Egypt appeared to pay a premium, but not an excessive one,
for wheat as it extended its timely start to wheat purchases for 2017-18, against
a backdrop of concerns over the return of controversial zero tolerance rules over
Gasc, the grain authority for Egpyt, the world's top wheat
importing country, bought 360,000 tonnes of Romanian and Russian wheat at
tender over the weekend, for delivery July 10-20.
The purchase extended to 540,000 tonnes the amount of the
grain that Gasc has already purchased for delivery in 2017-18, at a time of
year when it is typically absent from tenders, with Egypt focusing instead on stockpiling
supplies from the domestic harvest.
The authority bought nearly 5.9m tonnes of wheat at tender
for delivery in 2016-17, the vast majority from Romania and Russia.
The accelerated purchasing has been attributed officially to
a quest to boost reserves while international wheat prices are depressed,
although some observers believe that other influences may also be involved –
including a quest by Gasc to secure supplies ahead of a potential fresh rumpus
over ergot curbs.
Gasc wheat purchases at tender, June 10
60,000 tonnes of Russian wheat from GTCS at $204.20 a tonne on a cost and freight basis
60,000 tonnes of Romanian wheat from Cofco at $204.80 a tonne on a cost and freight basis
60,000 tonnes of Romanian wheat from Cerealcom at $204.99 a tonne on a cost and freight basis
60,000 tonnes of Russian wheat from Aston at $206.45 a tonne on a cost and freight basis
60,000 tonnes of Russian wheat from Friends at $206.40 a tonne on a cost and freight basis
60,000 tonnes of Russian wheat from AOS at $206.40 a tonne on a cost and freight basis
An Egyptian court decided last week to re-instate a zero tolerance
policy on imports of ergot - a common grain fungus which can, if ingested in
sufficient quantities, cause hallucinations – although an announcement is not
expected officially until Wednesday.
Also, Gasc, claiming the support of the agriculture
ministry, said that it would be able to import anyway at the 0.05% ergot
contamination rate typical among other buyers.
Egypt's previous enforcement of a zero tolerance approach effectively
barred it from international wheat markets, given the difficulty of
guaranteeing supplies are ergot free, and with cargo rejections posing high
costs for merchants.
Traders raised prices to account for the risk of trading
with Egypt, or boycotted tenders altogether, causing the cancellations of four
tenders over August and September last year.
Big guns stay away
The price that Gasc paid for wheat at the weekend tender, an
average of some $205.50 a tonne including freight, was actually not much higher
than that at the previous event, at the end of last month before the fresh
ergot worries were known, at least publicly.
Then, the authority paid $202.61 a tonne for grain, although
wheat prices have risen on international markets since, lifted by dryness
worries in the US, besides Australia and Canada.
A number of merchants, including Aston, Cofco and Friends,
cut their offer prices this time, compared with the May 31 tender.
However, the price paid was higher than the $192.75-199 a
tonne, including freight, reportedly paid last week for wheat by Algeria, which
has a reputation for higher specification on its purchases than Egypt.
Furthermore, the number of offers to Gasc's latest tender,
at seven, was well down on the 15 at the May 31 event, with big names such as
Archer Daniels Midland, Cargill, Glencore and Louis Dreyfus noticeably absent
this time – potentially a sign of worries over a renewed ergot furore.
Debt market signal
However, there is an idea that a signal from credit markets
indicates that Egypt is not about to enact a strict anti-ergot campaign – with some
observers believing that such clampdowns have actually been motivated by a wish
to preserve the country's fragile foreign exchange reserves.
Indeed, during the curbs last summer, credit default swaps or
CDSs – insurance against defaults – on Egyptian sovereign bonds were "blowing
out to near 400 basis points on a one-year note", said Terry Reilly at Chicago
broker Futures International.
"The last time Egypt initiated the zero tolerance policy the
country was in a credit crunch."
"Keep an eye on credit spreads if this no ergot policy stays
in place. If the lack of foreign exchange reserves is the driver behind the implementation
like last year, CDS prices will shoot higher again."
But such credit default swaps are now standing well below
last summer's high, closing on Friday at 152.16 basis points, although that is
still "10 times higher than Thailand, and three times higher than Algeria",
other importing countries, Mr Reilly said.