UPDATE 2-Egypt sets up commodities exchange for wheat, oils, sugar and rice

(Adds trade comments, background)

CAIRO, Sept 9 (Reuters) - Egypt on Wednesday announced the formation of a commodities exchange which will initially trade wheat, oils, sugar and rice beginning in the first half of 2021.

Egypt, the world’s largest wheat importer, established the exchange to provide protection for small farmers and producers and make their stocks available to the wider market, the supply ministry said.

The exchange will have 91 million Egyptian pounds ($5.78 million) in capital and will be chaired by Ibrahim Ashmawy, the current head of the internal trade development authority which falls under the supply ministry.

Farmers, traders and producers can deposit their stocks in any of the supply ministry’s certified storage facilities where they will be evaluated and graded, then directly traded on the electronic platform, Ashmawy said. Supply and demand will then determine the price of these commodities for the consumer, he added.

“It is strange that they did not choose to start with crops that are widely grown in Egypt privately by farmers such as citrus,” a Middle East commodities expert, who declined to be named, said.

Citrus is one of Egypt’s most competitive agricultural exports, whereas it imports sugar and vegetable oils, in addition to wheat, for its sprawling food subsidy programme which covers the needs of more than 60 million people.

Egypt grows rice in quantities that are sufficient to cover local needs but does not export its staple short grain variety as it seeks to rein in production of the water-intensive crop.

Traders and market sources said the announcement came as a surprise and they were unsure of how the exchange would operate in practice given the government traditionally prices the strategic commodities it buys from farmers.

Most recently, the supply ministry had announced a buying price of 700 Egyptian pounds per ardeb of wheat ahead of the local harvest in April.

It was not immediately clear how the grain would be priced on the exchange and whether the government would purchase directly from it.

The exchange could also allow for developing options and futures contracts for the commodities on offer at a later stage, the supply ministry said.

$1 = 15.7500 Egyptian pounds Reporting by Nadine Awadalla and Maha El Dahan; editing by Jason Neely and Mark Potter