The prospect of a new commodities exchange in Egypt is one of the more significant developments to emerge in 2016. While the possibility of creating a new market has been floated for years, the current proposal, if developed as planned, will be a regional first. It would also correct the currently dysfunctional system that governs trade in some of the nation’s most important staples. News of the initiative first broke in late 2014, when the government announced it intended to turn Egypt into a trade hub. It talked of processing and re-exporting up to 65m tonnes of wheat, soybeans, sugar and other commodities via a new port to be built on the Mediterranean, as well as creating the Middle East’s first commodities mercantile exchange. The announcement came despite several similar attempts, largely unrealised, by other markets to establish grains processing hubs for the region, and despite the fundamental governance problems Egypt faced.
By November 2015, however, the Ministry of Supply and Internal Trade and Sigma Investment, the Jordan-based conglomerate, signed a memorandum of understanding to establish the first MENA commodity exchange in Egypt. Since then a number of milestones have been passed that suggest there is real momentum behind the scheme, including the completion of a feasibility study in January 2016 and the subsequent implementation phase of the project.
The EGYCOMEX, as it is now called, will initially handle spot and futures transactions in a range of agricultural commodities, before including precious metals and energy commodities such as oil and gold, according to information released by Sigma Investment. Commodities contracts will be able to be bought and sold based on international prices and information, which for Egypt’s farmers and traders means the ability to operate under a fair auction system and hedge prices over the long term.
Fair price discovery, long-term price stability and institutional transparency all have special significance when applied to Egypt’s troubled wheat trade, a staple that is likely to be the focus when the exchange is launched. The country is the world’s largest importer of wheat and has attempted to encourage domestic production by heavily subsidising local farmers. The result of this policy has been inefficiency and corruption, with some wheat producers accused of rebranding imported wheat, which the government distributes at a subsidised rate, as domestically produced grain in order to take advantage of the lavish production incentives, according to a March 2016 Reuters report. In November 2015 the government committed to buying domestically produced wheat at the average global price, starting in 2016, which in effect is an important relinquishment of price control and an essential step in the creation of the commodities exchange.
The development of EGYCOMEX, therefore, is already bringing a welcome rationalisation for the dysfunctional wheat market. However, many questions regarding the final implementation of the exchange remain to be answered. These range from which platform will be used to conduct transactions – the principal candidates being NASDAQ, Millennium and Euronext – to the ability of the regulator to establish an adequate framework that will allow for operations such as margin calling. With respect to wheat trading, warehouse operations will need to be regulated to satisfy traders that the standardised specifications required for futures contracts are being met. This is a particularly challenging objective in the context of the present shouna (open-air plot) storage system, which lead to post-harvest losses of between 20% and 40%, according to Blumberg Grain, a US-based food security company that has partnered with the Egyptian government. Overcoming these obstacles will be crucial to the ministry’s aim of attracting 2m investors in the exchange’s first year, rising to 9m over the next five years, a benchmark which if reached would be a major success for the government and its private partner.