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Wheat Rally Will Increase Budget Deficits in North Africa, Iran, FAO Says

Higher wheat prices will raise budget deficits in North Africa and Iran because of spending on bread subsidies, said Abdolreza Abbassian, senior grains economist at the Food and Agriculture Organization.

All of the North African countries on the Mediterranean Sea as well as Iran provide some sort of subsidy on bread, meaning household food budgets will be shielded from higher prices for now, Abbassian said yesterday. Wheat futures have risen 49 percent in Paris since June as drought damaged crops in Russia, a supplier to North Africa.

“One way or the other, the governments will have to find the money,” Abbassian said from Rome yesterday. “This will certainly result in higher budget deficits.”

Egypt was the world’s largest wheat importer last year, Algeria ranked fifth, and Morocco, Iran, Libya and Tunisia are often importers, figures from the International Grains Council show. Iran imported 3 million metric tons of wheat in the past year, down from 8.9 million tons a year earlier when it was the second-largest importer, according to IGC data.

“Some are politically unstable countries, and they simply cannot afford” social unrest due to costlier bread, Abbassian said. “Wheat is a large part of the diet. It would greatly impact the urban poor, so they will be very careful.” The FAO is part of the United Nations.

Russia last week announced a ban on all outbound shipments of grain from Aug. 15 until the end of the year to curb domestic prices, which surged because of a failing harvest.

Egypt Covered

Egypt said Aug. 8 it had wheat supplies for subsidized bread for four months. Russia’s export ban is expected to add as much as 4 billion Egyptian pounds ($702 million) to the budget, Trade Minister Rachid Mohamed Rachid said.

“It’s a very important political staple when you talk about North Africa and the Middle East,” Abbassian said. “This definitely concerns them more than anybody else.”

Russia accounted for 28 percent of global wheat trade last year, according to Abbassian, up from 4 percent a decade ago. The country’s share of wheat exports may fall to half of last year’s number, the economist said.

“It is really mostly a Russian problem,” Abbassian said. “The place where there’s been a huge price increase is Russia. There the wheat price went up 100 percent. Any country where the wheat price goes up 100 percent has to take drastic measures, and that’s what they thought was in order.”

Look Elsewhere

Importers of Russian wheat in the Middle East that will have to look elsewhere for supplies after the export ban include Egypt, Iran, Syria, Jordan and Yemen, he said. The region’s wheat-buying countries benefited from a good harvest last year that allowed them to build up stocks, Abbassian said.

“Last year was an exceptionally good year in North Africa, so most of them have quite good stocks to wait and see and negotiate with other suppliers,” the economist said. “We don’t feel the panic that we experienced in the last round,” he said, referring to a surge in food prices in 2007 and 2008.

The wheat harvest in North Africa jumped to 20.2 million tons in the 2009-2010 season, from 14.4 million tons a year earlier, according to data from the U.S. Department of Agriculture. Middle Eastern growers produced 37.3 million tons of the grain, up from 32.3 million tons the previous season.

In addition to the “very good” crop last year, North African countries usually limit grain purchases at this time of year as they await the result of the local harvest from June to the middle of August, Abbassian said.

Low Season

“At this time of year, the countries usually don’t buy a lot of grain because they have their own harvesting,” he said. “It’s usually the low season. It’s a bit of an unusual situation in that regard.”

Egypt agreed to purchase 120,000 tons of French wheat for $285.97 a ton in a tender this week, compared with the $183.50 a ton it agreed to pay for a 60,000-ton shipment of Russian wheat on July 7.

“The immediate impact is on the government budget,” Abbassian said. “As long as this price increase stays limited to wheat, one could say the problem can be contained. In North Africa so far, it has been contained.” It may take as much as six months before costs rise for consumers, he said.

The risk to consumers is if higher wheat prices drive up the cost of other food commodities, the economist said. The wheat market will remain “volatile” until the middle of September, when the harvest results and outlook for planting in Russia and the U.S. will be clearer, Abbassian said.

“It’s going to be a very unstable month ahead of us,” he said. “The longer it takes to settle it down lower, the greater the chances of creating wider problems because of the spill-over to other commodities.”

To contact the reporter on this story: Rudy Ruitenberg in Paris at rruitenberg@bloomberg.net.

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