Dubai Chamber study Highlights measures the UAE can adopt to cope with the global food price rise
Dubai, UAE: In recent years, global food commodity prices have registered major increases due to speculation, short supply caused by adverse weather conditions and water scarcity, rising demand by growing populations as well as income growth in developing countries which give more people the ability to afford higher and better quality meals. In light of the UAE being one of the major importers of food items, the country is exposed to movements in the international prices of food commodities.
Providing food for thought, a recent Dubai Chamber of Commerce and Industry study analyses the causes of high food prices, the impact on the UAE economy and recommends a few suitable policy responses the country can adopt to deal with the situation.
According to the study, some measures could include looking at more water conservation measures within the UAE by analysing which types of food crops don't require lots of water to grow. This can also be achieved through import diversification of food sources based on more or less water usage as a risk mitigating measure to improve the country's food security.
On UAE companies investing in developing countries' farmlands, the study warns the local investors to be aware of rising prices of farmland which could reduce return on their investments. Highlighting another long-term measure, the study stresses on increased emphasis on sustainable agriculture through water saving and higher crop-yielding technologies.
This measure could lead to many potential opportunities as the study suggests that the UAE, which uses water saving technologies, can export these to other countries in the region and in Africa. It further states that the country's companies are already active in investing in agricultural land overseas but they can now invest in developing technologies and products in collaboration with internationally renowned bio-tech companies in order to increase their crop yield.
This could be a win-win situation for both UAE as well as overseas companies receiving the investment, says the study, while sounding a note of caution. Global commodities are experiencing major long-term price increases and it seems there is more to come. However, at some point the speculative capital entering these markets will be withdrawn for investment in another asset class, causing potentially major price falls.
During the recent global downturn, the study informs that a major correction in commodities was experienced as commodity prices recovered due to the continuation of the cyclical upturn. The study further points out that once the cycle is over, the potential price corrections could be quite large as speculative capital is withdrawn. UAE businesses should therefore base their decisions on a realistic long-term value for these food commodities and prepare themselves for price volatility.
By implementing sound policies, they could turn a potential problem, into one of the most lucrative long-term opportunities for their businesses, the study recommends.
The study states that this being a global problem, international agencies like the United Nations and the World Bank have taken the initiative to improve food security and help low income countries cope with high food prices.
Impact on UAE
Globally, higher food prices fuel inflation as food commodities make up an important component of the basket of common household goods. For the UAE, rising global food prices have contributed to inflationary pressure. However, the long-term impact of rising global demand for food and water could be even more important, maintains the study.
The various global social issues of poverty, education, protection of the environment and sustainable living are all interconnected. Globally, the amount of agricultural land and water available is limited while world population continues to grow, putting pressure on land and eco-systems, which produce agricultural goods.
Therefore, the impact on the UAE could be in two major ways. One is the inflationary impact of high food prices and the other is the impact of any instability in countries as their populations increase, while agricultural production remains limited. If water is diverted for food production, then scarcity of water could also be another cause of shortage of food, informs the study.
The World Bank notes that the Middle East and North Africa (MENA) region is the most water scarce region in the world and further lack of water could be an important future issue, especially as urban populations grow.
Drivers of food price
As shown in figure 1, food commodity prices have been generally rising since 2000 with the base period for the index being 2002-2004. The important drivers of food price growth have been mere speculation which is used to earn returns on the large amounts of liquid capital available in international financial markets, decrease in the value of the US dollar and rising demand at a time when supply is being constrained due to adverse weather conditions and scarcity of water for irrigation as well as bio-fuel production. With the expected oil price rise, this driver is likely to continue contributing to higher food commodity prices.
The year 1999 was a time of historically low commodity prices, which meant there was little incentive to increase supply, while demand has generally been increasing as the world's population continued to rise. Since the year 2000, oil prices also registered strong increase as rising demand for oil reduced spare capacity.
The high price of oil led to rising transport costs which would also have contributed to price increases in key commodities. Increase in money supply from the US and the depreciation of the US dollar would also have been a contributing factor, leading to higher commodity prices denominated in US dollars.
The period 2000-2002 was also a time when US technology shares, which were bid up to very high levels, experienced major falls. Investment and speculative capital was leaving the stock market and seemed to have found a refuge in the international commodity market, pushing the prices of commodities higher, as investors preferred real assets.
Furthermore, inter-linkages between various global commodities also would have had an inflationary impact. For example, corn and sugar is also used for production of the bio-fuel ethanol, which experiences a price rise due to the rise in oil prices.
Demand and Supply balance
Demand for food is increasing as the large populations of developing economies experience rising incomes. So choices of food which were unaffordable earlier are now more affordable thus increasing the consumer base for those items. On the other hand, climate change, water scarcity and deteriorating weather conditions are impacting supply.
The result of all this is shown in table 1 in which some commodities such as sugar and coffee have lower ending stocks, which could indicate that demand has exceeded supply and this has generally reduced stocks.
Therefore, whether the increase in demand is due to increased use of bio-fuel, or increased human consumption, the result has been a generally tightening demand supply balance and this has contributed to the increased food prices, concludes the study.
-Ends-
Established in 1965, the Dubai Chamber of Commerce and Industry is a non-profit public entity, whose mission is to represent, support and protect the interests of the business community in Dubai by creating a favorable business environment, supporting the development of business, and by promoting Dubai as an international business hub.
© Press Release 2011
