Egypt, the world’s biggest wheat importer, has long aspired to become self-sufficient in its staple food through various schemes including reclaiming land in its desert wastelands.

Experts say growing wheat in the desert makes no economic sense given the logistical and environmental challenges.

That has not stopped UAE companies Al Dahra and Jenaan from turning to Egypt’s southern desert — home to Toshka, a failed agriculture megaproject under former President Hosni Mubarak.

As Egypt recovers from turmoil following the 2011 revolt that toppled Mubarak, Gulf allies such as the UAE hope to ensure that Islamists who briefly held power can never do so again.

Abu Dhabi has put its weight behind President Abdel Fattah al-Sisi, who has promised to deliver everything past administrations could not, from reclaiming millions of acres of desert land to creating jobs.

Within a couple of years, the UAE companies plan to grow and sell several hundred thousand tonnes of wheat to the Cairo government — equivalent to about 10 per cent of the domestic crop bought annually from farmers.

Low yields, poor soil quality and uncertain water supplies make such a venture seem reckless.

For a wealthy nation like the UAE, which sees Sisi’s Egypt as a bulwark against Islamists, the political value of the project outweighs the economic risks.

“They will eat the cost. It will not be profitable. It doesn’t make sense economically,” said Toby Jones, a history professor specializing in the Middle East and its environmental history at New Jersey-based Rutgers University.

Al Dahra and Jenaan said the decision to grow wheat in the East Oweinat and Toshka regions was made in consultation with Emirati authorities. UAE officials were unavailable for comment.

The best option

Jenaan CEO Mohammed al-Falasi acknowledged challenges including a lack of labour and transport costs.

But he said Egypt had become more stable for investors and that growing wheat was the best option the company had for land it had leased in East Oweinat.

In the nearby Toshka area, the looming problem is mainly water supply.

Despite the UAE’s commitment to back Sisi in a range of projects he has portrayed as a cure-all for the economy, reviving the Toshka project could be especially problematic.

Experts such as Cairo University agricultural economist Gamal Siam worry groundwater will run out before the investment could possibly pay off. That could explain why, of the half a million acres the Mubarak government hoped to reclaim, less than 10 per cent has been cultivated.

Suleiman al-Nuaimi, who heads Al Dahra’s Egypt projects, said his company produced 40,000 tonnes of wheat last year in the East Oweinat region but has yet to start work in nearby Toshka, where it hopes to grow 300,000 tonnes by 2016.

“We consider ourselves to be strategic partners for the Egyptian government in terms of food security,” he said.

— Maha El Dahan and Maggie Fick are commodities correspondents for Reuters based in Abu Dhabi and Cairo respectively.

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Fighters from the Islamic State have overrun large areas in five of Iraq’s most fertile provinces, where the United Nations food agency says around 40 per cent of its wheat is grown.

Now they’re helping themselves to grain stored in government silos, milling it and distributing the flour on the local market, an Iraqi official told Reuters. The Islamic State has even tried to sell smuggled wheat back to the government to finance a war effort marked by extreme violence and brutality.

International officials are drawing uneasy comparisons with the days of hardship under dictator Saddam Hussein, when Western sanctions led to serious shortages in the 1990s. “Now is the worst time for food insecurity since the sanctions and things are getting worse,” said Fadel El-Zubi, the U.N. Food and Agriculture Organization (FAO) representative for Iraq.

While Iraq faces no immediate food shortages, the longer-term outlook is deeply uncertain.

Hassan Nusayif al-Tamimi, head of an independent nationwide union of farmers’ co-operatives, said the militants were intimidating any producers who tried to resist.

“They are destroying crops and produce, and this is creating friction with the farmers. They are placing farmers under a lot of pressure so that they can take their grain,” he said, adding that farmers had reported fighters were also wrecking wells.

Many farmers have joined the hundreds of thousands of Iraqis who have fled the Arab and foreign fighters’ advance. Those who remain have yet to be paid for the last crop, meaning they have no money to buy seed, fuel and fertilizers to plant the next.

The statistics following the jihadists’ lightning advance across northern Iraq in June are grim both for the government in Baghdad and a population that needs reliable food supplies.

Iraq’s trade ministry says 1.1 million tonnes of wheat it bought from farmers this harvest season is in silos in the five provinces. This represents nearly 20 per cent of annual Iraqi consumption which the U.S. Department of Agriculture (USDA) puts at around 6.5 million tonnes, roughly half of which is imported.

Amidst the chaos of northern Iraq, it remains unclear exactly how much wheat has fallen into rebel hands, as the government still controls parts of the provinces.

However, a source at the Agriculture Ministry confirmed the size of the problem. About 30 per cent of Iraq’s entire farm production, including the wheat crop, is at risk, the source said, requesting anonymity.

Jihadi business dealings

The Islamic State already has extensive business dealings. It is selling crude oil and gasoline both in Iraq and Syria, where it is fighting President Bashar al-Assad’s forces to create a cross-border caliphate.

So far, it has largely used energy and food resources under its control as a fundraiser rather than an instrument of siege, selling instead of withholding them.

A senior Iraqi government official told Reuters that the militants had seized wheat in recent weeks from government silos in the provinces of Nineveh and Anbar, which both border Syria.

These included 40,000-50,000 tonnes taken in Tal Afar and another Nineveh town, Sinjar, where tens of thousands of local people from the Yazidi religious minority have fled the militant onslaught to a nearby mountain range.

Hassan Ibrahim, director general of the Grain Board of Iraq, said the Islamic State had tried to sell wheat stolen from Nineveh back to the government via middlemen in other provinces. “For this reason I stopped purchasing wheat from farmers last Thursday,” said Ibrahim, whose Trade Ministry body is responsible for procuring wheat internationally and from local producers.

Bread prices are stable in Baghdad due to imports and crops in areas still under government control. In Baghdad and nine other southern provinces, the Trade Ministry has bought nearly 1.4 million tonnes from farmers this season.

It is not clear whether the government’s import needs will rise dramatically, given that it will probably not try to supply areas no longer under its control.

Unpaid farmers

Iraq’s wheat harvest began in May, the month before the Islamists and their allies launched their assault, taking the cities of Mosul and Tikrit in days when resistance from thousands of U.S.-trained government soldiers collapsed.

The harvest begins in the south and moves north, meaning that farmers began delivering wheat to government silos in rural areas around Mosul in early June, less than two weeks before militants stormed the city.

Zubi said the government usually pays the producers two months in arrears. Therefore an estimated 400,000 farmers are living under the militants with no hope of being paid for the wheat they delivered before the offensive. “No farmer received his money,” he said, meaning they will not be able to start planting in the seeding season that begins as soon as next month in some areas. “This is their sole income.”

The FAO is urgently working to get 3,000 tonnes of wheat seed to the farmers for planting, he said, though this effort faces major problems due to the security situation. Seed deliveries are vital for ensuring that fellow U.N. agencies such as the World Food Programme, which are already helping hundreds of thousands, are not saddled with feeding yet more Iraqis.

John Schnittker, a former USDA economist who advised the Trade Ministry for three years before USDA pulled its staff out of Baghdad in 2012, said a number of factors would “severely test” the ability of farmers in northern Iraq to grow their wheat crops to be harvested next year.

These included threats to irrigation water due to the militants’ control of the Mosul dam, the government’s inability to get fertiliser and fuel to farmers in areas under the Islamic State, and the fact that many producers fled their homes.

He expected a “lower planted area and lower yields” for the 2014-15 harvest. “It’s very likely to be disrupted because of the conflict.”

Meanwhile, the “public distribution system” – the government’s means of supplying subsidized flour and other goods such as vegetable oil, sugar and rice – has broken down in militant-held areas.

Although the system is corrupt and wasteful, impoverished Iraqis depend on it. Schnittker said its breakdown poses a “huge hardship” to northern Iraq’s rural population and would eventually push more people into refugee status.

— Maggie Fick reported for Reuters from Baghdad and Cairo; Maha El Dahan is a commodities correspondent for Reuters in Abu Dhabi. Additional reporting for Reuters by Sarah McFarlane and Jonathan Saul in London.

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Supplies Minister Khaled Hanafi said some 25 million Egyptian families who already have electronic smart cards for bread purchases will be able to use them to buy 20 different subsidized goods at grocery stores across the country from July.

The new system aims to raise incentives for Egyptians to buy only as much subsidized bread as they need, helping reduce spending on wheat, of which Egypt is the world’s top importer.

Subsidies of bread and energy products have traditionally eaten up around a quarter of Egypt’s budget, which is forecast to end the current fiscal year on June 30 in deficit to the tune of 12 per cent of economic output.

Officials say wheat consumption is kept artificially high in part by citizens who purchase subsidized loaves for the equivalent of one U.S. cent and feed them to their livestock because the bread is cheaper than animal feed.

“A motivation was needed (to bring down consumption), so we came up with a system to give citizens points for the bread that they do not use,” Hanafi told a meeting of local businessmen in Cairo on Tuesday night.

Under the reformed bread programme being rolled out since April, a “points system” allows citizens who consume less than the quota to spend their savings on other foodstuffs.

Under the current system, they only have the option of buying infamously poor-quality rice, sugar, and oil but Hanafi said the list of items available to purchase would be expanded first to 20 and then to 100 within months. Meat and poultry will be among the new products on the initial list.

He said smart card holders will accrue points if they purchase less than the quota of five loaves per family member per day, a number that officials hope can later be reduced.

The points can then be used to purchase foodstuffs to be made available at 25,000 privately-owned grocery stores around the country partnering with the government for the programme.

Hanafi, who retained his position after Egypt’s new president Abdel Fattah al-Sisi took office earlier this month, has been outspoken about the need to reform wasteful subsidies.

Sisi spoke cautiously on the topic during his campaign, saying it could only happen gradually, but has urged Egyptians to prepare to make sacrifices, apparently laying the ground for a period of painful economic austerity.

Three years of turmoil in which protests have helped lead to the removal of two presidents and hundreds have been killed in the streets have wrecked Egypt’s economy and left it largely dependent on aid from wealthy Gulf Arab allies.

“Huge leaking holes”

Egypt spends more than US$4 billion a year on food subsidies on which millions of poverty-stricken Egyptians depend. One cash-strapped government after another has resisted tackling problems in the system, fearful of a backlash from the public.

Officials increasingly acknowledge that a system intended to help the poor now allows profiteers to reap the benefits of corruption and mismanagement in the winding supply chain.

“A lot of money is pumped in by the state and the recipients are on the far other end, there are huge leaking holes and in the end the recipient doesn’t get anything,” said Hanafi.

The new system will also enable the government “to avoid a lot of corruption” because grocery stores will have to order goods requested by their customers from the government instead of the government delivering goods without any consumption data.

The new smart card system for bread distribution launched in April and now operational in several provinces already collects such data, and targets parts of the supply chain where waste and corruption has become ingrained.

Hanafi said last month that the reformed system had so far reduced bread consumption by 30 per cent in the Suez Canal city of Port Said where the rollout began.

— Maggie Fick is a Reuters correspondent covering energy and wheat markets from Cairo.

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