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UNITED NATIONS ECONOMIC COMMISSION FOR AFRICA

ECA/SERPD/1992/4

The Food Gap in Egypt

SOCIO-ECONOMIC RESEARCH AND PLANNING DIVISION UNECA, ADDIS ABABA

November, 1992

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TABLE OF CONTENTS

1. INTRODUCTION 1

2. FACTORS AFFECTING THE FOOD SITUATION IN EGYPT 3

,2.1 Food production 3

2.1.1. Horizontal expansion 3

2.1.2, Vertical expansion . . . 4

2.1.3 Production constraints .-. . . 4

Water constraints . 4

Land constraints 5

Capital constraints 5

2.2 Price policy . 5

2.3 Food consumption 8

2.3.1. Population ; . 8

2.3.2. Consumer food subsidy 8

2.3.3. Income 10

2.3.4. Urbanization 10

2.4 Foreign trade in Food i 10

2.4.1. Food Imports 11

2.4.2. Food Exports 11

2.5. Food aid 11

2.6 Recapitulation 12

3. EGYPT'S FOOD PROBLEM , 14

3.1 The historical development of the food gap ; 14

3.2 The food gap to the year 2000 14

3.2.1 Production projections 17

3.2.2 Demand projections 18

3.2.2.1 Human consumption 18

Population projections 19

Per capita income projections . 19

Expenditure elasticities .19

3.2.2.2 Animal feed 22

3.2.2.3 Seeds, waste.and non-food uses 22

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3.2.3 The food gap projection to the year 2000 23 4. PROPOSED APPROACHES FOR REDUCTION THE FOOD GAP IN EGYPT ... 24

4.1 Price support policy 24

4.1.1 Unit cost of production approach 25

4.1.2 Terms of trade approach 25

4.1.3 International price approach 26

4.1.4 Crop income equalization approach 26

"": 4.1.4.1 The activities _... ... ... 26 '■■; 4.1.4/2 The objective function ..-■■. ...'... 27

4.1.4.3 The constraints .27

4.1.4.3.1 Land constraints 27

4.1.4.3.2. Labour constraints 28

4.1.4.3.3 Water constraints 28

4.1.4.3.4 Capital constraints 28

4.2 Supply response for cereal crops 29

4.3 Technology transfer 30

4.4 Consumption function 31

5. EMPIRICAL RESULTS 32

5.1 Price support policy . 32

5.1.1 Cost of production approach 32

5.1.2 Terms of trade 32

5.1.3 International price approach 32

5.1.4 Crop income equalization 32

5.2 Supply Response Functions 34

5.2.1 Wheat 34

5.2.2 Maize 34

5.2.3 Rice 34

5.2.4 Sorghum 38

5.2.5 Barley 38

5.3 Impact of Price Policy on the Food Gap 38

5.3.1 Cost of Production Approach 38

5.3.2 Terms of Trade Approach . 38

5.3.3 International Price Approach 38

5.3.4 Crop Income Equalization Approach 40

5.4 Technology Transfer 41

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5.5 Impact of Technology on the Food Gap 42

5.6 Consumption Functions of cereal crops 42

5.7 Impact of Consumer Prices on the Food Gap 47

5.8 The Impact of Price Policy, Technology and Consumer Price Changes on

Food Gap 47

6. POLICY IMPLICATION 49

APPENDIX . . . 50

Data Source: ..' 50

Supplementary Data . . . ... 51

REFERENCES 74

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LIST OF TABLES

Table 3.1: The food gap and the self-sufficiency ratios of cereal crops in Egypt 15 Table 3.2: Annual growth rate of cereals production ., 17 Table 3.3: Production projections of cereals to the year 2000 18 Table 3.4: Fuinctional forms for expenditure elasticities 20 Table 3.5: Expenditure elasticities of cereals and fresh meat 21 Table: 3.6: Demand projection of cereals to year. 2000 ...:.... .-... 22 Table 3.7: Cereals gap projection to the year 2000 23 Table 5.1: Farm prices estimated by support price approaches 33

Table 5.2: Wheat area response 35

Table 5.3: Maize area response ' 36

Table 5.4: Rice area response 37

Table 5.5: Sorghum area response 37

Table 5.6: Barley area response 39

Table 5.7: Effect of support prices on the food gap 40 Table 5.8: Analysis of variance of EMCIP for wheat 41 Table 5.9: Analysis of variance of EMCIP for maize 41 Table 5.10: Analysis of variance of EMCIP for sorghum 41 Table 5.11: Effect of technology on the food gap 42

Table 5.12: Wheat consumption function 44

Table 5.13: Maize consumption function -. 44

Table 5.14: Rice consumption function 45

Table 5.15: Sorghum consumption function 46

Table 5.16: Effect of increasing consumer prices by 10% on the food gap 47 Table 5.17: Effect of support prices, technology and consumer price policy on the

food gap during 1988 - 1990 48

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LIST OF FIGURES

Figure 3.1: Wheat gap 16

Figure 3.2: Maize gap 16

Figure 3-3: Rice gap 16

IV

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Egyptian Units and Equivalents

1 feddan = 1.038 acres = 0.42 hectares 1 ardeb (wheat) = 150 Kgs.

1 ardeb (maize) = 140 Kgs.

1 ardeb (sorghum) = 140 Kgs.

1 ardeb (barley) = 120 Kgs.

Exchange rate = US$1.00 - L.E 3.30

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CHAPTER 1

INTRODUCTION

It has been generally recognized in economic theory ( in particular by the classical economists ) that food supply could be a constraint on economic development. For the classicals, food constituted the most important part of capital: working capital. An increase in food supply, given in particular a labor dependent technique of production, will lead to the employment of more labor. Thus food.supply can constituteVan upper limit to employment generation in the economy arid thereby constrain the level of economic activity. There are of course other ways where the food sector can play an important role in the economy, notably through the various multiplier effects and inter-sectoral linkages.

The role of food in the socio-economic development process is coming increasingly into the forefront, where, the level of food consumption through the nutrition connection is the predominant determinant of the living standard and health of the population, which also determines the level of labor productivity as a deficient diet could cause non-fatal diseases, disability and mental deficiency and thereby retard work effort.

Indeed, the recent economic history of the present developed countries is replete with experience linking food supply directly with growth and development of these countries. For example, in Denmark, the economic development of the nineteenth century was led by the growth of food production, where the expansion of the dairy production provided the country with foreign exchange which enabled the country to industrialize with foreign financial aid. In the United States of America, Britain and France, the transformation of society from predominantly agricultural to predominantly industrial in the nineteenth century was accomplished partly as a result of increasing home production of food, where food production increased faster than demand and a large surplus of food was made available for exports. India, which faced food deficit upto the mid-1970s, became self-sufficient thereafter and was able to generate a surplus; this significantly contributed to the remarkable economic growth and poverty alleviation in that country.

Although historically Egypt was one of the granaries of the Mediterranean area, over the years, under population pressure, the growing prominence of non-food export crops in international trade and given the limited arable land in Egypt, food production has stagnated.

The problem has also been accentuated particularly after 1973 by the increased food demand in lieu of increased income levels in the face of slow supply response arising essentially from technological constraints and the rise in world prices. To gauge the extent of the burden of food imports on the Egyptian economy, suffice it to note that according to FAO data the capacity of agricultural exports to pay for food imports fell precipitously from about 300 percent in 1973 to only 18|percent in 1990. Under the circumstances, Egypt suffered a growing food gap. The financial and economic costs for closing this gap have been quite enormous, as increased allocations of the scarce foreign exchange have to be ear-marked for food imports. These costs seem to far exceed the incremental contribution of the food sector to the national economy.

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While many African countries suffer food gap problems, those of Egypt seem to be more acute, as the food self-sufficiency ratio in wheat, the main staple, for instance, is barely above 25 percent in the eighties. This represents a precipitous decline in food security levels as compared to the situation in the 1960s.

The government's policy however remains committed to both attaining a sufficient level of nutrition for the population and working towards the narrowing, if not complete elimination of the food gap, particularly for such staple crops as wheat. Indeed, attaining, food self- sufficiency is among the top priorities of the Egypt's recent development plans. Views and even approaches Varied:among the governmeritj as the focus of viz. self-sufficiency is basic grain, creation of emergency reserves and availability of foreign exchange.

A major instrument for overcoming the food deficit is food imports. Egypt ranks the third in the list of wheat importers. Government policy on food imports is supported by domestic policy changes favouring food production.

This study examines the food gap problem in Egypt, explores its policy implications and provides some suggestions to redress it. The study focuses on the major food crops "(cereals) namely: wheat, maize, rice, sorghum and barley. The study will proceed by estimating the size and composition of food gap since 1967; projecting the food gap to the year 2000; analyzing the factors and policies that led to this gap; and, finally providing some suggestions that could lead to the reduction of this gap. The study consists of 6 chapters. Chapter 2 discusses in detail the factors affecting the food situation in Egypt and reviews the most important arguments in the food equation. Chapter 3 focuses on the size and composition of the food gap since 1967 and gives a projection of the food gap to the year 2000. Chapter 4 examines some possible approaches that could be used as tools to address the food gap. Chapter 5 analyzes and discusses the empirical results for the factors influencing food production. Chapter 6 assesses the policy implications of the food gap and gives some recommendation for addressing it.

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CHAPTER 2

FACTORS AFFECTING THE FOOD SITUATION IN EGYPT

To be better able to understand the food situation in Egypt, we need to address the issue principally in relation to the. eonstraints facing the economy at large and the agricultural sector in particular. The present chapter will therefore, concentrate on the factors deemed to have a direct bearing on the country's food equation, nokbly those pertaining to production, consumption; price policies, trade, and food aid. We shall address these factors seriatim:

2.1 Food production

Food production in Egypt failed to increase as fast as that of demand. In order to meet the increasing demand for food, which results from the growth of population and the rise in per capita income, Egypt has to further increase its home production of food, and/or increase its food imports. However, serious handicaps, such as balance of payment difficulties caused by substantial imports of capital good need for industrialization tend to reduce the capacity for increasing food imports. At the same time increasing food production both horizontally and vertically, a course of policy followed simultaneously by the government, has been constrained by Egypt's limited fertile arable land and by country's quota in the Nile water agreement.

2.1.1. Horizontal expansion

Out of the total surface area of 238 million feddans, Some 232 million feddans are deserts. The cultivated area is limited to only 6 million feddans or to about 3 per cent of the total surface area and is concentrated in the Nile delta and the narrow strips of land along either side of the Nile. The scarcity of land in'physical terms resulted in the development of a complex and intensive use of the land under a complex a multi-cropping system.

Through the recent history of Egypt, the various governments have made it priority to reclaim arable lands from the desert. These efforts were particularly vigorous during the period (1960/61-1964/65) when about half a million feddans were reclaimed. Overall, and since 1882 when reclamation efforts started, about 2533 thousand feddans were reclaimed (see appendix table 1). It should be known that the costs of reclamation have been. relatively high and technically challenging. Despite these efforts, the cultivated area has remained constant, since early 1970s due to the loss of arable land to urbanization and others uses, which amounted to about 48 thousand feddans annually. Also, the quality of the reclaimed land has generally been low and the full potential of the reclaimed land cannot be attained in less than four to six years (Aliboni- 1984).

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2.1.2. Vertical expansion

Significant efforts were made to increase productivity through vertical expansion. In cereals, plant breeding of wheat and rice made significant gains, tetraploid wheat were replaced by hexaploid and giza 139, an Egyptian bredrust resistant variety was diffused during the 1960s.

Similarly, a rice locally bred from Japanese stock, Nahda, was replaced in 1954. By contrast, plant breeding played a little role in maize production; hybrids were introduced, but they proved susceptible to late wilt. Further, farmers preferred local varieties to meet this combined purpose of home consumption and supplementary fodder supplies (Richards, 1982).

Egypt's agricultural system is generally considered successful; the yields obtained make it one of the most prolific agricultural systems in the world. Expanded mechanization and further application of fertilizers, improved seeds and plant protection can boost yield and output and bring in a new production function, as we have seen in other countries as follow (Weinbaum, 1982)

In India, the introduction of the new seed/fertilizer technology in the mid-1960s marked the beginning of a new chapter in the history of India's agriculture. The adoption of new production technology led to a remarkable expansion of the area under food grain, from 97.3 million hectares in 1951/52 to 128.5 million hectares in 1983/84, while the yield increased significantly from 587 to 1076 kilograms per hectare. According to one study (Sarma 1990), 70 per cent of the growth in production was due to technological factors. The technology has also played an important role in moving Malaysia and Philippines closer to self-sufficiency and has considerably enhanced production of rice in Indonesia (Holloist, 1987).

2.1.3 Production constraints

The expansion of production in Egypt faced numerous obstacles, such as water constraints, land constraints and capital constraints.

Water constraints

As was once said, Egypt is the gift of the Nile. The country is virtually rainless and as such had to depend almost exclusively on the water of the Nile for irrigation. Indeed the Nile provides about 93 per cent of the water resources, while the balance of 7 per cent is obtained from ground water, rains and recycled drainage water.

The quota for Egypt from the Nile river water, according to the 1959 agreement between Egypt and the Sudan, amounted to 55.5 billion cubic meters annually. However, the current water requirements are about 59.5 billion cubic meters : 49.7 billion cm for agriculture, 3.3 billion cm for industry, 1.5 billion cm for drinking water and 4 billion cm for electricity.

Consequently, there is an irrigation water shortage of about 4 billion cubic meters annually.

This shortage was faced by using recycled drainage water and ground water (El-Kohli, 1987).

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Land constraints

The land suitable for reclamation depends on many factors such as, soil variety, the chemical characters of the soil and the level of underground water ... etc. A survey of 14.5 million feddans undertaken between 1960 and 1964 by a group of international experts found only 88 thousand feddans of class I (soil of high potential similar to the cultivated area in the valley), 190 thousand feddans in class II (soil of good line, textured soil, some heavy clays, some loomy sands and some coarse sandy loams), and 565 thousand feddans of class III (soil of a very mediocre quality). In all, only 843. thousand fedclans or 5.8;per cent of the sample were found suitable for cultivation (Mabro, 1974).

Capital constraints

The land reclamation depends also on the volume and efficiency of investments. The relative share of agricultural investments declined during the 1970s compared with the 1960s.

The horizontal investment during 1965/66-1969/70 amounted to 77 per cent of agricultural investments, decreased to 60 per cent during 1970/71-1973/76, to 48.2 per cent during 1976/77- 1980/81 and to only about 16 per cent in 1981/82. In the Five Year Plan (1982/83-1986/87), the percentage increased to 68 per cent (National Planning Institute 1986). The investment per feddan increased from LE 358 in 1952-1959 to L.E. 1849 in 1970-1981 and reached about L.E.

3154 in current terms in 1987-1991 (see appendix table 2).

The process of land reclamation was faced by serious financial constraints for meeting both infrastructural and internal reclamation requirements. At the infrastructural level (a responsibility of the government), the insufficiency and the lags in allocations resulted in inadequate infrastructural support. At the level of internal reclamation (which is carried out by the land reclamation companies or societies), the shortage of finance is even more acute. The government credits vary between L.E 800-1250 per feddan, depending on the irrigation system used, which is only about,10-20 per cent of internal reclamation costs. Consequently, these companies are forced to resort to borrowing from commercial banks, generally at high rates of interest.

2.2 Price policy

Prices assume special importance in farming decisions. In the short run, the movements in the pattern of relative prices for inputs and outputs affect the supply of agricultural commodities at the given level of technology. In the long run, given both technology and investment, the movements in output and input prices determine the allocation of resources not only within the agricultural sector, but also between agriculture and the rest of the economy.

In Egypt, agricultural price policy has been an instrument of government intervention.

One of the goals is the extraction of resources for industrialization, and defence and social

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spending from agriculture, and to provide cheap food for the urban centres as a means of avoiding political instability which urban food shortages may trigger.

Since the early 1960s, the public sector has been increasingly involved in agricultural marketing. The system of control of agriculture by the State in input and output markets was generalized at the beginning of the 1960s when the first Five Year Plan was implemented. This period was characterized by a chaotic state of the pricing system with various agencies and governmental bodies interferingwith thepricing system. It is hardly surprising, therefore, that prices arrived at: through;this procedure could be optimal. To establish a more rational price policy, the government established the Price Planning Agency and the Agricultural Commodities Stabilization in 1971. After 1973, economic stability became a particularly important objective of government policy. In accordance with an open-door policy, the government started a more liberal agricultural policy by raising producer prices close to international prices.

It is evident from the above that output prices are manipulated through government determination of producer prices. Fixed proportion of major crops are compulsorily sold to cooperative at fixed prices. The amount vary from crop to crop according to urban consumption and industrial needs. The non-compulsory portion of a crop does not fall under the domain of the State. The government enforced and extended its regulatory cooperative system by controlling the allocation of inputs (fertilizers, fuel, seeds, pesticide, credit and equipments).

The Ministry of Agriculture, through the cooperative syste'm, issues each farmer with a farm holding card which states the amount of his land and the. crop rotation to be followed, and specified the amount of inputs to be used on each crop. Farmers could not buy less than this amount. The cost of inputs is deducted when the crops are marketed through the cooperatives.

If the farmers wanted to buy more than their quota, they should pay in cash.

Farmgate prices are determined on the basis of estimated cost of production. Under this pricing practice, it is difficult to arrive at a correct set of relative producer prices which avoids misallocation of resources as this method deals with each crop separately and does not take into account the competitive and complementary relationships between crops.

Wheat is the main food crop and has been in the domain of State regulative power over an extended period. Before world war II, the farmers disposed with their surplus production in the free market. By then Egypt was self-sufficiently in wheat, during and after World War II and because of the insufficiently of local production, the State intervened in production decisions by forcing the allocation of more resources to wheat production, even when cotton, the leading

competing crop, is more profitable.

A quota system was introduced when farmers were required to deliver a certain proportion of their produce to the cooperatives at fixed prices, usually below the international prices. The quota ranged between 25 and 40 per cent of total production, depending upon the consumption targets. The balance is sold in the free market, which in any case was influenced on the Supply side by allocation to the districts and the level of wheat imports. The quota system was abolished in 1976, reintroduced in 1984 but again abolished in 1986. It was argued

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that the insignificant quantities procured relative to the total consumption did not justify the heavy costs of managing the programme.

Rice plays a key role in the government's strategy for feeding the urban population. It's market is partially controlled. Farmers are required to deliver to the government nearly 1.5 tons per feddan at fixed prices. The balance may be,sold to the cooperative at higher prices or sold to the private merchants in the free market. After milling by the government, rice is sold to the consumers at prices often below the costs incurred by the government. ,

Maize is one of the important staple food crops, particularly for the poorer rural people.

About half the production is consumed on the farm while the rest is sold in the village markets.

Maize is not a requisitioned crop since it is not exported or consumed to a large extent in the urban areas.

The effect of price policy on cereals production during the period 1960-1985 as measured by the nominal rate of protection, indicates that, wheat producers were protected and that consumers were taxed in the 1960s and early 1970s when world prices were low. This situation was reversed since mid-1970s. In the case of rice, producers have been taxed while the consumers have been subsidized. Similarly, maize producers were taxed from 1966 to 1973, as a result of the import policy, but have been subsidized thereafter, reflecting the growing importance of subsidized maize imports for livestock (Dethier, 1989).

In general, price policy has penalized cereals producers. Consequently, farmers shifted to other crops whenever possible. The diffusion of higher yielding varieties has been limited as the price policy did not provide enough incentives for farmers to adopt new technologies

Egypt's experience with the use of price policy as an instrument of increasing production and productivity contrasts sharply with the experience of a number of other countries in Africa, Asia and Latin America, where the impact of price policy was generally growth-inducing.

In India, agriculture recorded a phenomenal growth and has undergone a radical transformation since the mid-1960s. Food grain production is by far the major activity, covering about 80 per cent of the cropped area. An important factor in this rapid growth is the existence of a favourable price climate since the establishment of the Agriculture Price Commission. By its terms of reference the Commission is expected to recommend prices for food grains that are remunerative to the cultivators and give them sufficient incentive to invest in new technology.

At the same time, the Food Corporation of India purchases the entire market arrivals of food grain at the minimum support prices. The prices, combined with extensive technological diffusion, resulted in raising grain production from 57.1 million tons in 1950 to 138.4 million tons in 1983 (Bhalla, 1990).

Fox (1979) studied the Brazil's minimum price policy and showed that Brazil's minimum price programme operates under a set of minimum prices announced before the planting season.

These prices can be and are revised when unexpected events arise, such as a rapid price rise,

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8

in order to guarantee that market prices do not fall below the minimum price levels. Two basic instruments are used; government acquisition and government loans policy. This policy reduced the variability of prices and incomes, reduced seasonal price variations and helped in expanding

output.

Malawi has been successful in increasing agricultural production and is now a.net exporter of food. The policy of announcing producers (guaranteed producer prices) before the start of the growing season and setting remunerative prices has supported the techriological diffusionJand has resulted in increased production. Accordingly, maize production has increased from 63 thousand tons in 1966 to 296 thousand tons in 1984. Also, rice output rose from 4461 tons in 1966 to 30814 tons in 1978. The Agricultural Development and Marketing Corporation (ADMARC) is the main purchasing agent of small-holder crop, determined every year the producer prices for the following year, and revisions may be made in the course of the year (Chole, 1990).

2.3 Food consumption

Mostly in response to the increase in population, and the rise in per capita incomes, food consumption rose sharply. This section deals with these factors and their effect on food consumption.

2.3.1. Population

The population of Egypt has doubled between 1961 and 1989 reaching about 53.1 million. The average rate of population growth was estimated at 3.1 per cent during the 1960s, decreased to 2.3 per cent in the 1970s and fell slightly to 2.2 per cent in the 1980s (see appendix table 3). Food production failed to increase as fast. The failure of food production to keep pace with the rapid growth of population is one of the most important factors behind the food gap in Egypt.

2.3.2. Consumer food subsidy

Subsidies played a crucial role in Egypt's public finance and in the economy in general.

Egyptian consumers have been receiving basic food items at low and stable prices, where the government did manage to hold down urban food prices to avoid wage inflation and urban political instability, as well as= succeeding in placing "a subsistence floor" for the urban poor.

Food subsidies and rationing were guided by social equity considerations.

The relative share of subsidies in government expenditure increased steadily throughout the 1970s. Since 1973, in fact, expenditure on subsidies has increased sharply and constantly in concomitence with the big jumps in world prices and the increase of population. It should be mentioned that all major subsidised foodstuffs except rice are imported.

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Food subsidies take two forms: direct subsidies, which appear under the cost of living subsidies item of the government budget, and implicit subsidies, which consist of the losses borne by the government owing to the difference between production costs and the selling price to the consumer. Until 1973, consumers were subsidized by implicity taxing producers. After 1973, consumer subsidies were financed directly out of the government budget. Government expenditure on subsidies increased, sharply in 1974 and continued to date. In 1975, a special fund for subsidies was established. The bulk of food items subsidized through the Ministry of Supply are marketed to'consumers, but some subsidized items are used as inputs for the food processing industry.

The subsidized good are supplied to the population through four different channels. The essential goods such as wheat flour and bread are available in unlimited quantities and are subsidized throughout the country. Others, such as, oil, sugar and tea are only obtainable on the presentation of a ration ticket. However, they are supplied at regular intervals (monthly quota) which vary according to governorates and to the rural or urban location of households.

Commodities such as, rice are rationed and supplied at irregular intervals, depending on availability. Finally, such goods as meat, poultry and frozen fish are less subsidized, but are supplied in limited quantities (Aliboui, 1984).

A policy of heavy subsidization of food, although it achieves its objectives of supplying food at low prices to the vast majority of population and maintenance of subsistence levels for the bulk of the population no doubt, burdens. the fiscal system and makes it vulnerable to fluctuations in world prices and on other exogenous influences over which it may have little control. Moreover, subsidies give rise to distorted cost structures, and result in poor allocation of resources. They also affect the terms of trade between agriculture and the rest of the economy. Keeping the prices of farm products much lower than the prevailing international market prices discourages farm production and encourages migration from the countryside to urban areas, with a whole range of serious and unimaginable negative consequences. In the long-term, the maintenance of subsidies may increase the system's inflationary tendencies, in that it does not permit sufficient growth of productivity, owing to its perverse effects on the allocation of resources. At the same time, the subsidies policy led to an increased allocation of foreign exchange to food imports and to severe problems of deficit financing which have grown steadily and represented about 14 per cent of total public expenditure during the 1970s and 1980s. This situation was characterized by massive foreign and domestip borrowing required to finance the fiscal deficits. Finally, the subsidy policy led to increasing the per capita consumption for food commodities, for example, the per capita consumption of wheat increased from; 71 kilograms in 1969 to 168 kilograms in 1981. Part of the consumption was due to using subsidized commodities as animal feed.

The elimination of the subsidy system would produce a price increase, which due to the low elasticity of substitution of the subsidized food, would cause aggregate demand to fall, and as food grains (wheat) are largely imported would ultimately have positive effect on the trade balance (Aliboni, 1984).

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Since late 1970s the international donor community put pressure on the government to undentable policy reforms in view of what they consider as an increasing unsustainable macro- economic situation in the country.

Food subsidy in Egypt during the period 1970-1989/90 is presented in appendix table 4.

As could be seen from the table food subsidy rose sharply from L.E. 23.7 million in 1970 to reach L.E. 2055 million in 1983/84, falling thereafter, but remaining very high at L.E. 1747 million irivl989/90. The cereals subsidy represented about 35 per cent of total food subsidy.

The wheat subsidy, the greatest component of the food subsidy, represented nearly 75 of the cereals subsidy.

2.3.3. Income

The consumption of food increases as per capita income rises. The magnitude is determined by the income elasticity of demand for food. The gross domestic product per capita at current prices rose from L.E. 80 in 1967 to L.E. 395 in 1981 and reached L.E. 1219 in 1989, (see appendix table 3). This increase in per capita GDP led to the rise in per capita consumption of food commodities. Also, the distribution of income influenced food consumption.

2.3.4. Urbanization

Urbanization affects food consumption in a number of ways: prices of food commodities are often lower in urban areas than in rural areas due to urban price subsidy; consumer behaviour is influenced by the greater varieties of food items in urban markets; the opportunity cost of doing household chore and women's time in general, is higher in urban relative to rural

areas.

Egypt is a highly urbanized country. The urban population rose from 9.9 million persons in 1969 (representing about 37 per cent) to 23.1 million persons in 1989, (representing about 44 per cent of the total population in the country) (see appendix table 5). The growth of the urban population has been rapid and sustained.

2.4 Foreign trade in Food

For thousands of years, Egypt remained self-sufficient in food and indeed an important food exporter, especially of wheat. This continued until cotton was introduced by Khadive Mohammed Ali in 1812. Gradually, cotton, being the more profitable crop, repalced wheat (Amin, 1966). By World War II, Egypt turned from a net exporter to a net importer of food.

Since then Egypt's food deficit continued to grow. This section discusses the pattern of the country's foreign trade in food.

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11 2.4.1. Food Imports

The first response of the government to the imbalance of demand and domestic food supply was accelerating food imports. This was an attractive option both politically and economically. Increased reliance on food imports was politically attractive, for the government especially in the short run. First, it is extremely difficult to increase food production in the short run given the land constraints if consumption rose. Second, food imports afford the government a high degree of political control over strategic urban food supplies.

According to data provided by FAO, the value of Egypt's food imports rose from an average of $185 million a year in 1961-1969 to $2561 million a year in 1986-1990 (FAO Trade Year Book). Similarly, cereal imports increased from $135 million to $1316 million, with wheat imports representing between 80 and 84 per cent of the bill. Egypt is currently the third largest importer of wheat in the world, after China and the former Soviet Union.

2.4.2. Food Exports

Egypt's main food exports consist of rice, onions, potatoes and groundnuts. According to the same FAO sources the value of food exports rose from an average of US$79.1 million in 1961-1965 to an average of US$225.3 million in 1986-1990. Despite their sharp rise it needs to be emphasized that the value of food exports fell short of those of imports. Hence, the widening food import gap in the country.

Heavy reliance on food imports undeniably carry political risks. For Egypt, in particular, concentration of its food imports on one country, namely the United States of America which provides about 50 per cent of the wheat imports, presumably at preferential rates, may have a built-in risk of dependency and may have catastrophic consequences. In addition, there are the hazards of the international market for wheat which is presently controlled by the production decisions of a few major producers such as the United States of America, Australia, Canada and

the EC. -

2.5. Food aid

Food aid is a vital element in the welfare and indeed the survival of many millions of people in the poorer countries of the world, particularly in Africa. It is also a very controversial subject: as has been said of other matters "you cannot live with it and you cannot live without it. Food aid, if improperly handled, can do more harm than good, and there are plenty of horror tales to testify to that". Yet equally, when properly handled, food aid can do a great deal of good and can be a vital instrument of development. In other words, food aid can be a means to alleviate short-run food shortages but can also have a disincentive effect on production, especially if given in large quantities, continued indefinitely, and unaccompanied by an effort to institute effective long-run domestic policies.

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12.

Food aid to Egypt began in 1953, ceased following the Suez War of 1956 but was resumed with a $25 million P.L. 480 wheat agreement in December 1958. In subsequent years, concessional food sales and other forms of economic aid grew, reflecting, in part, Egypt's cooling relations with the Soviet Union. By 1964, deliveries to Egypt accounted for more than 10 per cent of all U.S. foreign wheat and wheat flour sales. Under the Kennedy and Johnson administrations, food aid matured into a conscious tool with which President Nasser was to be persuaded to temper the more radical aspects of his foreign policy notably to temper Egypt's, policy .stance vis-a-vis the; region's more conservative regimes. The policy did not restrain

Egypt from stepping up support for revolutionary forces in Yemen during 1964 and 1965, the

Nasser government's denunciation of U.S. policies in the Congo and its instigation of Anti- American demonstration in Cairo. These events, along with new contacts between Nasser and Soviet and Chinese leaders, prompted Washington's decision to curtail future P.L. 480 sales to Egypt and to stop entirely all other forms of assistance. In late 1964 talks on a food assistance programme were conspicuously postponed. In 1966, a short term p.L. 480 agreement was reached with Egypt. In 1967, the United States refused to negotiate a wheat agreement and stopped food aid to Egypt. Food aid was resumed in 1973.

Food aid flows to Egypt have been considerable and have reduced balance of payments pressure. Food aid has been consistently increasing since 1973, amounting to 1427 thousand tons in 1989 (see appendix table 6). Currently, the largest donor is the United States, which contributes chiefly wheat and wheat flour. P.L. 480 wheat shipments to Egypt rose rapidly from 1973 until 1981 where the value of food aid to Egypt has slightly declined in value terms, but the actual tonnage has remained roughly the same. Commercial shipments on confessional terms have replaced PiL. 480 shipments since the early 1980s. Also competition in the world markets has increased, and the United States has been fighting with the European Community over access to the Egyptian imarket. Egypt benefited from this competition in the form of the terms of the food aid.

2.6 Recapitulation

From what has been critically viewed in the previous sections, it is evident that Egypt is currently facing an acute food deficit problem, despite consistent vertical and horizontal efforts to increase production and ensure an adequate level of nutrition to the average citizen. The government endeavoured to establish a better sectoral balance between agriculture and other sectors, and develop mechanisms for meeting the needs of an increase in urbanized society.

However, this is not to suggest that the government's policy towards agriculture has been adequate to address the food deficit problem and the wider problem of the agricultural sector.

Indeed, it is believed that there are ample opportunities for the transformation and development of the agricultural sector, in particular the food sector, the known structural constraints notwithstanding. Although Egypt's agricultural prductivity is among the highest in developing countries, it is widely believed that there is further scope for enhancing it a further through applying better technology. It is also believed there is significant potential for improved policy mix. It is in recognition of this potential that the present research purports to estimate in fine

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13

T detail the magnitude examine the nature of the food problem in the country X and suggest pqssible approaches for addressing it.

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BgKsia^tef^ii^^

CHAPTER 3

EGYPT'S FOOD PROBLEM

A main finding of Chapter 2 is the continuing lag in Egypt's food sector, notwithstanding government's efforts to develop agriculture. The policies followed so far to bridge the consumption gap is definitely unsustainable as Egypt had to devote a significant and increasing share of its foreign exchange resources to pluck the food gap. To be able to suggest some appropriate remedial measures for the amelioration of the problem, we need first to gauge the magnitude of the food deficit and its future development with respect to the various cereal crops if present production and consumption trends continue to the year 2000. This is the focus of the present chapter.

3.1 The historical development of the food gap

Table 3.1 and figures 3.1-3.3 present the gap in cereal crops during the period 1967- 1990. As could be seen from this data, the gap in wheat increased almost uninterruptedly from 2783 thousand tons in 1967 to 6460 thousand tons in 1990, that of maize rose from 269 thousand tons to 1197 thousand tons while the surplus in rice decreased from 859 thousand tons to 110 thousand tons during the same period. As a result, the self-sufficiency ratios decreased significantly from 53 percent in 1972 to 21 percent in 1984 rising however to 40 percent in 1990, and from 97 percent in the early 1970s to 60 percent in 1986 and 78 percent in the late 1980s for maize. The self-sufficiency ratios for rice also decreased form 172 percent in 1968 to 104 percent in 1990. Thus, except for rice, which recorded a small surplus, the supply gaps in wheat and maize, the other two main staples, remained wide despite efforts to increase production during the mid-1980s.

3.2 The food gap to the year 2000

Prudent policy would require a foresight in the allocation and management of resources.

Accurate predictions of the future would definitely improve the efficiency of policy decisions.

Indeed, the effectiveness of management is measured in relation to its capacity to foresee and address the challenges of the future. Of course the reliability of projections depends on the validity of their underlying assumptions, the relevance of their central arguments and their tractability of unforeseen factors.

Thus, in making projections for the food situation in Egypt to the year 2000 we have to address both the demand and supply aspects of the food situation and delineate the factors affecting them.The projection period chosen was to coincide with the five yearly planning cycles of the country and is considered long enough to allow the implementation of desirable change in agricultural policy.

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■j^gjk^^^^^^^r^aa^^a^l^fefc^

Table 3.1

15

The Food Gap and the self-sufficiency ratios of crops in Egypt.

cereal

Years

1967 1968 19 69 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990

Wheat FG 2783 1945

: 1503

2293 1645 1435 1732 2496 3206 2991 3416 4782 57 02 4691 6490 5471 5660 6934 6254 6202 5644 4656 6075 6460

SSR 32 44v 4 6 40 51 53 51 43 39 40 33 29 25 28 23 27 26 21 23 24 33 38 34 40

Barley FG

-4

■■:-3-:"

-3 -2

— 9 3

-

-20 -5

3

— 7

5 7 33 -9

— 6 -7 -1 4

-

-

-

-

SSR 100 103 103 104 103 102 97 100 120 104 97 106

96 94 76 108 105 105 101 97 100 100 100 100

Rice FG -859 -1087

-892 -789 -697 -437 -196 -166 -322 -182 -292 -289 -298 -2 -13 -238

-29 5 -22 -97 -135 -104 -47 110

SSR 160 172 I54:

143 138 121 109 108 116 109 115 114 113 100 100 111 101 96 101 102 106 105 102 104

Maize FG 269

15 64 72 48 68 77 255 277 193 914 337 673 3854 1223 1734 1225 1447 1726 1860 1546 1124

1293 *

1297

SSR 89 99 97 97 98 97 97 91 91 94 75 90 81 84 73 66 74 72 68 60 70 78 78 78

Sorghum FG

. -

-

-

-

-

-

-

-

-

-

-

-

_

-

-

-

-

- ;

- 1

-

SSR 100 100 : 100 too 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100

100'

100 100 100

Note : FG = food gap

SSR = self-sufficiecy ratio

Source: Calculated from Appendix Tables 7-12.

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FIGURE 3.1 WHEAT GAP

676869 707172 7374757677 78 79808182 83 84 858687 88 89 90 YEARS

FIGURE 3.2 MAIZE GAP

676869707172 737475 7677 78798081828384 858687 888990 YEARS

FIGURE 3.3 RICE GAP

1.4 676869 7071 72 737475767778798081 828384 858687 8889 90 YEARS

CONSUMPTION —«— PRODUCTION

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17

3.2.1 Production projections

Production projections were made by making production a function relating output to price and non-price factors. In its logarithmic form the equation used is as follows:

AUbl

where,

Yt == AP

Yt .-= crop output in yeart . , Pt = real price of the crop in year t b: = the price elasticity of production

b2 = annual growth rate of the production induced by non-price factors

T = period in years starting from the base year

A = constant

In its semi-logarithmic form the above equation takes the form:

Y = e(a+bt)

where,

b - logarithmic of the estimated value of one plus the variable's annual rate of change.

The above equations have been applied to all major staples, namely: wheat, maize, rice, sorghum and barley using regression techniques. The results are depicted in Table 3.2 below!

Table 3.2: Annual Growth Rate of cereals production

Item Wheat Production Maize Production Rice Production"*

Sorghum Production Barley Production

3.15 2.94 0.11 -2.22

1.61

Yt = APtblTb2 3.56 2.94 0.30 -2.02 1.31

Source: Calculated from Appendix Table 7.

The analysis of the regression results shows that on the basis of type of estimation (ie.

log and semi-log) production of wheat would increase at annual rate of 3.56 or 3.15 percent

during the projection period, 2.94 percent for maize, 0.30 or 0.11 percent for rice and 1 31 or

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18

1.61 percent for barley. Production of sorghum would however decrease at the rate of 2.02 or

2.22 percent.

At these rates, wheat and maize production would expand at a rate faster than that projected for the population (2.53), while the production of rice and barley would expand at less than the rate of growth of population . Assuming that these rates would remain the same throughout the projection period, the cumulative compound growth rate over the 10 years would be 36.36 or 41.88 percent for wheat, 33.61 percent for maize, 1.11 or 3.04 percent for rice and 13,9 or 17-32 percent for barley, while sorghum would decrease by 18.46 or 20.11 percent Thus , the production projections of cereals would total 5820 or 6055 thousand tons for wheat, 6412 thousand tons for maize, 3202 or 3263 thousand tons for rice, while that of sorghum would be 503 or 513 thousand tons. Finally, barley would increase by 147 or 151 thousand tons (see

table 3.3).

Table 33: Production projections of cereals to year 2000

000's ton Crop

Wheat Maize Rice Sorghum Barley Total

Alternative I 5820 6412 3202 503 '

147'

16084

Alternative II 6055 6412 3263 513 151 16394

Source: Computed from Table 3.2 and Appendix Table 7.

3.2.2 Demand projections

The total consumption of the cereals is the sum total of the consumption of various cereals crops which in this exercise is taken as consisting of human consumption, animal feed seeds, waste and non-food uses. As each of these consumption elements is governed by a different set of factors, this exercise proceeds by first making separate consumption estimates in lieu of each category and for each crop and then adding them up to arrive at the projected total consumption per year. These are only direct demands. No attempt is made to derive

indirect demand.

3.2.2.1 Human consumption

Although a number of factors influence human demand for a commodity/the size of

population, real per capita income and real prices are believed to be the major determinants of

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_'■/■. i

19

food consumption. Under the assumption of constant prices, the projections of the demand for food become a function of population and per capita income projections. Formally, this relation could be expressed as:

C = POP + [Ey Y + where,

C *= growth rate of consumption

POP = growth rate of population .""■".."..

Ey = income (expenditure) elasticity of demand Y = growth rate of per capita GDP

Ep = price elasticity of demand

P = rate of change in real price of commodity

By assuming that price remains unchanged, the above equation therefore collapses to:

C = POP + EyY Population projections

The population trends during the period 1967-1989 were assumed to continue to the year 2000 which gives an average annual growth rate of 2.53 percent and a cumulative compound growth rate of 31.63 over the 11 year period.

Per capita income projections

Income (expenditure) affects the demand for food through the income (expenditure) elasticities and the annual growth rate. The per capita income data for the period 1967-1989 was obtained through dividing GDP by the corresponding annual population. Assuming that the 1967 - 1989 real per-capita GDP trends of 3.5 percent annualy continue, the projected real per capita GDP cumulative growth rate would be 42.16 percent by the end of the century.

Expenditure elasticities

The income expenditure elasticities were obtained from the family budget survey data.

The cross sectional nature of the family budget data has the advantage of showing the influence of income on food consumption without major disturbing effects from changes in prices, as the absence of price variation and the possibility of a wide range of incomes means that the income (expenditure) so estimated are more precise. The various functional forms appearing in table 3,4 below have been estimated.

To determine the range of expenditure elasticities and hence to gauge the range (limits) of the influence of income on food consumption the estimates were made for both urban and rural communities. The elasticities established in accordance with functional forms presented

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20

in table 3.4 are presented in appendix tables 13-17 and summarized in table 3.5 below, findings in relation to the various food commodities are reported seriatim. The

Table 3.4: Functional Forms for Expenditure Elasticities

Linear Logarithmic Semi-logarithmic Log-inverse Log-log-inverse

Function Q = a -f- bx

Ln Q =.a + b Lnx Q = a + b Lnx Ln Q = a - b/x

Ln Q = a -b/x - c Lnx

Expenditure elasticity b(x/Q)

b b/Q

b/x (b-cx)/x

Source: FAO, Agricultural price and marketing policy: Government and the Market.

Internal Document, Policy Analysis Division, Rome, 1992.

Wheat: As could be seen from table 3.5, the expenditure elasticity of wheat in the urban areas ranged between 0.11 and 0.18, while the expenditure elasticity in the rural areas is

estimated at 0.34 by using the log inverse function, and at 0.45 by using the semi-logarithmic function. The results indicate that the expenditure for wheat in the rural areas is greater than in the urban areas. This shows that wheat is the more necessary for urban diets than in the rural

areas. It also shows that consumers in the rural areas can substitute other cereals for wheat.

Maize: The same functional forms were used to estimate the expenditure elasticity of maize. The estimates for maize showed that all five functional forms are suitable to express the relationship between per capita expenditure and per capita maize consumption in the rural areas.

The elasticity amounted to 0.24 by using a linear function and 0.32 by using a semi-logarithmic function. It should however be noted that the parameters for all forms were not statistically

significant for the urban areas.

Rice: The expenditure elasticity of rice in the urban areas is found to be lower than in the rural areas. The elasticities were estimated at between 0.11 and 0.22 in the urban areas and at between 0.4-and 0.5 in the rural areas. All the parameters of the functional forms were

statistically significant in both areas.

Sorghum: The results indicated that the expenditure elasticity of sorghum has a negative sign and ranged between 0.96 and 0.75 in the urban areas and between 0.56 and 0.38 in the

rural areas.

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21

The above results indicate that wheat, maize and rice are normal goods where the elasticity is greater than zero and less than one,.while sorghum is an inferior good as the expenditure elasticity is less than zero. The results showed also that the consumption pattern in the urban areas is different from that in the rural areas.

Table 3.5: Expenditure Elasticities of Cereals and Fresh Meat

Function

Linear

Log

Semi-log

Log- inverse

Log-log- inverse

Urban Rural

ilgiii§ii§

Urban Rural

Urban Rural

Urban Rural

liiifegfll!!

Urban Rural

Wheat

-

0.35

Illlll

0.17 0.40

illlllili

0.14 0.45

Illllll

0.18 0.34

lllllll

0.11 0.42

lllllll

Rice 0.14 0.40

lllllll '0.19

0.47

iilllil

0.19 0.50

lliiiii

0.11 0.40

lllllll

0.22 0.47

lllllll

Maize

-

0.24

Ilililll

0.31

illiiiii

-

0.32

IllllSii

-

0.30

Illiiiii

0.29

iililil

Sorghum

-

-

-0.92 -0.56

liiillHl

-0.96 -0.38

illiiiii

-0.84 -0.54

Illiiiii

-0.75

-

iiiMilf

Meat 0.98 0.75

iiiiiiiiiliiili

1.2 1.02

111111111

0.85 0.79

iiiiiiBi

-

g;:'||;i;i:;;:;S;::|2;^;;;!S:;-;::;;;

1.06 0.86

iiiiiiii

Source: (1) Appendix Tables 13 - 17.

Based on the projection trends of growth in population, per-capita GDP and the estimated

expenditure elasticities of demand on the aggregate level, human consumption to the year 2000 can be expected to increase by 40.91 percent as a lower limit and by 46.36 percent as an upper limit for wheat, between 40.48 and 44.70 percent for rice, and between 41.75 and 45.12 percent for maize . For sorghum, the lower limit indicates that the human consumption can decrease by about 2.1 percent, while the upper limit shows that the consumption will increase by only

0.43 per cent.

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22

Based on the above elasticity configuration, we estimated the human consumption projections to the year 2000 as follows: at 12238, 5894, 3419 and 518 thousand tons as lower limit for wheat, maize, rice and sorghum respectively. The upper limits were estimated at

12714, 6034, 3522 and 532 thousand tons for these crops respectively (see table 3.6 below).

Table 3.6: Demand projection of cereals to year 2000

Crop

Wheat Maize Rice Sorghum Barley Total

Human lower

limit 12238 5894 3419 518

-

22069

upper

limit 12174 6034 3522 532

-

22262

Animal feed lower

limit

-

2154

-

47 138 2339

upper

limit

-

2327

-

.50 149 2526

Others lower

limit 1048 513 192 23 51 1827

upper

limit 1090 513 196 25 52 1876

000'sfon Total lower

limit 13286 . 8561 3611 588 189 26235 '

upper

limit 13806 8874 3718 607 201 27206

Source: Computed from Table 3.5 and Appendix Tables 8 -12.

3.2.2.2 Animal feed

The expenditure elasticity for meat is used as proxy for the income elasticity of demand of meat, (see table 3.5). Using this elasticity together with the growth rate of population and per- capita GDP, the projections for animal feed to the year 2000 indicate a cumulative increase of about 66.62 percent as a lower limit and 79.69 percent as an upper limit on the level consumption in 1989. In physical terms, the consumption projection of animal feed would be 2154, 47 and 138 thousand tons as a lower limit, and 2327, 50 and 149 thousand tons as the upper limit for maize, sorghum and barley respectively (see table 3.6).

3.2.2.3 Seeds, waste and non-food uses

The projected requirements for seeds, waste and non-food uses were calculated on the basis of their ratio of the production of the crop during the period 1967-1989. Thus these requirements for the year 2000 were estimated at 1048, 513, 192, 23 and 51 thousand tons for wheat, maize, rice, sorghum and barley respectively as a lower limit, and 1090, 513, 196, 25 and 52 as an upper limit.

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23

The total demand for cereals to the year 2000 was estimated at 13286, 8561, 3611, 588 and 189 thousand tons as a lower limit and 13806, 8874, 3718, 607 and 201 thousand tons as an upper limit for wheat, maize, rice, sorghum and barley respectively (see table 3.6).

3.2.3 The food gap projection to the year 2000

By subtracting the projected consumption from the projected production of the cereal crops we can obtain the gap per commodity. The results show that the wheat gap amounted to 7231 thousand tons as a lower limit, arid 7986 thousand tons as an upper limit. The maize gap would amount to 2149 or 2464 thousand tons, the rice gap would stand at 348 thousand tons as a lower limit and 516 thousand as an upper limit, and the sorghum gap would be ranging beween 85 and 94 thousand tons. Finally, for barley the gap would range between. 38 and 54 thousand tons (see table 3.7 below).

Table 3.7: Cereals gap projections to year 2000

000's metric ton Commodity

Wheat Maize Rice Sorghum Barley Total

Lower limit 7231 2149 348 85 38 9851

Upper limit 7986 2462 516 94 54 11112

Source: Computed from Tables 3.3 and 3.6.

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CHAPTER 4

PROPOSED APPROACHES FOR REDUCTION THE FOOD GAP IK EGYPT

To reduce the food gap in the basic staples, production has to grow at,a rate faster than the historical rate of growth and/or that consumption should decrease, through reducing current calorific intake per capita of about 3194 calories in 1981-1985 to the optimum of 2260 calories per capita suggested bytheFAO under Egyptian conditions. To explore the feasibility of the above production/consumption-configurations it was thought appropriate to advance a number of hypothesis that impinge on the production procees or on consumption, and trace their impacts with a view to arriving at the most appropriate policy mix that could be suggested for reducing the food gap in the country. These approachs could be classified into two broad categories. The first category deals with the production aspect within the context of price support policy, supply response functions and technology. The second category focuses on the consumption side. A consumption function for cereal crops would need to be estimated to assess the impact of changes in consumer prices of staples on the food gap. The subsequent sections outline the various aspects of these approaches and laydown their modular forms.

4.1 Price support policy

Prices are among the most important instruments used to engender a fast food production response. In a free market system, prices are instrumental in guiding resource allocation. Within agriculture they can similarly guide the allocation of agricultural resources among competing

crops.

In Egypt, for along time farm prices are set by the govenment a system that relies on a cost of production method. The prices of the basic inputs were themselves administratively determined and often subsidized and cooperatives are used as the main channels for marketing and supplying the inputs to the farmers. To ensure the production of adequate quantities of strategic food crops, the government imposes a system of area restriction. Under this sytem area grown to each crop is predetermined. In other words, the output price,input price and area sown to individual food crops are fixed by the government. This arrangement does not provide the necessary incentives to the food producers and has in fact encouraged various types of evations.

Since 1987, however, and within the framework of the economic liberalisation programme adopted by the government, agricultural prices were freed in an attempt to encourage farmers to grow food crops and increase productivity. This system too has serious disasdvantages to the farmers in terms of price and income fluctuations and by disturbing their resource allocation decisions. While free prices would reflect market conditions, to ensure some stability in farm resource allocations a system of supported prices maybe necessary.

There are several criteria that could be used in determining farm support prices, but each method would ofcourse have its own advantages and limitations.

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25

Four approaches have been used by researchers to determine food prices, namely:

unit costs of production approach terms of trade approach

international prices approach crop income equalization approach

, . The; study utilizes all four approaches with a view to selecting the most appropriate to the Egyptian conditions.

4.1.1 Unit cost of production approach

The farmgate prices estimated by this approach cover the total cost of production for the crop under consideration, plus a remunerative margin that also reflects the inflation rate. A margin of 35 per cent is believed adequate under Egyptian condition. It should however be mentioned that this approach by concentrating on individual crops, does not take into account the competitive and/or the integration relationship between crops. Formally, this relation could be expressed as:

TCit+35 (TClt)-Vlt

where,

Pit = farm price of crop i in year t

TCit = total costs per feddan of crop i in year t Vit = value of by-product of crop i in year t Yit = yield of crop i in year, t

Although this approach is useful, it also suffers from major disadvantages such as inability to take into account prices of competing crops, the terms of trade between agricultural and non-agricultural sectors, international prices and demand aspects (Nassar 1987).

4.1.2 Terms of trade approach

Prices according to this approach are determined by the ratio between prices paid by the farmer and the prices of his produce. Formally, this relation could be expressed as:

Pit={MPi/MCi)CIt

where,

j = moving average of farm price of crop i for the last three years.

MCj = moving average of consumer price index in the rural areas for thelast three

years.

CIt = consumer price index in the rural areas in year t

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