largest wheat importer, buying 10m tonnes or more every year. These imports put serious pressure on the country’s public finances, as well as its foreign exchange position. The lion’s share of the state’s $4.6bn annual spending on food imports goes to grain, and wheat subsidies are the second most costly segment of Egypt’s burdensome subsidy regime, after those on fuel.

Around one-quarter of Egyptians live below the poverty line and millions are reliant on subsidised bread, demand for which requires 9m tonnes of wheat a year, according to figures from Bank Audi. Successive governments have tried to reduce import dependence by boosting domestic production, but have run up against challenges related to cost and technical issues. In 2013 Egypt scaled back wheat imports due to the country’s political and economic challenges, particularly the weakened pound and shortages of foreign exchange reserves, which tumbled in the wake of the 2011 revolution. The decision was also somewhat of a political one by the Islamist government of President Mohammed Morsi, which was keen to boost Egypt’s self-sufficiency.

Thus Egypt imported just 6.66m tonnes in 2012/13, down from 10m in 2011/12. The cut in wheat imports was only partly offset by a 13.5% rise in domestic production to 9.6m tonnes. It therefore had a significant impact on the country’s wheat stocks, which fell by a similar proportion, from 4.9m tonnes in July 2012 to 3.5m in July 2013, when Morsi was ousted, according to Bank Audi. This left Egypt with only enough wheat to cover only around three months’ demand, so the new military-backed government moved quickly to import 480,000 tonnes to cover demand at least until year-end. The decision to cut wheat imports while not attempting to manage wheat demand within Egypt has been seen as misguided, if well-intentioned.

Return To Market

In 2014, with a new government, increased political stability and an economic recovery strongly bolstered by international support, Egypt has returned to international markets with a more ambitious purchasing programme that has had a noticeable effect on global wheat prices.

In January 2014, Egypt re-entered the international wheat market with its largest purchase since 2010, before the revolution, in a move that lifted prices across the world. GASC bought a total of 535,000 tonnes of Ukrainian, Russian, French and Romanian wheat at an average price of $317 a tonne, taking advantage of low prices to stock its silos.

Analysts said at the time that Egypt’s purchase programme would continue, as the government looked to ensure a steady flow of wheat to prevent shortages and local harvests fell below expectation, and were proved correct as acquisitions continued through 2014. In September, Egypt made its first wheat purchase since the beginning of the year, with 60,000 tonnes to supplement 60,000 tonnes bought from Romania, and a further 55,000 tonnes of soft red wheat from the US.

The US purchase also shifted prices upwards, not because of the relatively small shipment, but because of its indication that GASC is a keen enough buyer of wheat that it is willing to bear the higher cost of importing from across the Atlantic, and not from traditional markets in the Black Sea and Mediterranean.

Meanwhile, Egypt’s purchases of French wheat are notable as well, as they show that GASC’s is now willing to import wheat with a higher moisture content (as French grain has), and represent a reversal of a policy announced in 2013 of not purchasing wheat with a moisture content in excess of 13%.

Boosting Output

The government of President Abdel Fattah El Sis has committed itself to continuing Egypt’s drive to increase self-sufficiency, but with more realistic targets than its Islamist predecessor. In August 2014, the minister of agriculture, Adel Al Beltagy, announced the goal of covering 75% of wheat demand from domestic sources by the end of 2017. At present, Egypt is around 60% self-sufficient in wheat production. Al Beltagy emphasised that this would require both increasing production and a reduction of losses. He said that the ministry planned to introduce trefoil seeds that would increase the yield of the crop. This would allow the area under cultivation to be scaled back, to be replaced by wheat. In addition, research to boost per unit productivity and efforts to reduce post-harvest losses should also help (see interview).

One of the difficulties of implementing this plan will be the strong demand for animal feed thanks to Egyptians’ growing appetite for meat as incomes rise and the population grows, and the importance of livestock and dairy farming, which caters both to a fast-growing domestic market, and exports. Ayoub said that a programme of substituting livestock-feed clover with wheat a few years ago lead to meat prices soaring from LE30 ($4.30) to LE70-80 ($10-11.40) per kg.

Rice

Rice is an important cash crop for Egyptian agriculture, but it has been affected by policy decisions made to support self-sufficiency. In November 2013, the government suspended rice exports just a week after issuing licences allowing them. The ban was intended to ensure that domestic demand was met by local production and that prices were contained at a time when the government was handling the sensitive issue of subsidy reductions. The ban was first imposed in 2011 to ensure domestic supply for its subsidy programme. However, Egypt produces a surplus of rice, producing 4.8m tonnes in 2012/13, against domestic demand of 4m. In September 2014, Bloomberg reported that the government was preparing to lift the ban in marketing year (MY) 2014/15, allowing exports until September 2015 or until 1m tonnes were sold abroad, depending on which occurred earlier. Lifting the ban would provide a valuable boost to Egypt’s export earnings, and allowing sellers access to the global market could stimulate production in the medium term.

Reducing Waste

Reduction of what are currently worryingly high levels of product wastage has become regarded as a pressing issue over recent years. The goals of greater self-sufficiency in some products (such as wheat) and increasing exports of others (fruit from tomatoes to exotic crops) are undermined by the extent of wastage. Egypt’s harsh, hot climate is certainly a challenge, but better technology, infrastructure and logistics management would bring great benefits to the agricultural sector – and create substantial opportunities for investors, contractors and consultants with the requisite expertise. Egypt loses around 15% of its agricultural output after harvest, according to estimates from the MARL. This is a normal level for developing economies, but Egypt, with its exceptionally tight water situation and millions of farmers eking a living from very small plots, feels the wastage particularly acutely. Some 1m to 1.6m tonnes of wheat alone are lost in transport and storage every year, at a cost of up to $500m. This is waste that Egypt can ill-afford, given the huge cost of imports and the importance of the crop as a staple in the country. Because of this, large-scale investments are being made in silo capacity. In May 2014, nine new silos with a combined capacity of 45,000 tonnes were opened in Alexandria, Egypt’s second city. Another 18 units, each with a 5000-tonne capacity, are due to be complete by June 2015.

The Alexandria silos are part of a UAE-funded project, announced in late 2013, to expand Egypt’s grain storage capacity by 50%, from 3m to 4.5m tonnes. Contracts for silos to be constructed in the Delta districts of Amiriya and Damietta were awarded in May 2014. Improving distribution infrastructure would be an important step towards enhancing output and supporting development, according to many in the sector.

Outlook

Egypt will continue to balance agricultural production for its large, growing population, and export-oriented output, like citrus, that is an important earner of foreign currency and attracts foreign investment. Over the longer term, demand-side management of wheat consumption might help free up land for other crops, from oranges and tomatoes to feed used for livestock herds for meat and dairy products. Investors should see growing opportunities in Egypt’s moves to boost output by increasing desert cultivation and yields, alongside efforts to consolidate and improve infrastructure. There is scope for consultancy, construction and crop protection, as well as cultivation.