CAIRO: Black Sea wheat exports to Egypt have surged in the past year delighting Russian traders, but a decision by Cairo to quarantine several shipments over quality concerns is casting a shadow over the growing trade. Cheap freight rates and a strong dollar have given Black Sea wheat a competitive edge over other origins, with Russian wheat comprising a majority of the 5 million tons purchased by Egypt's main state wheat buyer GASC during this fiscal year. Egypt's prosecutor ordered the seizure of Russian wheat last week after a complaint that a shipment contained a high level of dead bugs and impurities. Industry sources have said it is unlikely that Egypt, one of the world's top wheat importers, will seize Russian wheat already distributed in the country and that measures would likely be confined to new shipments arriving at ports. But the action threatens a trade which generated just over $1 billion last year and has earned Russia about $800 million in the current July 2008 season, based on an average free on board Black Sea Wheat price of $180 a ton. Russia's grain has proven irresistible to Egypt because the Black Sea's proximity to the Middle East makes freight rates around $10 a ton cheaper than those from the United States. When GASC last tendered on April 30, the cheapest free-on-board price for Russian wheat offered was $180 a ton with a freight offer of $13.75 a ton. The cheapest US soft red wheat was $182.99 with a freight offer of $19.99 a ton. The lowest French offer in the same tender was $190.67 a ton on a free-on-board basis. The freight offer for that bid was not available to Reuters. Canadian wheat was the cheapest FOB wheat offered during that tender at $179 a ton, but the freight offer was not declared by GASC. With the quality of Russian grain under scrutiny and relations with the Russian grain trade becoming tense Egypt could be distanced from a comfortable trading niche. "Globally people are realizing that the quality coming out of the Black Sea is just not that good, Keith Flury, a commodity analyst with F.O. Licht told Reuters. "There is definitely an understanding that you get what you pay for. Quality has also been an issue for Ukraine, which had shipped 997,605 tons of wheat to Egypt in the current season to date or 9.3 percent of its total exports. Egypt's social solidarity ministry had asked the trade ministry to halt Ukrainian wheat imports citing complaints last year by bakers about flour produced from the wheat. "The Ukrainian origin was never officially taken off the list but we knew that if we offered any in the tenders it would not be accepted, a Cairo-based trader, who asked not to be named, told Reuters. Ukraine, for its part, has spotted a chink in the market. "Potentially, our wheat could replace Russian wheat. The quality of Russian wheat is a little better, but if we need to, we will find the necessary quality and volumes, Mykola Vernytsky, Director of ProAgro consultancy, told Reuters. The Russian Grain Union, however, has said that the issue is not about quality, but rather an attempt to lower prices. "The reports about seizure or arrest of Russian grain and participation of the Egyptian prosecutor's office in the investigation are provocative and remind of the worst methods used when somebody is absolutely unable to compete honestly, the Russian Grain Union said in a statement. Traders in Egypt have said the issue relates more to internal competition between bickering local companies. Egypt is currently the biggest consumer of Russian wheat and has received 3.71 million tons between July 2008 and March 2009, data from analyst group SovEcon showed. That accounted for a quarter of Russia's wheat shipments during the period. Analysts and industry sources say Russian wheat exports to Egypt will likely cool during the coming period with concerns over tedious inspections rising with some traders already deciding to delay shipments. While GASC was not likely to change its tender specifications and remove Russia as an acceptable wheat origin, it may opt not to buy more Russian wheat in the coming period. "I don't think GASC will explicitly take the Russian origin out of their tenders but we will see less Russian wheat winning, even though no one is going to come out and say it literally, Flury said. Ashraf El Attal, head of Egyptian Traders company, which sold a shipment now held at Safaga port to GASC, said last week he would not send any more vessels of Russian wheat to Egypt unless the situation was resolved. Other traders have also said they would delay their Russian wheat shipments for fear of lengthy procedures on arrival at Egyptian ports. Egypt, which is in the middle of its local procurement season, is not in a rush to tender for overseas wheat and has procured 1.5 million tons of domestic wheat since the season started on April 28. "GASC can afford right now not to tender very often because of all the domestic wheat it is buying, a trader told Reuters. "But we have a lot of mouths to feed here and they will be tendering again soon, he said. Much of the wheat Egypt buys goes into its subsidized bread program, which allows millions to survive on low salaries. -Additional reporting by Aleksandras Budrys, Robin Paxton and Amie-Ferris-Rotman in Moscow and Pavel Polityuk in Kiev.
