The Ability to Pay: One Third of Iranians go Hungry

Sanctions and the resulting currency crisis, the Iranian riyal plunged more than half over the last year, affect food security in the country too.

Food accessibility is compromised for lower income households. About a third of Iranians have been cutting back their diet.Luxury products like dairy or chicken are consumed less.

The situation is exacerbated by neglect of the agricultural sector and recent droughts.

Like in Egypt, strained foreign exchange position affects the ability to import sufficient food at affordable prices.

The Ability to Pay: Egypytian Food Imports Threatened

As a result of its continuous currency crisis Egypt is facing problems in financing food and fuel imports. Lack of diesel for pumps and farming equipment in turn threatens domestic agricultural production.

The country is the world’s largest wheat importer, a dependency that has developed since the 1950s when Egypt started to import large quantities of P.L. 480 deliveries from the US as I describe in chapter 4 of Oil for Food.

This dependency is not to go away despite Egyptian efforts to increase self-sufficiency from currently around 60 percent. There is simply not enough land and water around. Ethiopia has already questioned the Nile waters accord of 1959 that grants Egypt three quarters of the flows.

Egypt is now amidst a demographic transition. Birth rates have been falling and the fertility rate, the average number of children per woman, stands at 2.64. However, it takes time until youth cohorts grow through a population pyramid.  Population will continue to grow to 124 million by 2050 and will only level out afterwards.

That means more food imports while Egypt faces growing problems financing them. It has turned into an oil net importer at the end of the 2000s. Natural gas exports face problems of their own due to underinvestment and sabotage of the pipeline to Israel and Jordan. In any case the rent component of natural gas production is much lower than for oil, even Qatar, the world’s largest LNG exporter receives the majority of its government revenues still from oil.

The problems of Syria are similar. Because of a lack of refining capacity its overall petroleum balance turned negative in monetary terms at the end of the 2000s. Dwindling crude oil exports did not earn as much foreign exchange as was needed to import refined products like gasoline. With the civil war and the EU import embargo against Syria this gap has grown.

Hence, the ultimate story of food security in the Middle East is not domestic agriculture, but economic diversification and the ability to pay for food imports. This is a daunting task given the current global financial crisis and the paltry track record of  the region’s countries in this field.

Iranian Food Imports and Sanctions

Iran’s food imports are increasingly affected by financial sanctions. Food is not part of the sanctions regime and imports are possible, but facilitation of payment is the issue.

International traders shy away from the uncertainty and the difficulty of receiving payment in convertible currency. Transport insurance is also an issue.

It is a structural problem. Essentially the Iranian trading system has problems in coping with the new situation: Private traders stay away and the public sector cannot fill the void.

In the past, Iran has already entered barter arrangements with Pakistan or accepted payment in non-convertible Indian rupees.

In good years Iran is close to self-sufficiency in grains. But this year was not a good one and Iran had to resort to international markets on a large scale, not to mention more luxurious food items like poultry where there has been an import boom in the past fueled by oil revenues.

Iranian diets are becoming simpler and experts fear for increased malnutrition among poorer Iranians who  cannot afford a more varied diet.

Saudi Barley Imports: Russia and Ukraine Fail to Deliver

In good years, Russia and Ukraine are responsible for about half of global barley exports. Saudi Arabia in turn imports about 40 percent of globally traded barley. An early drive at barely self-sufficiency was given up in 2003 already, before the wheat phase out in 2008.

After a drought this summer Russia and Ukraine fail to provide necessary quantities and Saudi Arabia needs to source supplies in Australia, Argentina and Western Europe, where France is a large supplier.

One reason why barley imports in Saudi Arabia are so high are subsidies.They encourage a sheep fattening industry – economically it makes more sense to import lamb and feed it on subsidized barley than importing grown up sheep.

This industry is mostly located in Jeddah and other coastal cities, not in traditional livestock rearing areas.

Beside this industry barley subsidies are also important to feed the camel and sheep of Bedouin in rural areas and ensure tribal loyalty there.

Hence, interests are vested. Yet Saudi Arabia needs to think whether it is wise to incentivize barley consumption to such an extent and maintain such a high dependence on volatile imports.

As self-sufficiency is not an option for lack of water, some sort of demand reduction might be necessary.


Iran’s New Three Tiered Exchange Rate and Food Trade

Iran continues to be plagued by financial sanctions that hurt its ability to export oil and import vital goods like food or gasoline, which is scarce due to a lack of refining capacity.

One way to cope with this issue have been oil for food barter arrangements with Pakistan and the acceptance of non-convertible Indian rupees as payment for oil. Now a new coping strategy has been devised with a new currency system.

As the Iranian Rial has lost about half of its value compared to the dollar over the last year, the government has switched from a managed float that kept the official exchange rate in balance with free market rates to a three tiered system that rations foreign exchange.

Such a system was already in place during the Iraq-Iran war in the 1980s and during the subsequent reconstruction in the early 1990s. Food imports had high strategic importance for the Iranian leadership during the war as I outline in chapter four of my Oil for Food book.

The allocation mechanism of the new currency system highlights the crucial importance of food imports for political legitimacy.

The highly subsidized official rate of IR12,260 is less than half the free market rate of IR26,880 rials and applies only to imports of essential commodities like grains, meat, sugar, vegetable oil, and medicine.

For all other items, importers essentially have to pay the double:

The second tier is a “non-reference” rate that only trades about 2 per cent below the free market rate. It currently stands at IR 23,927 and applies to livestock, metals and minerals.

All other imports like appliances, cars or clothes are regarded as less essential and strategic.For them one has to pay the free market rate.

It remains to be seen how this oil for food nexus plays out as the Iranian nuclear stand-off unfolds and whether the US might be tempted to use food trade in an openly political way as it did – unsuccessfully – during the 1970’s.

Impact of Global Food Price Rise on the UAE

The recent rise in global food prices, particularly animal feed like corn and soybeans, impacts on the UAE, which has the highest pass-through of international prices in the GCC according to a Word Bank paper.

The UAE’s system of food price controls will come under pressure because of this. Either the government starts to give subsidies to retailers as it has already done with partly government owned Agthia, or retailers will withdraw certain items from sales should they perceive necessary cross-subsidies as excessive. A black market would develop.

Saudi Arabia imports more soft wheat, mills need to adjust

Saudi Arabia increasingly imports soft wheat, which is needed for biscuits and other items. The Saudi milling industry is manly laid out for hard wheat and will need to adjust.

In 2011 the main wheat exporters to Saudi Arabia  was the European Union with a 36 percent share, mostly from Germany. It was followed by Canada (26 percent), the United States (14 percent) and Australia (12 percent).

The relatively large share of the EU and the US is remarkable. before 2008 when Saudi Arabia started to import meaningful quantities of wheat, they were under represented as main GCC suppliers and Canada and Australia dominated. Until 2005 India was also an important supplier, before its growing domestic needs impeded exports.

Saudi Arabia Srategic Storage: Why Flour and not Wheat?

The Saudi Minister of Agriculture Fahd Balghunaim has announced that the kingdom’s strategic wheat storage covers now consumption for six months and stands at two million sacks of flour.

Ultimately the kingdom aims at 12 months.

It is surprising that they store flour and not wheat itself. The Ford Foundation started the planning for an expansion of the Saudi wheat program in the 1960s and one of its arguments was that flour is not good for storage. Instead Saudi Arabia should expand wheat production and domestic milling capacities to enable strategic storage the argument went.

Why is the storage now in flour, which does not seem to be the optimal solution? Is there not enough milling capacity? (This would be surprising given past wheat self-sufficiency in Saudi Arabia).

US Wheat Exports to Iran: Just Commercial or Carrot in the Sanctions Game?

Iran is continuing its wheat import spree against the backdrop of sanctions and the nuclear stand-off.

It has already purchased  or tried to purchase 3 million tons this year. In good years Iran is self-sufficient in wheat and has production subsidies in place to encourage such self-sufficiency. Yet it imported 7 million tons in 2008 after a drought and a bad harvest. Due to inclement weather this year’s harvest is not expected to be a good one either.

1.8 million tons of the 7 million tons came from the US. The US has never included food in its sanctions against Iran. It contemplated such measures in the wake of the hostage crisis in 1979, as declassified documents in the Carter Library reveal, that I have seen. Yet, food was never included in sanctions because it was assumed that “Iran’s oil is a powerful tool in finding alternative sources of supply for agricultural goods.”

Such trade diversion indeed happened in the wake of the grain embargo against Russia in 1980. It failed to achieve its foreign policy objectives and just angered the US agro-lobby.

Wheat sales to Iran just require the approval of the US Treasury and sales of more than 100,000 tons of any commodity to any country need to be reported to the USDA by law.

Apart form the commercial interest of the agro-lobby and the negative track record of food embargoes as a foreign policy tool the US might be tempted to use the carrot of food exports as a show of good will in negotiations around the nuclear program.

Recently US food aid delivery to North Korea coincided with a suspension of enrichment activity and a moratorium on nuclear and missile tests by North Korea. Marcus Noland and Stephen Haggard of the Peterson Institute have showed a historic coincidence of American aid offers and North Korean diplomatic concessions.

This year the US has already exported 180,000 tons of US wheat, enough to fill two large cargo ships. Another 200,000 are rumored to be contracted.

Iran has also purchased 120,000 tons of soy meal from India and asked to import a million tons of wheat from Pakistan in a barter deal against iron ore and urea.

It would be interesting to know how the Iranians pay for the US wheat imports given the financial sanctions which make dollar transaction all but impossible. Maybe a big commodity trader like Cargill or Glencore is accepting barter deals as well or takes not freely convertible Indian Rupees from Iran’s still vibrant oil trade with India.