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FOOD FEARS REVEAL UNDERDEVELOPED SECTOR
Water and arable land are becoming increasingly scarce in Egypt, and the population is growing at a dramatic rate of nearly 2 million year. Meanwhile, annual food production and income levels have failed to keep pace. The challenge will be for Egypt to ensure that its citizens have enough to eat in the future and define a role for the private sector in guaranteeing food security.
BY SARAH MARQUER
Bread riots in April 2008 and the dramatic increase in global food prices over the past few years beg the question: Can Egypt’s population afford to buy the food it needs? Well-publicized problems with wheat imports illuminate the government’s failure to ensure food safety as well as the country’s insufficient production of the high-demand crop. After all, the average Egyptian consumes 180 kilograms of wheat a year, compared to the worldwide average of 90, and Egypt’s poor rely on the country’s bread subsidy program just to be able to eat at all.
Climate change is threatening the Nile Delta region, where more than 90 percent of Egypt’s food is grown. At the “Business Summit on Climate Change” in October, former US vice president Al Gore said the Nile Delta region will be under water in a matter of decades due to rising sea levels. A recent article by Agence France-Presse states that a 30-centimeter rise in sea level is expected by 2025, enough to flood about 200 square kilometers in the Delta and trigger serious food shortages.
Since Egypt already suffers from a scarcity of arable land, the question is whether the country will have the resources to grow enough safe food.
Akila Hamza, coordinator of the Food Security Information Center and supervisor of the Regional Center for Food & Feed at the Agricultural Research Center, says there are three components to food security: availability and safety; accessibility for all people; and knowledge of what foods are necessary to lead a healthy, balanced life. “[Food security] means that all people can get the food they need, according to their health requirements, safely, all the time,” she says.
The lack of food security in Egypt is clear. Hamza notes that many of the 40 million people in Egypt who live below the poverty line suffer from chronic malnutrition, often resulting in iron and vitamin A deficiencies, and anemia. She points out that 29 percent of Egyptian children aged five or younger suffer from stunted growth.
According to Hamza, about 4,300 calories are available per person per day in Egypt, “but not everyone gets that. Some people are getting too much and some are getting too little.”
Douglas Anderson is regional director for MENA at ACDI/VOCA and executive director of ASI, two organizations funded by the United States Agency for International Development (USAID) working in agriculture and small farmers’ issues. “It’s a distribution issue,” says Anderson, insisting that food security is not about producing enough to eat, it’s about increasing the productivity of Egypt’s small farmers since they typically are the poorest in the country and among those most threatened by lack of food security. Increase their productivity to increase their incomes, he says, “so they have the wherewithal to buy what they need [and] to afford sufficient, nutritious foods.”
Thinking small
Since the 1960s, Egyptian agriculture has consisted largely of small farmers, or small holders, most of whom are concentrated in the Nile Delta. This is problematic, says Mohamed Shoukry, deputy chairman of the Chamber of Food Industries and member of the Food Export Council, because most small holders own only 50 acres of land. “For some crops you need more. You need machines, you need irrigation systems, you need personnel,” he says.
Shoukry’s statement elucidates an overarching challenge to food security: small holders have neither the resources nor knowledge of modern agricultural practices to produce a diverse selection of healthy foods. “These farmers don’t have a lot of access to information to start with or to the equipment [that modern farming requires],” says Anderson. If they did, he argues, they could increase their yields and income and therefore be able to buy more diverse, safe and nutritious food for their families. Small farmers need assistance, he says, and his organizations are providing just that. “We’re introducing new varieties to small holders throughout the country, and then providing technical assistance to them to reduce their use of pesticides and fertilizers and... costs in other areas – irrigation, labor,” says Anderson. As a result of these efforts, he says, water consumption can be reduced by two-thirds and five days’ worth of work done in one, and with higher yields. A tomato field that usually costs LE 7,000-8,000 to grow, can now be grown for about LE 5,000, he says.
The dominance of small farmers in the agricultural sector affects food safety and security. Heike Hagenguth, marketing manager and business development manager for local sales at Modern Agriculture Co. (PICO), uses the example of testing food products to ensure their safety for human consumption, which is a requirement of doing business for large exporters. A single crop residue analysis costs about LE 1,000, she says, with the price for a more comprehensive analysis rising to upwards of LE 4,000. “So who will pay for this? The small guy?” she asks. “He cannot.”
Large farmers or agricultural companies operating in Egypt should be concerned with food security too. Hamza explains that agricultural sector corporations should care about small farmers because their own success will depend on it sooner or later. “As long as we have a lot of small farmers owning a very limited amount of land, we have to help them by formulating cooperatives and working together so they can produce better [crops], get higher yields, income and so on,” she says.
Hamza believes that both the public and private sectors need to recognize the importance of supporting small holders, especially since they are the source of most of Egypt’s food. She is convinced that small holders are an integral component of Egypt’s economic growth and, consequently, food security.
Hagenguth, like Hamza, sees an opportunity for the private sector to aid small holders, and increase food safety and security. “Companies like PICO and our fellow big growers have to take the responsibility and help the smaller [farmers] by, for example, subcontracting them,” she says. Certain specifications must be met when exporting abroad, which mandate that big companies that outsource from smaller ones must ensure that they also meet those standards. “By involving more of the smaller guys, you can help them to improve,” she explains, “and bring them into the system.” Likewise, Anderson explains that his organizations already work with hundreds of food processors and large agro-businesses that depend on small farmers to “meet their annual production plans,” noting that there is room for continued growth.
Food imports
News outlets and industry experts often say Egypt’s dependence on imports, especially important crops such as wheat, is an inherent threat to food security. According to Hamza, for example, Egypt requires 9 million tons of wheat annually to meet domestic demand, yet it can produce only about half that. She alleges that many shipments of imported wheat and other essential crops spoil and are unfit for human consumption, and that this is symptomatic of a weak agricultural sector and the government’s failure to effectively regulate it. Many shipments must be paid for before arriving, yet are of a very poor quality once received, she says. Hamza also argues that many businesspeople facilitating such imports sacrifice quality to “go for cheap commodities.”
With regard to wheat, arguably Egypt’s most important food staple in light of the government’s bread subsidy program, which costs $2.7 billion annually, Shoukry says the inefficient agricultural industry ineffectively monitored by the government results in substantial losses in terms of both food and money every year. He claims 15 to 20 percent of wheat is lost during processing: “At the end of the day, the bread is subsidized to 5 piastres,” says Shoukry, “but let us calculate the waste of the whole operation, which is fully subsidized from the beginning, and tell me: What does an Egyptian pay... and how much does he suffer from what is wasted?”
Hagenguth points out that ensuring food security, supporting the industry and its small players and producing more for domestic consumption cannot only be the responsibility of large private stakeholders. “There need to be incentives by the government or large companies to produce for the local market,” she explains, suggesting that tax relief and other incentives be offered to encourage large businesses to produce for domestic consumption. She clarifies that companies such as PICO and other large Egyptian producers export most of their products, noting that it is not profitable to sell large quantities in the domestic market. Most people, she says, simply cannot afford PICO products.
Likewise, Mansour believes the government should provide incentives and disincentives for certain crops to ensure sufficient harvests of needed crops and that land is not damaged by production of the same crop year after year.
Food exports
The effect on food security of Egypt’s reliance on exports is debatable; what is certain is that food exports have been rising consistently and significantly. According to Shoukry, Egyptian food exports have grown about 20 percent annually in recent years (with the exception of 2009). Anderson says the fresh pack industry went from $26 million in exports in 1996 to $1.1 billion in 2008, and the processed foods industry from $62 million in 1998 to $1.7 billion in 2008. Even in the midst of the economic crisis, Hagenguth notes, PICO’s food exports were up 35 percent in 2009 year-on-year.
Hagenguth says that traditionally the best products go to export markets and cannot be found in Egypt’s grocery stores. What remains, which is unacceptable by international standards, is sold in Egypt.
On the other hand, Shoukry observes, “there is only 4-6 percent annual growth in local agricultural output,” far below the rate of growth for exports. In Anderson’s view, this is especially relevant for large-scale producers and processors. “I warned the industry a number of years ago that they’re going to outrun their supply lines,” he says. “There’s only so much that you can get off of the Delta. Very few of these companies are running at full capacity.”
Rapidly expanding food exports combined with low output rates are further complicated by Egypt’s high birth rate. Hussein Mansour, director of the food safety agency management unit at the Ministry of Trade & Industry, says Egypt produces only about 60 percent of its most strategic foods, such as wheat, corn, rice, beans and other staples. He notes that the population is increasing by about 1.8 million each year. “Right now, there are about 80 million people, and we are importing 40 percent [of our needs],” he explains. At that rate, and considering the rate of agricultural production, says Mansour, “Egypt will be forced to import 70-75 percent of its food needs by 2020.”
Not everyone agrees that Egypt’s expanding food exports and imports are detrimental to food security. “Pure unadulterated nonsense,” says Anderson. “Very few processors – and I’ve worked with over 500 of them – dedicate 100 percent of all their products to the export market.” Secondly, “those export dollars trickle back into the economy and they create jobs. And in order for exporters to export... meet international standards and in order for processors to produce products that they can export, they have to pay a premium to those growers to get the product that they need that complies with those international standards.”
Tapping the land
According to Shoukry, Egypt needs to increase the amount of land being cultivated. He believes the government can address this and encourage private sector investment and large-scale involvement in the industry by renting plots of arable land rather than buying it. “We need to increase the total area of land cultivation to expand our production capacity,” says Shoukry, citing the need for large projects in unexploited, arable land located along the North Coast, and in Upper Egypt and the Sinai peninsula.
Hisham El-Khazindar, managing director of Citadel Capital, illustrates why this can work. Citadel Capital’s three most recent investments in Sudan include the 30-year renewable lease of 250,000 acres of fertile Nile-fed land in Karti, south of Khartoum, which will be developed by Citadel Capital to include irrigation systems and infrastructure. “We pay just half a dollar per acre per annum,” says El-Khazindar. “So it’s a very small price to pay. You’re talking about $125,000 per annum for a huge tract of land.” He adds that the agreement includes an obligation to return about 15 percent of the developed land to the community. “We can then develop that land at a pace that makes sense for us [and] that allows us to manage risk,” he says.
On a side note, El-Khazindar says that while Citadel Capital’s agricultural investments in Sudan will ultimately produce strategic crops such as corn, sorghum and maize to satisfy Sudanese demand first, exporting those products to Egypt is likely once the development scales up. “Obviously, Egypt is a natural export market due to geographical proximity, trade agreements between the two [countries], etc.”
Indeed, many public and private entities are looking to invest – or already have invested – in agriculture in Sudan, Ethiopia and Uganda. In early January, Bloomberg reported the National Bank of Egypt plans to invest $40 million in Ethiopia to grow strategic crops for export to Egypt. After the shortages of 2008, the Egyptian government cooperated with Sudan to grow wheat for both, and has secured permission to cultivate wheat in Uganda.
With regard to large-scale investment and development projects in Egypt, El-Khazindar explains that none are on the scale of those in Sudan because large quantities of comparable land are not available. Nevertheless, there have been some domestic investments. In 2007, Citadel Capital’s subsidiary, Gozour, acquired Dina Farms and it has substantially increased output levels. “There’s been probably somewhere close to LE 30 million invested within Dina Farms for upgrading and developing the agricultural land that we own there,” says El-Khazindar.
Moreover, Citadel Capital has shifted Dina Farm’s agricultural practices in a manner that Anderson promotes as an approach to conserving Egypt’s scarce resources while increasing income and ensuring the availability of strategic crops. “We [Citadel Capital] started shifting from crops with large water consumption in Dina Farms to horticulture, essentially higher value added fruits and vegetables... that optimize water consumption,” says El-Khazindar.
“Why not grow higher value-added products and buy wheat and put the difference in our pockets?” asks Anderson. He points out that when Egypt produces and exports water-intensive crops such as rice or cotton, it is exporting its most scarce resource: water. It makes more sense for a private player such as Citadel Capital to produce and export higher value-added products. “It earns the country hard currency, it creates jobs, it filters back into the economy... [People] can buy their staples with the money that they earn from those exports,” he says.
The problem again is the lack of land and the cost of purchasing land to engage in such agricultural activities. However, Industry Development Authority chairman Amr Assal told Business Monthly in a telephone interview that the government recently approved a specialized agriculture industrial zone in North Sinai that will be available through an auction. The decision to move forward with such a zone, whose plots of land will be leased to winning bidders, was agreed upon only in the past month, and additional zones are planned in the coming years.
The North Sinai plot will cover 50,000 feddans, says Assal. He explains that the auction will begin on March 17 and that “the bidding is not on the rent price – that is fixed. Rather we will approve these [bidders’] facilities based on added-value.” The zone is meant to group land with food-processing facilities in order to boost the country’s supply chain – in much the same way that linking small farmers with large producers can.
Looking ahead
Mansour sums it up by quoting late Egyptian president Gamal Abdel Nasser: “He who does not own his food does not own his freedom.”
The future of food security in Egypt is unclear. The threats are clear, and some clear-cut solutions exist. Increased support from both the government and the private sector is needed to bring small holders into an efficient, formal system, but the private sector will require incentives for investment and participation to make “business sense.”
“Our view is that there is clearly growing global demand for agricultural products... so we think in general terms that this is a sector where there are attractive returns to be made, from a private equity point of view, over the next decade,” says El-Khazindar. “I think even the short- to medium-term outlooks are very positive,” he notes. “And prices for commodities today, when you compare them to where they were in 2004, 2005, 2006 are very, very attractive. You may have come down from the peaks of 2008, but you have pricing levels for agricultural products that by historical standards are very attractive and which seem to be on an upward trend.”
While some companies and public entities are looking to other African countries in this regard, what is most needed are domestic solutions to Egypt’s food insecurity. Anderson, for example, points out that expanding and strengthening supply chains is essential for large players in the agriculture sector. If they want to continue to grow their business and run at more-than-full capacity, “they’re going to have to look to Upper Egypt.”
“We have not completed any new investments [within Egypt],” says El-Khazindar, “but certainly part of the growth plan for Gozour on the agricultural side is to identify over the course of 2010 and 2011 areas of somewhere between 10,000 and 30,000 feddans, primarily in Upper Egypt [for agricultural investment and activities].”
“We realize that agriculture is one of the main pillars of many developing economies,” says Mostafa El-Anwar, a principal at Beltone Equity. “If you look at the sector from a global perspective, you can see that demand for agriculture products will continue to increase as a result of the expected growth in world population. A lot of investments will be required in the agriculture sector in order to meet such a demand. Not only that, but growing per capita income, shifts in diet and biofuel needs are further driving rapid increases in demand.”
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