ABU DHABI/CAIRO (Reuters) - Smugglers in the Middle East are enjoying an unlikely moneyspinner - illegal medium grain rice.
Shoppers across the Gulf, mostly unaware of the smuggling, depend on Egyptian rice to make popular Middle Eastern recipes such as Mahshi, a stuffed vegetable dish, since Cairo refused to lift a ban on exports.
Contraband Egyptian rice is displayed in shops across the Gulf including the United Arab Emirates, Saudi Arabia and Qatar, filling demand from shoppers like Ghada in Abu Dhabi who argue there is no replacement for the high quality medium grain rice.
"How can you make Mahshi with basmati rice?" asked Ghada, doing her weekly supermarket shop in Abu Dhabi where she and her family have been living for eight years.
But while Ghada and other shoppers in the Gulf are able to cover their needs through the growing trade in illegal Egyptian rice, Egypt has been forced to import rice to cover shortages in its subsidy program, introduced to fight rising food prices.
Egyptian rice is meant to be sold to the domestic market at subsidized prices - sometimes as little as $250 a ton - in a government program to avoid any repeat of protests over food inflation that rocked the country in 2008. In 1997, President Anwar Sadat's attempt to raise bread prices led to riots.
But the artificially low price has produced hefty premiums on the export market. With Egyptian rice fetching as much as $900 a ton abroad, some traders are willing to risk being fined by transporting the rice out of the country mainly to the Gulf.
"The only thing that has changed since the ban is that instead of dealing with rice traders, now I have to deal with smugglers, who basically look and operate like gangsters," said a Gulf-based trader, who declined to be identified.
The smuggling business is so large that a January report by the embassy attache for the U.S. Department of Agriculture (USDA) estimates Egypt will export up to 600,000 tons of contraband rice in the marketing year 2011/2012, which runs from October to September. That would total around half of the 1.1 million tons it needs ever year for its subsidy program.
Egypt banned rice exports in 2008, regularly renewing it to try to protect its domestic market and ensure low prices. It last renewed the ban in October.
Egypt should cover its needs easily; farmers cultivated 1.7 million feddans of white rice this season and should produce around 4 million tons, covering 3.34 million tons of domestic demand including 1.1 million tons needed for the subsidy program.
But with large quantities diverted to smuggling, Egypt has been forced to turn to imports of cheaper long-grain rice to feed its population.
"We have opened the door for imported rice because the quantity of Egyptian rice offered in tenders does not meet the needs of the subsidy program," said Nomani Nomani, vice chairman of the state's main grain buyer, the General Authority for Supply Commodities (GASC).
Egypt first imported rice in December, buying 234,000 tons mostly of Indian origin. The USDA estimates it will bring in a total of 500,000 tons in 2011/2012.
It would make sense to many in the rice market for Egypt to lift the ban, continue importing cheaper grains, export its more profitable harvest and pocket the difference.
If Egyptian rice can fetch $900 a ton on the open market, GASC can pay around $530 a ton for imported rice, making a healthy profit.
"If we only open the door for imports, we will drain foreign reserves, but if we simultaneously open the door for exports, we will bring more greenbacks into the country," said rice expert and former exporter Mostafa el-Naggari.
Others say the government should allow those supplying rice to the subsidy program to export a similar amount. But others say that was tested in 2009 and quickly led to a black market in rice export permits.
"It was during that period that anyone who could afford to rent a shabby apartment opened up an Egyptian rice export business," said Samir Abdul Sammad, who imported Egyptian rice for UAE-based Lifco Trading.
Egypt, the world's largest importer of wheat, wants to decrease its reliance on imports and is willing to pay a large price to keep its citizens fed.
In 2011, the food subsidy bill amounted to $5.5 billion mostly for wheat but also for vegetable oils, sugar and rice, a heavy burden for a country with a faltering economy and a budget deficit that is ballooning after the uprising that toppled president Hosni Mubarak last year.
"GASC prefers that the ban remain in place, so that Egyptian rice remains available domestically without resorting to imports," Nomani said.
And so the government has purchased equipment to scan containers at ports in the same way bags would get checked at an airport. It is not a failsafe measure.
"I doubt they will be available at all port terminals, and even if they were, smugglers would still find a way to get the goods out by taking care of some customs or port officials," the Gulf-based trader said.
Smugglers have found increasingly ingenious ways to get round the ban - for example, taking advantage of lax security at the Sudanese and Libyan borders after the Arab Spring uprisings. But sometimes the old ways are the best - bribery at ports.
"Forget about the Sudan and Libya argument," said the Gulf-based trader, who regularly purchases Egyptian rice smuggled into the UAE.
"The rice I'm getting is coming directly from ports in Egypt like Alexandria, Ain Sokhna and Port Said."
Rice is often buried underneath other goods in containers to pass through ports. The cover-up sometimes means that traders receiving the goods are forced to buy products they don't want.
"I've had to accept packets of pasta, salt and other goods because the smugglers say if you want the rice you have to purchase the whole container with everything in it," the Gulf-based trader said.
And apart from smuggling, some rice traders in Egypt have also resorted to other tricks to profit their businesses.
"I've met various traders at a food exhibition in Dubai last month who have offered Egyptian rice to me, and when I asked how they could get it out of the country, they told me they were importing cheaper Russian rice and processing it to look like Egyptian," the Gulf-based trader said.
Some traders say they use stockpiled Egyptian rice from before the ban for their sales, while others blame their counterparts for bringing it into the country - no one actually confesses to having broken the ban.
"Egyptian rice sold there now is fresh with very high quality and thus is not pre-stored from before the ban. The ban has been imposed for several years now, and that rice can't be that old," GASC's Nomani said.
The ban has slowly been turning consumers away from Egyptian rice to other medium-grain origins.
"The market for Egyptian rice is getting smaller because there have been alternatives now for some time," said Ahmed Abou Al Nasr, chairman of Al Nahda Al Masriyya Food Stuff Trading Company, which has offices in both Cairo and Abu Dhabi.
"The smuggling business is not as large as when the trade was legitimate, and the U.S. medium-grain rice for example, which is of a higher quality and with a better price, is taking over," he said.
Cheaper Russian, Chinese and Vietnamese brands are also eating into the Egyptian rice market share, Nasr said.
Other traders complain that it is getting more difficult to source the contraband rice regularly to meet demand.
"The business is unpredictable now ... I have to buy large quantities just to make sure I don't get stuck," the Gulf-based trader said. Instead of renting a small warehouse for 12,000 UAE dirhams ($3,333) a year, the trader is now renting a much larger one for 200,000 dirhams to store his goods.
"If the government does not do something about this soon they will do to Egyptian rice what they did to Egyptian cotton," the Gulf-based trader said.
Egyptian cotton, or Egypt's "white gold" as it was dubbed during its heyday in the 1960s, has suffered from years of government neglect and a series of bad policies, which have enabled cheaper cotton imports to invade the market and provided little incentive for farmers to grow the crop.
"Since the ban came into place, I have said that it would make Egyptian rice forgotten in markets abroad," Al Nahda's Nasr said.
editing by Jane Baird and Elizabeth Piper