Arab countries depend heavily on imported food, particularly wheat, leaving them exposed to international market volatility. In total, Arab countries import around 56 percent of the cereal calories they consume, the largest share of which comes from wheat. Some countries in the region import 100 percent of their wheat consumption needs. Population growth, rising incomes, and climate change will increase this dependency. “The Grain Chain,” a recent World Bank/Food and Agriculture Organization of the United Nations (FAO) study, identifies three critical steps toward rectifying the problem.
Increase reserves and draw them down according to clear decision rules to ensure availability of supply and to mitigate price volatility
Historical data suggest a strong negative correlation between changes in global wheat stock-to-use ratios and changes in international wheat prices: when the level of available wheat stocks is high, the likelihood of a price spike is lower, and vice versa. Targeted safety nets like cash transfer programs may be much less expensive than storage but they do not necessarily offer that additional security associated with holding physical stocks in food deficit countries. Well-managed strategic reserves can help reduce price volatility by purchasing wheat when prices are low and releasing stocks when prices are high.
Storage capacity in the region averages the equivalent of six months of consumption, and ending stocks (beginning stocks plus production and imports, minus exports and consumption) average four and a half months. Increasing these reserves can provide critical lead time to secure alternative wheat supplies or supply routes during times of crisis, and also offer psychological benefits that may prevent hoarding and pilferage.
Improve logistics for significant cost savings
The study assessed the efficiency and reliability of the supply chain from the unloading port to bulk storage at the flour mill, and found that the average import supply chain transit time for wheat in Arab countries is 78 days, costing around $40 per metric ton. Improved port logistics can drastically reduce these transit times and costs. On average, 29 percent of total wheat import supply chain costs are incurred at the port. Of these costs, 65 percent are driven by vessel turnaround time, which includes both waiting time in the harbor and the time it takes to unload the wheat once the vessel is at the berth. Long turnaround times impact significantly the cost of importing wheat. Wheat suppliers also consider port logistics when offering a bid price for wheat tenders. Therefore, efficiency improvements may reduce both logistics costs and the cost and freight price of wheat.
Strategic partnerships and hedging instruments can reduce the risk of supply disruptions and price volatility
Regardless of a country’s preferred method of wheat procurement, various risk management techniques can improve food security. Countries can develop strategic partnerships with grain traders and key grain exporting countries, in the form of a long-term contract with a global grain trader, or a free trade agreement with a grain exporter.
There may also be advantages to working with neighboring countries to import wheat to the region. A hub-and-spoke model can allow large volumes of wheat to be shipped to a single deep-water port in the region and then distributed to multiple destinations with shallow-water ports.
Countries can also take advantage of a “parcel service” model, whereby smaller countries like Qatar and Bahrain benefit from importing wheat on shared vessels. Physical and financial hedging instruments can also reduce exposure to price volatility and shocks.
Although the Arab world faces a unique set of constraints and risks, this approach is applicable for any other net grain importing country seeking to manage its exposure to import risks, and it is important for grain exporters as well. Arab countries import the majority of their wheat from North America, Western Europe, the former Soviet Union, and Australia; these key grain exporters can better serve the needs of their customers by improving their understanding of the risks Arab wheat importers are facing.
This article was originally submitted as a Smart-Lesson, a World Bank Group program which enables development practitioners to share lessons.
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