Markets

Currency float sparks uncertainty in world’s largest wheat market

Henry Wells, November 4, 2016

egypt-simple-map-mediumEGYPT, the world’s largest importer of wheat, overnight floated its currency in a move which has thrown uncertainty on the immediate outlook for grain and pulse sales to the Arab world’s largest population and second-largest economy.

However, floating of the currency is seen as a necessary step for the Egyptian Government to modernise its economy, and may eventually inspire confidence in two Australian exports in particular, faba beans and wheat.

In overnight currency trading, transition of the Egyptian pound, or EGP, saw its value plummet from US$8 to $13 when traded in the open market.

An immediate effect for its population of 82 million will be increased prices for imported food.

The upside of the float will be expectations that a US$12 billion loan package over three years, backed by the International Monetary Fund, will kick-start economic activity.

Egypt had in recent decades been a volume customer for Australian wheat, and its Five Star Mills Group, which since 2014 has been 10pc owned by GrainCorp, is a regular buyer of hard wheat grown in eastern Australia.

In 2015, Australian wheat sales to Egypt were valued at AUD $178 million.

“The floating, and subsequent devaluation, of the Egyptian pound will make the world’s largest wheat importer, even more price sensitive, as their buying power on international markets is reduced,” GrainGrowers Trade & Economics Manager Dr Cheryl Kalisch-Gordon said.

“Egyptian grain importers will notice a considerable price increase in grain in Egyptian pound terms.

“Most of Egypt’s wheat has been supplied in recent years from the Black Sea region, and so Egypt has had access to very competitively priced grain.

“In the case of supplies from Russia and the Ukraine, supplies have been priced even more competitively due to devaluation of their own currencies,” Dr Kalisch-Gordon said.

Faba beans

AGT Foods Australia CEO and pulse industry commentator Peter Wilson said the floating of the EGP has been expected for some time, and the currency devaluation may indeed boost demand for faba beans.

“Egypt is Australia’s largest destination for faba beans, and a lot of the work on price has been done in the past 12 months as the market prepared for this;  in Aussie dollar terms, prices have already fallen 20-25 per cent on where they were last year.”

“They are cheap in anyone’s language, being close to animal feeding parity at the moment, and closer to soy-complex support levels.”

He said faba bean prices have come down substantially in the lead-up to the float as the “mismatch” between the unofficial and the official foreign exchange market narrows.

Mr Wilson does not see downside in current cash prices of AUD $270-$280 being paid for faba beans to Australian container packers.

“The quality of UK fabas isn’t great, and ones coming out of the Baltic aren’t great either, which makes Australian fabas look attractive.”

Mr Wilson said the increased attractiveness of Egyptian exports could prove significant in driving demand for faba beans.

“Buyers want them not just to supply the domestic market, but also for further processing, canning and re-exporting, and for that they are seeking a better-quality bean.”

“I think we’ll see steady demand from Egypt for Australian fabas. Kabuli chickpeas are three times the price, red lentils are two-and-a-half times the price, so in terms of nutritional dollars spent, fabas certainly give more bang for your buck.”

In September, Pulse Australia forecast the 2016 Australian faba bean crop at 405,000 tonnes.  Harvest of the crop will start in earnest this month.

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