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Shifting Governance Structures in the Wheat Value Chain:
Implications for Food Security in the Middle East and North Africa
Ghada Ahmed1, Danny Hamrick2, and Gary Gereffi3
September 15, 2014
Abstract The globalization of agrifoods systems is transforming the value chain of multiple food commodities, including wheat. The role that various actors play in the chain is also changing. This paper uses the global value chain approach to explore transformation in the wheat system and the implications of these changes for one of the world’s most import dependent regions, the Middle East and North Africa (MENA). We argue that there is a shift from traditional organizational strategies that are state-centric towards a new model that is firm-centric. Import dependent regions, which still largely depend on state organizations to manage wheat production, trade, processing and retailing, allow us to examine the interactions and trade-offs between these two strategies. To show this in greater detail, we explore the wheat value chain of both Egypt and Saudi Arabia to illustrate the various ways that states are interacting with firms to meet their food security needs and how the shifting roles of global grain traders and domestic food agencies alter food security strategies in import-dependent regions like MENA.
1Senior Research Analyst, Duke University Center on Globalization, Governance and Competitiveness 2Research Associate, Duke University Center on Globalization, Governance and Competitiveness; Doctoral Student, North Carolina State University Dept. of Sociology and Anthropology 3Director, Duke University Center on Globalization, Governance and Competitiveness; Professor, Duke University Dept. of Sociology
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Introduction The globalization of agrifoods systems and the resulting shifts in food supply networks for the Middle East and North Africa (MENA) (Abed et al., 2011),along with environmental constraints, are challenging traditional food security strategies for the region. Self-sufficiency policies, along with food and energy subsidies, have long been the cornerstone of food security programs and a source of national pride in MENA nations. The region is the largest global importer of cereal with 58.1 million metric tons, which covers over 50% of its consumption (Wright & Cafiero, 2010). Between 2008 and 2010, at least 29% of all exported wheat was destined for a country in the region (Larson et al., 2012). Importing grain is not a matter of choice for MENA nations, but is one of necessity. Many factors, including population growth, limited arable land, chronic water stress, and inadequate domestic production make it necessary for MENA to rely on the global market to meet the dietary needs of its population. The 2007/2008-food price crisis renewed concerns that dependence on food imports increases the exposure of importing nations to uncertainty due to production shortfalls from droughts in exporting countries, global price volatility, and restrictions on crop exports (FAO, 2011). Compounding these uncertainties is that in the last decade 70% of cereal exports came from only eight countries (FAO, 2013;MacDonald, 2013).1 The 2007/2008 food prices crisis had a profound impact in the MENA region, especially in countries that saw their food import bills surge while their purchasing capacity decreased. The objective of this paper is to provide a better understanding of the structural transformations in wheat value chains and their implications in two selected MENA countries, Egypt and Saudi Arabia, to shed light on strategies that can best manage food security concerns in an interconnected, global economy. By applying the global value chain (GVC) framework to the wheat industry we are able to better understand the structure of the chain to identify the actors, the segments and the conditions that impact food security outcomes in net wheat importing countries in the MENA. The ultimate goal of our research is to use the GVC framework to analyze MENA vulnerabilities and to design more resilient food security strategies at the regional level. This paper explores three questions: (1) In what ways are wheat value chains transforming structurally? (2) How have these transformations changed the role that wheat value chain actors play? (3) What are the implications of these value chain transformations on food security outcomes?
Food Systems: From Public to Private Spaces Traditional agricultural trade is characterized by a dependence on state institutions to facilitate interactions and secure food. This system, which arose following World War II, but emerged from colonial trade dynamics, sought to help to secure food supply and stability through strong state systems comprised of agencies whose sole purpose was to manage national food systems. Scholars label this organizational form the second food regime. Food regimes, as characterized by Friedman and McMichael (1989) are the rules
1 Argentina, Australia, Brazil, Canada, France, Germany, Russia, and the United States.
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(informal or formal) that govern the production and consumption of food on a world level. Food regime analysis looks at the macro level trends in food trade and also helps to identify structural shifts, such as those that occurred with the rise of neoliberalism. The first food regime, lasting until the 1930s, is characterized by colonial trade and empire. It was succeeded by the second regime, from the 1950s until the 1980s, with increased importance of state bodies but also an industrialization of food and the nation state as a dominant paradigm.2 Wheat boards, which traded wheat on behalf of nations, became a quintessential part of wheat value chains for many nations under the second food regime. Beginning in the late 1980s, a new wave of globalization and the neoliberal shift created a weakening in state power as agrifoods systems became increasingly globalized. The state-centric model that proliferated in the wheat industry and governed agrifoods systems deteriorated amid increased power and consolidation of large, often transnational food producers and traders. The end of the Cold War and the Washington Consensus accelerated the process as nation states began several deregulation initiatives, seeking to achieve economic growth, and a balanced food system through dependence on market forces (MacDonald, 2013). In 1994, the establishment of the World Trade Organization was notable for the inclusion of agriculture as part of its focus, signaling the further commodification and globalization of the food system (Pechlaner & Otero, 2008). As state importance decreased, firms took an increasingly important role in food systems, becoming the primary suppliers of inputs, traders, processors and retailers. They also shifted their strategies into new areas, such as financial markers, in order to grow profits, minimize risk, and diversify their companies. As companies diversified, they also shifted their focus away from staple grains and increasingly towards production of higher value crops. Grains are increasingly in demand not only for staple foods across the world, but also for animal feed, biofuels, and other high-value products (Clapp, 2013; Peterson, 2013). The neoliberal shift in food systems presents new opportunities and risks. Many argue that deregulation and increased power concentrated among firms enhances efficiency and helps to deliver wheat at lower prices. However, increased financialization and the consolidation of private sector actors heightened the risk for importing nations, increased volatility, and raised the potential of abuse from oligopolistic trading. This is further exacerbated by the shift of wheat companies towards knowledge-based firms who derive their power not only from their size and global reach but also their control of information. The expanded geographic reach and the altered role of companies in the agrifoods system is important to analyze in order to better understand challenges and risk for food security under neoliberalism. However, in order to understand the complex relationship present in the agriculture sector, a systemic approach is needed to explore the dynamics between firms, nation states, and international organizations.
2 For more information see (MacDonald, 2013).
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Approach Conventional models to food security typically do not adopt a systemic approach that links all of the important issues, such as international trade, firms, government institutions, and other actors involved in food systems outside of production. Even the food regime literature is often limited to a macro-level focus and it struggles to bring in the meso-level factors. Thus, traditional understandings of food security, despite their many benefits, did not offer insights to help policy makers anticipate the 2007-2008 food crises nor did it help to explain the role of corporations in government decision-making on import or export bans. The GVC framework offers a systemic approach that incorporates often-overlooked actors and institutions that contribute to food (in)security outcomes. Since the early 2000s, GVC concepts gained popularity as ways to analyze the international expansion and geographical fragmentation of contemporary supply chains (Dicken et al., 2001; Gereffi et al., 2001; Gereffi et al., 2005; Henderson et al., 2002). Global value chains refer to the sequence of value-added activities that comprise the creation, delivery, and end-use of a given product or service. Applied to the agrifood sector, the framework examines actors, activities, policies and transformations in global and local wheat networks and their effects on food security outcomes (Gereffi et al., 2009). Governance is a centerpiece of GVC analysis. It shows how corporate power can actively shape the distribution of profits and risks in an industry, and it identifies the actors who exercise such power (Gereffi, 2014). Gereffi, Humphrey and Sturgeon (2005) identified three variables that determine how global value chains are governed and change. These are: (1) the complexity of transactions, (2) the ability to codify transactions, and (3) the capabilities in the supply-base. Gereffi el al. (2005) also established five types of GVC governance that range from high to low levels of explicit coordination in and power asymmetry. These are hierarchy, captive, relational, modular, and market value chains.
The Wheat Industry Global Value Chain
The wheat global value chain map in figure 1 is characterized by international flows of inputs, financial resources, information, and – of course – grain. There are four main stages in the value chain: the provision of inputs, production (or farming), processing, and marketing (bringing wheat-based products to consumers). Trade is important for exporting and importing countries, most of which suffer from production constraints and have to fill their food gaps from international markets. Finally, the GVC map includes components of the wheat industry’s enabling environment that impact the efficiency, globalization and food security outcomes of the chain, such as public governance, infrastructure and financial networks.
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Figure 1. Wheat Global Value Chain
Source: G. Ahmed et al., 2013.
Wheat Trade and Chain Governance Wheat is the most important traded cereal in international markets with the bulk of exports originating from the United States, Canada, Russia, France, Australia, Argentina, and Brazil (MacDonald, 2013). Wheat is traded on several major futures markets, including the US Chicago Board (CBOT) for soft wheat, the Kansas City Board of Trade (KCBT) market for hard wheat, and the Paris grain exchange (Marché à Terme International de France MATIF) (Gilbert, 2011). Price formation generally occurs at these grain exchanges. Price variations between the grain exchanges and import prices occur due to factors such as transport costs, grain quality and variety, and tariffs. Most bulk grain transactions are based on contracts established by the Grain and Feed Trade Association (GAFTA) in London, an association founded by grain traders, brokers, and processors in 76 countries in 1971 (Mercier, 1999). MENA governments generally procure wheat through international spot tenders. Importing state agencies issue a declaration of intent to tender and invite accredited traders to bid and submit their price quotes against a standard set of procurement parameters that includes volume, quality, acceptable origins, and delivery date. Generally tenders are announced one or two weeks before closing date and bidders have approximately 24 hours to respond and usually 30-60 days to deliver the wheat. Financing mechanisms, including bonds from suppliers and letters of credit from buyers, are critical to contract execution (Peterson, 2013). Coordination in the wheat chain is highly explicit with traders dictating many of the terms of trade and shaping the system (Bair, 2009; Gereffi, 2014). Wheat exports are principally managed by a handful of multinational companies that purchase, store and market cereals internationally. The largest grain traders, often called the ABCDs, are Archer Daniels Midland Co (ADM) (U.S.), Bunge Group (U.S.), Cargill
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(U.S.), Louis Dreyfus, and Glencore PLC (Switzerland) (Goodbody et al.) (see table 1). They are estimated to control 70% - 80% of world grains ((Murphy et al., 2012). These companies also benefit greatly from food aid going to developing countries. For example, in 2003 Cargill and ADM won contracts to provide one-third of all U.S. food aid shipments.3 On average, across a number of commodities the US government has paid 11 percent more than open market prices for food aid (Bertini et al., 2009; Murphy & McAfee, 2005).
Table 1. Lead Firms in the Wheat GVC
Company Ownership Country of Origin
Revenues (Billion USD)
Assets (Billion USD)
Company Operations Segments
Geography of Operations
Archer Daniels
Midlands (ADM)
Public USA $89.80 $43.75
Oilseed Processing,
Corn Processing, Agriculture Services, Finance
75 nations
Bunge Limited Public
Amsterdam (Now
headquartered in USA)
$61.34 $26.78
Agribusiness, Sugar and Bioenergy, Food and
Ingredients, Fertilizer
40 nations
Cargill Private USA $136.65 $59.88
Origination and Processing,
Food ingredients and applications,
Agriculture services,
Risk management,
Finance
67 countries
Louis Dreyfus Commodities Private France $63.59 $19.17
Proteins, Tropicals, Other
Products 100 nations
Glencore Public Switzerland $232.69 $154.93
Metal and Minerals, Energy
Products, Agriculture Products
50 nations
Source: Authors based on company websites and annual statements.
3 U.S. law requires that a minimum of 75% of U.S. food aid be sourced, fortified, processed, and bagged in the U.S.
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Global traders drive the flow of wheat and are involved in agricultural inputs, such as fertilizers and agrochemicals, and upstream activities including milling, biofuels, and manufacturing. Their size and market diversification allows them to exploit economies of scale in information gathering, data analysis, technology, storage, transportation, and risk management. Governments influence segments of the chain through instruments such as grain standards, subsidies, marketing and trade. Scholars debate the ability of large transnational corporations (TNCs) in grain trade to influence prices, and some analysts express concerns regarding the concentration of power in these large firms (Prakash, 2011). Generally attempts to influence the flow or alter the distribution of grains can contribute to market price volatility and can create conflict among various actors in these chains, particularly at points where different governance structures intersect (Bair, 2009). For example, the 2010 Russian export ban was largely attributed to the advice of Glencore, a TNC involved in the region that also advised the government about grain issues (Blas & Farchy, 2011; Kramer, 2010). Table 2 summarizes the key governance variables of trading firms and government actors in the wheat value chain in MENA. The three variables of complexity and codifiability of transactions, and capabilities in the supply base used in analyzing GVC governance structures are taken from Gereffi et al. (2005). The leverage column in this table refers to the relative ability of TNCs or MENA actors to influence outcomes in terms of each key variable.
Table 2. Key Variables in Chain Governance in MENA’s Wheat Value Chain
Variable Description
Leverage TNC MENA
Government Agencies
Complexity
Traders manage a complex network of logistics to supply and move grains Traders form joint ventures and partnerships with other agribusiness to expand export terminals and participate in upstream and downstream activities. Importing countries issue tenders, trade agreements and implement trade facilitation.
Example: � Cargill grains and oilseed division coordinates export activities with Cargill Ocean transportation to manage grain export and freight risks. In 2012, Cargill and CHS Inc. announced that the two agribusiness companies are expanding the scope of their grain export terminal joint venture to include other Pacific Northwest export assets owned by the companies. � Government bureaucracy is a characteristic of the wheat GVC in MENA countries. Government agencies manage the wheat value chain through subsidies, price controls, tariffs, and complex international tenders. Wheat production is problematic due to water scarcity and limited arable land throughout MENA and imports are constrained due to limited access to foreign exchange in energy importing nations such as Egypt and Syria.
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Codifiability of
Information
Traders leverage technology to collect and analyze data that impact supply, demand and global prices. Importing countries have limited information network advantage. Both traders and importing countries keep accurate grain storage information confidential.
Example: � Lead firms collect information from farmers and global markets to develop tools and products that hedge supply and demand risks, diversify into other markets, and expand global reach. � MENA countries are price takers and do not leverage global market information. In Egypt, the General Authority for Supply Commodities (GASC) is the largest single structure buyer of wheat in international market. GASC buys wheat based on CBOT closing prices and its tender requirements are complicated with narrow windows set between the time purchase and delivery dates and costly because of frequent tendering (almost every two to three weeks).
Capability
Traders developed economies of scale and have the financial capital to invest. Most importing countries have constrained resources.
Example: � ADM operates 154 terminal, sub-terminal, country, and river elevators covering the major grain producing states in the Untied States with aggregate storage capacity of approximately 400 million bushels. The company has six grain export elevators in Argentina, Mexico, St. Vincent and Ukraine that have an aggregate storage capacity of approximately 30 million bushels. ADM has eleven country elevators located in the Dominican Republic, Romania, and Ukraine. In addition, the Company has seven river elevators located in Romania and Ukraine. � Domestic factors, often linked to storage, logistics, and procurement, play a major role in high food inflation and waste in the majority of MENA countries. In Egypt, Losses are estimated at between 20-30 percent annually due to the lack of appropriate storage.
Source: Authors. Quantitative trade data on wheat, such as exports and price; on TNCs, such as sales revenues and global footprint; and on MENA countries, such as GDP and imports, do not capture the complexity of the relationship between TNCs and states. Gordon explains this relationship as both cooperative and competing (Gordon, 1988). Table 3 outlines some of the dimensions of the differing goals between TNCs and importing governments that impact food security.
High Medium Low to no influence
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Table 3. Contrasting Objectives of TNCs and MENA Governments in Wheat Trade Factor TNC s MENA States
Objectives • Maximize profits and shareholder
value • Maximize exports
• Maximize food, water and national security
• Lower food import bill
Strategy
• Support market deregulation • Achieve optimal global sourcing and
logistics network • Hedge supply and demand risks • Leverage market information in trading
securities and derivative instruments
• Retain a state monopoly • Ensure adequate physical supply,
logistics and storage • Use subsidies to protect form price
swings • Reliance on spot markets to tender
wheat
High-order function
• Ensure global supply security and increase exports
• Develop long term partnerships • Diversify into upstream and
downstream activities and other markets
• Improve market competitiveness through consolidation and control of assets and supplies
• Encourage domestic production of wheat
• Investment in overseas wheat production
• Diversify wheat sourcing • Manages trade and subsidies of food
and energy
Source: Authors.
Transformations in the Wheat Value Chain Contemporary globalization has been marked by significant shifts in the organization and governance of global industries (Gereffi, 2014). The wheat marketplace is constantly changing and very complex, and it places exceptional demands on accurate and timely information on commodity developments and the external drivers that influence food security outcomes (Prakash, 2011). The transformation is characterized by deregulation of state monopolies, consolidation, accelerated globalization and financialization of lead firms, and an increased dependency on imports of countries in MENA. In particular, the grain chain is illustrative of a transition from a concentrated industry that is dominated by public sector enterprises in most countries to a more decentralized and liberalized market that allowed numerous private enterprises to emerge. However, the contemporary wheat value chain is characterized by high levels of concentration by a handful of transnational private sector actors (UNCTAD, 1999; World Bank, 2005). These changes are outlined in table 4 and mark the emergence of a new world order since the 1990s versus the traditional model that characterized the wheat value chain from the 1950s through the 1980s (see figure 2).
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Figure 2. Timeline of Key Events that Influenced Wheat Trade
Source: Authors based on literature review.
Table 4. Transformations in the Global Grain Industry Dimension Old Model New Model
Deregulation
• State monopolies control the movement, pricing, quality standards, and marketing of the agricultural products
• From 1994-1997 about 33% of global wheat exports where handled by AWB and CWB4.
• STEs5 buy from farmers and sell directly to an end users and importers.
• Accredited exporters facilitate some wheat sales to buyers
• Deregulation of agriculture and liberalizations (Uruguay and Doha WTO meetings)
• Many countries deregulated STEs • Privatization of AWB in 2008 and CWB in 2012 • Accredited traders such as Cargill can buy directly
from farmers in Australia and Canada • Private firms can export directly to buyers
Consolidation
• Consolidation started in agrochemicals around 1960s to improve output
• Accelerated in 1990s with larger inputs suppliers buying small firms
• Accelerated by mid-2000s driven by export quotas and ethanol mandates
• Traders acquired input suppliers in agrochemicals • Traders acquired small and large players in grain
infrastructure
Globalization
• Grain traders opened overseas offices • International traders have an active role in
food and benefited from contracts • Invest in mills and elevators
• Traders expand globally by investing in assets and export facilities overseas
• Develop partnerships and acquisitions in upstream and downstream segments of the chain
• Leverage technology and data analytics
Financialization
• Traders manage supply risks through forward contracts with grain producers and demand risk through future contracts and hedging
• Finance asset investments through public offerings and increasing shareholder value
• Traders expanded risk management and financial operations that range from commodity markets trading to facilitating credit to suppliers and buyers
Source: Authors. 4 Australian Wheat Board (AWB) and Canadian Wheat Board (CWB). 5 State Trading Enterprises (STE).
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Deregulation Throughout the 1950s, 1960s, and 1970s, most governments engaged directly in supporting agricultural production and food marketing through state marketing boards or organizations that purchased, stored, and sold crops; controlled prices; and restricted private trade within and across borders (World Bank, 2005). Supporters believed that state interventions were necessary to protect famers and consumers, promote price stability for staple foods, foster the adoption of improved technology, and support macroeconomic stability (Cummings et al., 2005; Jones, 1994; Meerman, 1997)6 . However, state-led models require heavy subsidies that add to the fiscal burden of nations and limit their ability to maintain this role (Byerlee & Sain, 1986). A number of events, such as rising handling and transportation costs and the 2007 financial crisis, advanced the deregulation of state monopolies in grain trade. Government-controlled wheat boards have been dismantled across the globe, in both developed and developing economies -- for example, in Australia in 2008 and in Canada in 2012. The goal was to create greater market efficiency by improving market liquidity, reducing supply-chain costs, generating greater valued added opportunities, and facilitating producer choices. The deregulation of state trading enterprises (wheat boards) in major grain-exporting countries offers transnational trading firms new opportunities in global markets and avenues to accelerate their growth. Consolidation Market consolidation is increasing along value chains. TNCs now have great power and influence in international trade because of their globally integrated production and marketing operations. Firm activity is strategically organized to capitalize on this power and often creates further integration along value chains and into related industries (Nissanke, 2010).7 Vertically, traders are expanding into upstream (processing) and downstream (marketing) segments of the wheat value chain. The traders started by owning grain elevators that were once dominated by agricultural cooperatives and expanded to include other activities such as transportation to reduce cost (Wilson and Dahl 1991). Control of vital grain assets such as the grain elevators shifted from farmers and cooperatives in the traditional system to the TNCs, who also control retail sales. This shift allowed processors to mitigate transport cost by controlling the logistical networks and helped to create a system where futures markets were profitable (Hill, 2014). In addition to vertical integration, grain TNCs are also consolidating by acquiring firms in other industries, such as agrochemicals, food manufacturing, and energy. This allows
6 In a number of cases, these interventions stabilized food prices and significantly improved poor households’ access to food for a decade or more in Asia with the green revolution and in a small number of African countries (World Bank, 2005). 7 Nissanke, M. 2010. Commodity markets and excess volatility: Sources and strategies to reduce adverse development impacts, in Paper presented to a CFC Conference, Brussels.
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traders to diversify and distribute risk. For example, Cargill is a majority shareholder in Mosaic Company, a publicly traded global fertilizer firm. In 2007, Cargill’s revenues were significantly higher due to increased global demand in fertilizer and grains (Cargill, 2008). Also, when crude oil supplies fell in the early 2000s, Glencore, which is also active in the energy and mining sectors, along with few other traders, sought to buy the available supply. This spiked prices and allowed Glencore to gain a huge profit while lowering margins for others, such as refiners (Schneyer, 2011). This creates what McMichael (2009) calls a food-fuel complex, where staples become less important to companies compared to value-added crops. Mergers, such as Glencore’s with Xstrata, which established an integrated mining company and agriculture trader, are a good example of this trend (Pirrong, 2014). Consolidation, while helpful for the large firms trading wheat, has had the converse effect on farmers, who find themselves squeezed in the value chain with limited options for expansion. There is no clear evidence that these types of consolidations are making food cheaper or more affordable to consumers. The current system is characterized by the need of high levels of capital and diversified holdings to be profitable, limiting the ability of smaller firms to remain competitive in developed and developing economies and shrinking the number of suppliers and small firms (Heumesser & Staritz, 2013; Kaltenbrunner et al., 2012). Globalization Globalization along the production side is altering the wheat industry, as firms increase their reach across national borders in an effort to enhance power and increase profits. Because of their global reach, firms like ADM and Cargill are able to manage stocks, invest in future markets, and manipulate prices on a global scale in order to obtain large profits (Nadal 2008). This is increased by the strategic alignment of grain companies to help bolster revenues, as discussed by Margarita Louis-Dreyfus, the trading house’s majority shareholder (Hume, 2014). Further diversification is occurring as companies move into new industries, such as the recent move of many oil and energy companies into grain and agricultural commodities. The impact will result in an increased number of firms active in the region, but also continue the trend to large-scale trade infrastructure, as many of the TNCs are seeking to acquire silos and grain elevators across the globe to increase their global reach (Best, 2013). At the same time, consolidation and globalization of assets in infrastructure, large vessels, and ports provides trading firms with a unique set of integrated resources that are key to moving grain across the globe. As one CEO of these firms attests, “To be successful you have to be large and present in all different regions, well capitalized, have a complete portfolio. This means more consolidation, large firms with medium or even smaller ones... Bunge has been a major acquirer and will expect to continue to do so” (Weisser, 2013). Additionally, you must shift into the information economy, as Patricia Woertz, the chairwoman of ADM states: “Productivity is about producing more food, storage, more capacity, processing, and ability to move product around the globe. Global network is not just food or goods; it is
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also about money, data, and ideas, which flow across borders more than ever before” (Economic Club Minnesota, 2014). As TNCs globalize, they are increasingly becoming information companies whose profitability is linked to their size and the information they have access to at a global level. It is important to note that in addition to the ABCD traders, there is also the emergence of other companies in Asia that started as traders and now own infrastructure and processing centers, expanding their involvement along the whole supply chain (Ethiraj, 2014). Firms such as Mitsui, Marubeni, Mitsubishi in Japan, and Olam (Singapore), are currently expanding globally and investing in grains to meet growing demand in Asia, the Middle East and North Africa, and other regions (Soble, 2010). Financialization Financialization, a new aspect of grain companies that is highly controversial, is also altering the food system. Since 2000, financialization has become a major feature of large traders, and the main source of their profits. In the 1990s heavy regulation limited the ability that firms had to engage in financial markets and profits of the firm were largely static. However, the Commodity Futures Trading Act of 2000 opened the door for speculation in agricultural derivatives markets, which has increased substantially even during and after the food price crisis in 2007-2008. Many firms, such as Cargill, acknowledge publically that their profits are linked to their financial activities (Murphy et al., 2012). The large traders all have financial arms with multiple interests. These often span the globe -- for example, Louis Dreyfus’s land investment fund, Calyx Agro, which operats in Latin America (Louis Dreyfus, 2013). In an interview with a wheat merchandiser of one of the leading firms, he stated that revenues from the financial activities are becoming the largest and most critical aspect of agribusiness. Since the 2007/2008 food price crisis, debates have raged about the role that commodity speculation in agriculture played in the crisis. Proponents argue that speculation is necessary for the functioning of markets. However, many claim that unconstrained regulation is problematic at best and often disastrous (Prakash, 2011). Financialization is not limited to the trading of wheat, but also extends into the processing, seeds, farm equipment and other sectors of the value chain (The Economist, 2009;Ross, 2008). One of the most heavily financialized sectors in the value chain is fertilizer, which is an important industry for many of the big traders, including Cargill (Cargill, 2008). Transformations in the grain value chain under neoliberalism are creating a new business model that centers on consolidation, financialization, and deregulation. Simultaneously, water scarcity, limited arable land, and growing domestic demand spurred policy shifts in MENA from self-sufficiency towards importing wheat and overseas agricultural investments.
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Wheat Value Chain Transformation: Implications for MENA
The Middle East and North Africa (MENA) region is the largest wheat-importing region in the world. In 2009, wheat was the dominant source of food supply in MENA, accounting for roughly one third of all available food (see figure 2) (FAO, 2009). Figure 3. Food Consumption by Commodity in MENA
Source: FAO, 2009. MENA countries face many challenges in growing and securing wheat. Some issues, such as environmental stress and waste, are consistent across countries, and others, such as access to foreign exchange, vary by country. Egypt and Saudi Arabia are two MENA countries that exemplify some of the major shifts in wheat value chains in the region (see table 5 for country variables). Water scarcity, limited arable land, and growing domestic demand spurred policy shifts in both countries from self-sufficiency models towards importing wheat and overseas agricultural investments. However, the capacity of Egypt, an energy-importing country, versus Saudi Arabia, an energy-exporting country, varies greatly because of constraints on foreign reserves to finance imports and improve grain storage and handling infrastructure. Both countries seek to diversify their wheat supply base, but are limited to a small number of exporting countries and multinational firms that are able to meet their procurement standards. Egypt has been increasingly sourcing its wheat from the Black Sea region, which is cheaper but also more volatile. At the same time, Egypt is attempting to improve its domestic production to meet local demand. By contrast, Saudi Arabia is ceasing all domestic production, and will entirely depend on imports. It is also starting to invest in agriculture regionally as well as in Africa, Asia, and Eastern Europe to supply its own food. However, these overseas investments are still in their infancy and their effectiveness is highly questionable due to political dynamics and low capacity in many target countries.
36%
11% 9%
4%
3%
37%
Wheat
Sugar
Rice
Maize
Soyabean Oil
All other food
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Table 5. Egypt and Saudi Arabia -- 2012, Selected Indicators
Egypt Saudi Arabia Population 79.7 million 26.8 million
GDP (per capita) $3,187 (USD) $20,777 (USD) Wheat Consumption (per capita) 145.2 kg/yr. 89.3 kg/yr.
Wheat Imports $2.6 billion (USD) $0.4 billion (USD) Wheat Import Dependency 51.7% 53%
Energy Export $6.9 billion (USD) $162.7 billion (USD) Source: World Bank, 2012.
Case Study: Egypt Egypt has the largest population in the MENA region8 and is the world’s leading importer of wheat (Abdel-Razek, 2013). The country depends on imports to supply around 50% to 60% of its wheat needs, which makes it vulnerable to global price shocks (World Food Program, 2013). Food security in the country is related to income rather than availability9. Egypt procures most of its wheat from Russia, Ukraine, United States and France and is diversifying its supply base towards other countries, such as India and Kazakhstan (World Food Program, 2013). Reducing import dependency and exposure to global prices is one of the leading concerns of policy makers and the Egyptian population. Domestic production is constrained because of limited arable land (only 2.4%), water shortages, a growing population, and shifts to high value export agro foods (Coelli, 2010). In 2011 and 2012, Egypt raised its domestic wheat production by about 5% to reach an above average yield that was over 8.8 million tons (GIEWS, 2013). Favorable weather conditions, availability of improved varieties, and higher government procurement prices of domestic wheat are some of the factors that contributed to the larger harvest. Egypt mostly grows the hard winter variety of wheat, which is poorly suited to bread making. Domestically produced wheat is often mixed with imported wheat to improve its quality for bread making (Kherallah et al., 2000). 10 Egyptian annual per capita consumption is higher than the global average at about 180-200 kg of wheat (World Food Program, 2013).11 Almost two-thirds of the grain is used to produce baladi bread (Hamza & Beillard, 2013).12 Subsidized bread is a major staple of the Egyptian diet utilized by almost 75% and is consumed approximately 6.4 days a week by poor households (FAO,
8 In 2012, Egypt’s total population was approximately 81 million (The World Bank, 2013). 9 Egypt is one of the 36 countries that account for 90 percent of child undernutrition (Horton et al., 2010). 10 There are two main types of bread in Egypt: baladi bread, which is a coarse and dark-grained pita bread, that is produced by extracting 82% of the wheat grain; and fino bread, which is produced by extracting 72% of the wheat grain (Larson et al., 2012). 11 This is compared to annual average global per capita wheat consumption of about 66 kg (World Food Program, 2013). 12 Bakeries produce approximately 240 million baladi loaves daily across Egypt (World Food Program, 2013).
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2013; The Media Line, 2011; World Food Program, 2013). Access to bread is a politically sensitive issue, with previous shortages, reduction in subsidies or price hikes resulting in civil unrest, such as the 2008 riots (World Food Program, 2013). Industrial Organization
The Egyptian government controls the wheat value chain through subsidies, public private partnerships, state monopolies, and regulation. The government subsidizes most inputs including seeds, fuel, and water. Farmers cultivate wheat on small plots with yields of 4.5 to 7 tons per hectare, and they exercise some autonomy in their growing activities (Hannusch, 2008). The state is the primary purchaser of wheat, and it buys from local producers at a price above the prevailing world price. Some farmers prefer to sell to the local private traders because they provide loans for input purchases (fertilizer, seed, etc.)13, and they will collect the wheat from the farm gate (Hannusch, 2008). Producers who would like to take advantage of higher government prices are required to deliver their wheat to the public mills or collection centers which is problematic due to increasing costs of transportation and the deterioration of roads especially in upper Egypt (Wally, 2014). The General Authority for Supplies and Commodities (GASC) is the government entity responsible for importing wheat and managing the domestic procurement of wheat for baladi flour. Traders consider GASC to be the largest single structure buyer in the international market. GASC usually issues its tenders every two to three weeks and announces them the after the closing of CBOT. Tender requirements are complex compared to ten years ago and to other regional buyers including Algeria and Saudi Arabia (Wally, 2014). The organization is part of the Ministry of Supply and Internal Trade (MOSIT) and depends on other state enterprises to receive, store, transport, and mill wheat into (subsidized) flour. GASC also distributes money to the state agencies that buy domestic wheat, such as the Principal Bank of Development and Agricultural Credit (PBDAC). Purchasing wheat on the international market requires that the GASC has access to foreign reserves, which are shrinking amid the social unrest, particularly since late 2012. GASC pays higher price guarantees to farmers as a means of raising domestic production and reducing dependency on imports (McKee, 2013). The department tries to maintain a five-month supply of strategic wheat stocks (Mansour, 2012). However, limited storage capacity confines stocks to about three months of annual consumption (Wally, 2014). The grain-handling port facilities are owned by the Ministry of Investment (MoI) (Coelli, 2010). Trains and trucks transport bulk wheat from ports to storage. Trucks transport wheat in bags from farms to storage and / or mills. Trains are owned by the government and trucks are for the most part privately owned (Hannusch, 2008).
13 Prices of Inputs such as nitrogen fertilizers increased from $150/MT in 2009/10 to $ 230/MT in 2013/14. All insecticides are imported therefore international price fluctuations affect wheat production costs (Wally, 2014).
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The General Company for Silos and Storage (GCSS) is responsible for wheat handling and storage. The government controls most of the company’s shares, and the rest is traded on the Cairo stock exchange (McKee, 2013). GCSS operates five grain terminals at ports on the Mediterranean, the Suez Canal, and the Red Sea. These have a total capacity of 350,000 tons. It also operates all inland silos with an additional 320,000 tons of storage capacity (Mansour, 2012; McKee, 2013). The organization moves wheat within the nation from points of import to the government-controlled mills. There are also a few private companies that operate grain terminals, including subsidiaries of Cargill. The government recently established The Holding Company for Silos and Storage (EHCSS) as part of its efforts to upgrade wheat storage capabilities in the country. EHCSS controls the modern silos built after 2005, purchases wheat from farmers, and transfers wheat to government-controlled mills (Hamza & Beillard, 2013; McKee, 2013). The Egyptian milling industry consists of 231 public and private sector mills (Hamza & Beillard, 2013). Public sector capacity (126 mills) represents about 55% of total milling capacity, the private sector (105 mills) controls almost 45% of total capacity (Hamza & Beillard, 2013). The government controls the majority shares in the two holding companies that operate government mills: Holding Company for Rice and Wheat Mills (HCRWM) and Food Industry Holding Company (FIHC) (Hannusch, 2008). FIHC controls most state-owned food processing companies and has a milling capacity of about 7 million tons annually. Public mills face little competition in the production of flour for the subsidized baladi bread, accounting for 70% of supply(Halawa, 2013). On the other hand, private mills have grown increasingly competitive as producers of flour for other breads such as tabaki flat bread (McKee, 2013). Millers sell the flour to local bakeries, which must retail the subsidized bread and flour at the government-set price. Bakers are unable to sustain their operations and complain that government prices do not cover their cost (Halawa, 2013). There are about 19,000 baladi bakeries in Egypt (Mansour, 2012). Almost 90% of them are privately owned and 10% are owned by the government (Coelli, 2010). Each bakery serves about 4,000 people annually (Mansour, 2012). Egypt has a very expensive and extensive food subsidy system, which is straining the fiscal budget. Waste and leakage along the marketing chain is high and is estimated at $1 billion annually. Recently MOSIT introduced a pilot smart card system for subsidized bread in the city of Port Said to introduce subsidy reform and allow choices within the bread subsidy system (Wally, 2014).
Case Study: Saudi Arabia Saudi Arabia’s dry climate, poor soil quality, limited water supply, and limited arable land (1.5% of total land area) significantly restrict agriculture (FAO, 2013). Nevertheless, the kingdom was able to become self-sufficient in water-intensive crops such as wheat by investing in and implementing polices that support the agriculture sector from the 1970’s onwards. The country’s vast oil resources financed the kingdom’s agricultural and economic development, supported a heavily subsidized welfare system and helped ease food price inflation. By 1984, Saudi Arabia became self-sufficient in wheat and even
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became the sixth largest exporter of wheat in the early 1990s (Al-Shayaa et al., 2012). However, such an agricultural strategy was environmentally unsustainable and depended on high direct and indirect subsidies from the government (Dincer et al., 2005). In 2006, wheat production reached over 2.6 million MT, though this came at the high cost of depleting non-renewable underground water resources. Groundwater depletion led the country to move away from its self-sufficiency strategy and prompted the development of extensive and costly water desalinization projects to meet growing water demand (Dincer et al., 2005; FAO, 2013). Wheat is an important staple grain in the Saudi diet, where it is mostly consumed in the form of pita\flat bread and other types of European bread such as French baguettes, hamburger buns, and toast (Mousa, 2012b). Average Saudi per-capita consumption was 89 kg/year in 2009 and is estimated to be about 110 kg/year in 2012/2013 (H. F. Ahmed & Mousa, 2013; FAO, 2013). The main drivers for growing food consumption are population growth, increasing incomes, and diversification in diets, as Western-style pasta dishes, breads, cakes and biscuits become more popular. Total wheat for human consumption in 2012/13 is estimated at 3.0 million MT, of which 10% is utilized for food processing (H. F. Ahmed & Mousa, 2013). Industrial Organization
The state plays a strong role throughout the various segments of the Saudi wheat value chain. In the past, the government provided significant subsidies on wheat inputs such as water, fertilizer, and agricultural machinery, and offers interest-free loans, free land, and seeds to promote wheat growing. The government also created marketing channels for wheat producers and purchased their production at prices higher than prevailing world prices through the Saudi Grain Silos and Flour Mills Organization (GSFMO), which was created in 1972 (Al-Hamoudi et al., 1997). The Saudi GSMO is responsible for wheat purchasing, storage, milling, and distribution throughout the country. The agency is in charge of managing wheat subsidies, allocating farmers’ production quotas, setting guaranteed prices for purchasing wheat from the local producers and importing additional wheat to cover domestic consumption needs (GSFMO, 2011). The number of farmers in the chain has been steadily declining, and large commercial farms have been replacing small farmers in cultivating wheat. In 2012 the number of farmers was estimated at about 6,000 farmers, compared to more than 34,000 farmers at the peak of the Saudi wheat program in 1993 (H. F. Ahmed & Mousa, 2013). The GSFMO will continue to purchase domestically grown wheat from farmers until the completion of the phase-out of wheat production in 2016. The agency imports wheat directly through public tenders that are open to registered international exporters, and it does not buy through grain brokers (H. F. Ahmed & Mousa, 2013). The GSFMO owns and operates silos in major cities in the country and is expanding its storage capacity to gradually meet higher wheat consumption by the end of 2015 (Mousa, 2014). The Saudi government is considering the restructuring of GSFMO and just approved the privatization of GSFMO’s nine flour mills and some of its storage. The
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government is also establishing an investment fund to encourage private sector companies to invest in agriculture overseas and re-export of crops to Saudi Arabia. Domestic bakeries and supermarkets purchase their wheat on a weekly basis from the GSFMO’s mills in their cities or appointed agents in their regions. Retail stores purchase flour from wholesalers, which are sold to consumers in 1 to 10 kg packages (H. F. Ahmed & Mousa, 2013; Mousa, 2012a). Other GSFMO activities include implementing food quality regulations and health standards, and also coordinating food security strategies with the Ministry of Agriculture, Ministry of Finance and Ministry of Planning and Economy (GSFMO, 2011).
Implications of GVC Transformations on Food Security in MENA The ability of MENA countries to respond to global shocks in the food systems, such as the 2007/2008 food price crisis and trade embargos, determines food security and regional stability outcomes for the region. The region has a recent history of chronic food riots tied to increases to food prices including the Arab Spring that started in late 2010 in Tunisia and quickly spread to Egypt and other countries in the region. The structure of the value chain in the cases of Egypt and Saudi Arabia summarized in table 6 has implications on each country’s ability to respond to food security and changes in the global wheat industry.
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Table 6. Characteristics of the Wheat GVC in Egypt and Saudi Arabia
Variable Egypt Saudi Arabia
Production
Water stress and limited arable land Imports and subsidizes inputs such as fertilizer Exposure to global price volatilities in agricultural inputs Government supports increasing production
Government phasing out wheat production Government supports private sector investment in overseas production
Farmers receive higher prices from the government but prefer selling to private processors who facilitate logistics
Farmers receive higher prices from the government until wheat program ends
Imports
Government monopoly Based on international prices and complex tendering system Port capacity is limited Imports 50%-60% of its needs Will import 100% of its needs
by 2016 Constrained foreign reserves Finances imports from a
hydrocarbon exports
Storage Limited and low quality storage capacity
Increasing storage capacity
Processing Government and private millers GSFMO owns mills and will start privatization
Marketing
Public and private bakeries Private bakeries
Large subsidy system is a strain on fiscal budgets and contributes to food system waste Pilot smart card for subsidized bread to provide consumers with food choice and lower bread waste
Government introduced price controls and social spending programs in an attempt to ensure stability
Source: G. Ahmed et al., 2013. Generally success or failure in achieving acceptable levels of national food security depends on a country’s ability to respond to value chains disruptions. The GVC framework provides a unique lens to evaluate transformations in the wheat industry and interplay between the role of the state and TNCs in wheat trade. Table 6 below outlines the wheat GVC transformations discussed earlier in the paper in relation to MENA and their impact on food security.
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Table 7. Wheat GVC transformations and MENA's Food Security Typology of
Change Situation in MENA Impact on Food Security
Deregulation
The state plays a key role in multiple segments of the chain Example: GSFMO in Saudi Arabia is a state monopoly that controls wheat imports, processing and marketing. In Egypt GASC controls most wheat imports and marketing; but the system is a mix of state and private sector actors.
Government Failure Risk The MENA region wheat GVC is structured around old world model of state control. Liberalizing MENA countries triggered higher food prices and social unrest.
The push for structural adjustments in MENA increased the prices of food Example: In Egypt food price inflation reached a high of over 20% in 2010 and averaged about 12% in 2014.
Consolidation
Consolidation is in the international segments of the chain in inputs and lead firms in trades. Only approved traders are invited to bid. Consolidation implies higher economies of scale and coordination in the chain
Market Failure Risk Limited choice Traders are an oligopoly interacting with state monopolies
Globalization
Companies favor privatization and policies that promote open competition Example: In 2013, Cargill bought a stake in a Russian grain terminal to bolster its access to Black Sea export facilities as MENA countries are increasingly buying from the Black Sea region
Market Failure Risk High dependence on TNCs Local traders are limited Constraints in MENA’s domestic capacity Global reach of TNCs increases their influence in MENA
Lead traders expand operations and invest in MENA Example: In 2010 National Stevedoring Company in Egypt, a Cargill subsidiary, completed the building of two new warehouses in the port of Dekheila
Financialization
International traders are active in financial markets to hedge supply and demand risk Importing countries in MENA use spot markets to buy wheat
Market Failure Risk TNCs use hedging and derivative instruments which might cause higher prices Price volatility and foreign reserves constrain countries such as Egypt and puts them at food insecurity risk
Example: Both Egypt and Saudi Arabia buy wheat in spot markets. In Egypt, GASC issues its tenders before the close of CBOT when prices are low. Wheat purchasing depends on GASC’s ability to open letters of credit quickly and having sufficient foreign reserves.
Source: Authors.
.
High Medium Low to no influence
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Bargaining Powers of TNCs and MENA States TNCs in wheat trade do more than secure wheat from producers and move it across the globe. Their information advantage, flexible capital, and enormous capacity allows them to shape global prices and the wheat GVC. These companies have been building their competitive advantage, supply chains, and a web of interests with exporting countries’ governments through programs such as food aid for a long time. For example, under the USDA food aid program for Egypt in the mid 1970s wheat sales from Louis Dreyfus amounted to US$ 99 million, US$85million for Bunge, and US$84 million for Cargill (Fold & Pritchard, 2005) of scale and complex logistics and exports networks make the barriers to entry high for small players and limits competition which in turn makes net importing countries in and outside of MENA dependent on lead firms. Table 7 provides an overview of the dynamics between TNCs and MENA that shape the dependencies of countries in MENA on these firms. Table 8. Factors that Shape Power Dynamics Between TNCs and MENA
Variable TNC MENA Countries
Competition Acquires export assets to secure supplies
Competes with other countries to buy wheat globally
Price Shape price by managing multiple segments in the chain
Price takers Tenders are based on spot market prices in international wheat trading boards
Capital Is able to acquire and move capital quickly for investments
Balance of payment, adequate foreign reserves, and access to capital is problematic for oil importing countries in MENA
Infrastructure Invests in grain elevators and export logistics
A bottleneck for most MENA countries
Food and Trade Policy Favors deregulation and open markets
Supports a mix of policies that encourage domestic production, imports, and investment in overseas agriculture
Political climate Can be a constraint to access and move grains
Can increase transaction costs
Political instability Can cause supply chain disruptions and increase costs
Can cause supply chain disruptions and increase costs
Food Consumption Increasing demand is an opportunity for TNCs
Growing populations and shifting diets outpace domestic production and increase dependency on imports
Source: Authors.
Bargaining power
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Conclusion Wheat represents a major source of nutrition for MENA nations and much of the world. Despite its importance, trade of wheat is largely limited to a handful of large transnational firms. These TNCs have undergone many recent changes including a consolidation along the value chain and diversification into new industries, along with globalization and expansion of operations into various importing and exporting nations. These transformations have been driven, or aided, by deregulation in the industry as well as a rise of financialization throughout the chain. They have implications for prices and volatility of supply, which have major ramifications, especially for importing regions such as MENA. As wheat prices and supply become volatile, importing nations are using many strategies to secure the commodity but must engage with the traders as domestic production is not sufficient to feed the populations of MENA nations. The shifting role of large transnational firms present new opportunities and vulnerabilities for MENA nations with regards to wheat imports and food security. These shifts will continue to intensify the direct or indirect reliance of MENA on imports and foreign resources for wheat. This implies that a broader focus on fostering collaborations, transparency and accountability between value chain actors is critical to regional food security as production and consumption locations continue to evolve. Moving forward, MENA countries need to explore the further development of some of its private sector firms so they can play a bigger role in wheat trade and possibly even become lead agribusiness and energy companies in the region. Building the local capacity and resiliency of grain trading within the MENA region is needed in order to help meet dietary demands and create more stable food security options for nations in the region.
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