The National | November 16. 2009
Each month, Alireza Emami, the chief executive of the food importer Zarrin Group, tries to identify what type of fruit will be a big seller. But deciding which will generate the most profits seems to be more like a roll of the dice than an acute business strategy.
While the economic downturn has not affected Mr Emami’s Tehran business as much as he thought it would, food prices have fallen sharply this year, leaving him guessing how many orders he should place each month to stay open for the next.
“For example, last month my margins for bananas were 40 per cent. This month it’s more like 15 per cent,” Mr Emami said on the sidelines of the Eurofruit Congress Middle East in Dubai last week.
Although he is just one cog in the food distribution system, his situation is typical of some of the issues surrounding the regional food industry.
Falling food prices, dietary changes and various government controls have all played a part in determining the success of his business and, to a larger extent, the Middle East’s food security.
Due to supply uncertainty and water scarcity, food security has become a major issue that governments in the Middle East have recently begun to take very seriously. In the past year, thousands of hectares of land in West Africa and Central Asia have been bought by GCC investors to ensure their countries do not go hungry.
Opponents, however, say such land acquisitions hurt small-scale farmers and harm the environment.
The worsening food security problem was to be a major topic at the UN Food and Agriculture Organisation’s (FAO) World Food Summit in Rome, which began yesterday and is notably sponsored by Saudi Arabia.
Saudi Arabia, the GCC’s largest agricultural importer, already has plans to invest 56.35 billion riyals (Dh55.19bn) in agriculture.
But that amount is likely to balloon after the announcement by Abdullah al Hussayen, the Saudi minister of water and electricity, that it plans to rely entirely on wheat imports by 2016 to try to preserve its scarce water supplies.
The strategy is sensible: why produce a low-value crop such as wheat using expensive water when the FAO says the global wheat harvest will this year be second only to last year’s record?
The UAE, with its limited agriculture and industrial sectors, imports about 85 per cent of its food at an estimated cost of Dh10.64bn, a dependency that has heavily contributed to the high inflation rates the nation has experienced in the past several years.
Although the global financial crisis has eased inflation to less than 4 per cent, it hit a 20-year peak of 12.3 per cent last year in the UAE.
The result has been a more concerted push by local private companies to invest in land leasing or purchasing agreements in Sudan, Pakistan and Egypt, in what has become a sustainable business model.
Last August, Jenaan, a private agricultural investment firm in Abu Dhabi, signed a Dh925 million farmland deal in Egypt to grow wheat while others, such as Emirates Investment Group, Al Qudra Holding and Abraaj Capital, have made similar investments.
This week, the US$250m (Dh918.2m) Pharos Miro Agricultural Fund will be launched in Dubai, focusing on land acquisitions in emerging markets. Investments are likely to continue.
The Emirates is also in the process of creating a food reserve of essential items to use as a hedge against commodity shortages and price increases, says Sultan al Mansouri, the Minister of Economy, adding that a full plan should be in place by the end of the year.
The UAE has also invested heavily in a domestic agriculture sector that is effectively self-sufficient in dates and fresh milk, and produces 79 per cent of the country’s fish consumption, 25 per cent of vegetables, 18 per cent of red meat and poultry and 52 per cent of eggs, says Dr Rashid Ahmed bin Fahad, the Minister of Environment and Water.
Investors are becoming more acutely aware that simply buying arable land at a discount may not be a wise strategy, and are looking at working with local farmers and governments for a better opportunity.
Agreements in developing countries are also risky, as the infrastructure needed to enforce and regulate these land deals does not exist.
“Agricultural development is fundamentally critical in Africa fulfilling its development goals,” says Oliver Barnes, a partner at Miro Holdings International.
“Stimulation of rural communities is critical to relieve the pressure of urbanisation, but trapping rural poor in unsustainable agriculture practices is also not the answer.”
A true food security solution for the GCC would be to diversify holdings through a mix of overseas farming operations, preferential arrangements with international merchant companies and commercial projects such as rice farming in South East Asia.
“The understanding of how solving food security issues in a Middle-Eastern country might be achieved has matured a bit to say ‘let’s think about all of our options, rather than just the foreign direct investment option’,” says Carl Atkin, the head of research at Bidwells’s agribusiness division.
By diversifying their food options, countries in the GCC will be better positioned to react to supply and geopolitical issues, while avoiding the ire of aid groups that can accuse governments of colonial land grabs.More importantly, countries will be able to ensure a stable food economy for their residents that will negate the effects of rising inflation rates and ensure future GDP growth remains stable.