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Egypt purchase supports wheat prices

01/06/2014 @ 9:33am

Egypt, the world's largest wheat buyer, has entered the market with its biggest purchase since 2010, lifting futures prices on both sides of the Atlantic.

Wheat futures were one of the worst-performing commodities of 2013--down 18% compared with the previous year--due to Egypt's reduced grains imports resulting from its economic crisis.

Analysts are now optimistic that the North African country will continue to increase its purchases this year to avoid public discontent over food shortages.

Egypt's state-owned wheat buyer, the General Authority for Supply Commodities, Monday bought 535,000 metric tons of Ukrainian, Russian, French and Romanian origin wheat at an average price of $317 a ton. That is one of Egypt's biggest purchases in the international market in recent years, topping a 475,000-ton order in September 2012 from Russia, Ukraine and Romania and a 420,000-ton purchase of Russian wheat a year before.

Observers think further buying by Egypt is inevitable because any shortage of wheat, which the government buys on the market and passes to its national bread program, could lead to fresh turmoil.

The country's Islamist government, during its brief rule, failed to satisfy public demand for subsidized food and fuel--spurring riots that helped bring the military to power last summer. But now the military-backed leadership is wrestling with the same challenge, trying to ensure there is sufficient cheap bread for the population of 85 million.

After nearly three years of political uncertainty that have badly bruised the economy and deterred much needed foreign investors and tourists, Egypt's budget deficit is nearly 14% of gross domestic product. But the state needs to maintain a supply of basic foods at subsidized prices.

"History hasn't been kind to these governments that were unable to feed their population," Kevin Davitt, vice president of commodity sales and trading at RCM Asset Management said.

Egypt particularly needs foreign wheat this year because its domestic crop is failing to live up to prior government estimates, according to the U.S. Department of Agriculture.

Also, at the weekend, neighboring Algeria purchased 500,000-550,000 tons of wheat. Combined with Egypt's order, this totaled over 1 million tons helping to push up the January milling wheat futures contract traded in Paris by 1 euro, to a fresh one-week high at EUR209 ($284) per ton. On the Chicago Board of Trade soft red winter wheat for March delivery, the most actively-traded contract, was up 0.7%, at $6.09 a bushel.

Some analysts believe that wheat prices could climb further should Iran also extend its recent buying spree of wheat. According to European traders, Iranian private buyers returned to international markets for the first time in around two years last November to source 500,000 tons of wheat flour.

Andrey Sizov, chief executive of Moscow-based agricultural consultancy SovEcon, said Iran was an important importer of Russian wheat last year and already stands as the third-largest importer of the country's grain so far this season, which is "uncommon."

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