Summary: How to deal with rising food prices is once again the main concern for the UAE’s government and food and drink industry, as discussed in BMI’s recently published UAE Food & Drink Report for Q308.
First the government announced in March that it is considering building a strategic food reserve as a means of controlling supplies and curbing inflation. The Economics Ministry has said that it is now conducting a feasibility study on building a reserve of six months worth of staple foods.
Then in April two of the UAE’s leading MGR operators, Emke Group and Carrefour, agreed to price caps with the government. According to the Memorandum of Understanding signed by the Ministry of Economy and both retailers, they will maintain 2007 prices for a group of basic food commodities to help curb inflation. This followed a similar agreement with the Union Co-Operative Society, as the government looks to control prices. However, naturally, such price caps have had negative repercussions, not the least of which have been severely squeezed profit margins for retailers and food importers.
In May rice importers in the UAE were demanding a minimum of a 25% subsidy for rice due to rising international prices. Because so many food prices have been fixed in an effort to curb inflation, many importers complain that their margins are now so reduced that they are selling at a loss. ‘International rice prices are going through the roof, so by fixing prices at 2007 levels without subsidies, the government is not taking into consideration what importers will have to face and giving room for a black market,’ said one importer. Rice is a very popular and important basic food in the UEA: according to the traders association, the country imported around 750,000 tonnes of rice last year, mostly from India, Pakistan, Thailand and Egypt. With the country so heavily dependant on food and drink imports, these issues become an even greater concern.
Therefore the government is taking various tactics to increase food security. One such move has been to cooperate with private equity group Abraaj Capital to purchase Pakistani farmland. Given its unsuitable climate for agricultural development, the UAE must look abroad if it is to significantly expand its agricultural output. With its vast agricultural potential, but limited financial resources, Pakistan could be the perfect partner for the cash-rich and land-poor UAE. Abraaj Capital specializes in private equity investments in the Middle East, North Africa and South Asia, managing US$5bn of assets across this region. The firm has been steadily building up its portfolio of Pakistani farmland over the last year.With the UAE’s economy remaining robust, and a forecast real GDP growth of 7.7% for 2008, the government is in a strong position to invest in such projects. However, despite the government’s abundance of petrodollars, just how to deal with rising food prices will continue to remain a challenge moving forward.