Biggest wheat importer Egypt may turn to hedging

LONDON: To cope with a sudden spike in wheat prices, the world’s biggest importing nation is considering an unusual tactic: price hedging.

Egypt, which relies on subsidised wheat to feed millions of people, is in the early stages of discussing a plan to hedge against price increases, according to Finance Minister Mohamed Maait.

The country is paying more for imports after severe droughts in Europe and Australia ruined crops, with benchmark wheat futures in Chicago reaching a three-year high earlier this year.

While the plan is in the beginning stages, it would be a dramatic development for the wheat market. It’s common for the private sector to hedge commodity purchases, but the tactic is rare among countries.

The most notable example is Mexico, which has run a hedging programme for its oil exports for nearly 20 years.

“It’s a sign that future wheat volatility is being taken very seriously by big buyers,” said Charles Clack, an analyst at Rabobank International in London.

“I wouldn’t necessarily say its a big deal for global prices, but it’s quite a shift in Egyptian risk strategy.”

Egypt will buy 12.5 million tonnes of wheat in the 2018-19 season, according to estimates from the US Department of Agriculture.

The World Bank and the International Monetary Fund had been encouraging emerging nations to hedge their exposure to commodities markets, in part on the positive experience on Mexico.

At current wheat prices and freight costs, Cairo would spend this year about US$3bil buying the cereal.

Insuring the expected wheat import needs of Egypt over the next year through the options market could cost roughly US$150mil in fees, according to Bloomberg News estimates based on current prices.

Egypt was already talking to at least one bank about the potential for wheat price hedging. — Bloomberg