Gulf eyes oil-for-food pacts

Inter Press Service | 20 June 2008

By Meena Janardhan

DUBAI - Recent attempts by Persian Gulf countries to invest in farmlands abroad to counter soaring inflation and guarantee long-term food security could prove to be a win-win situation in the short term for both the oil-rich region and its investment-hungry neighbors, but continued high oil prices may neutralize the gains in the long-run, say experts.

With Gulf countries importing 60% of their food on average, Saudi Arabia and the United Arab Emirates (UAE) are taking the lead in investing in Asia and Africa to secure supplies of cereals, meat and vegetables.

The move reverses a recent Gulf trend of acquiring plush assets in the West in favor of acquiring agriculture lands in developing countries, who themselves face a crisis amid high oil price-induced inflation and even food shortage.

Calling for transforming the buyer-seller relationship in the energy sector between India and the Gulf countries into a more substantial and enduring relationship, Indian External Affairs Minister Pranab Mukherjee told the Emirates Center for Strategic Studies and Research last month, "I see India's requirement for energy security and that of the Gulf countries for food security as opportunities that can be leveraged to mutual advantage."

Similarly, during Prime Minister Yousaf Gillani's visit to Saudi Arabia in early June, Pakistan sought US$6 billion in financial and oil aid in return for "hundreds of thousands of acres [hectares] of agricultural land, which could be tilled by the Saudis."

Such arrangements are likely to become increasingly common since inflation and food shortage are likely to worsen worldwide in future, said Shoaib Ismail, a halophyte agronomist who studies utilizing plants for food, fuel, feed and fiber.

Worried about inflation fueling social unrest, major food exporters to the Gulf countries resorted to export curbs. For example, India - the world's second-largest rice exporter in 2007 - banned all non-basmati rice shipments in March. Simultaneous moves elsewhere triggered a wave of panic buying, causing benchmark Thai prices to triple.

"The Gulf region is not conducive for sustainable agriculture and has been dependant on imported food, which it has been able to buy at the prevailing international price without difficulty. However, when oil and other natural resources diminish in future, the region cannot maintain the same level of dependence on external food supplies," Ismail told Inter Press Service.

Just 1% of land in the UAE is arable, while in Saudi Arabia it is marginally better at 3%. In comparison, 24% of land in Britain and 40% in Poland is arable.

As a result, Saudi Arabia plans to stop purchases of wheat from local farmers by 2016, abandoning a three-decade programme aimed at self-sufficiency that has depleted the country's scarce water supplies. Reeling under shortages of rice, Saudi Arabia has approached India, which annually exports 500,000 to 600,000 tonnes of rice to the kingdom.

"Given that global political scenarios vary constantly, the Gulf countries could come under pressure in future food negotiations," added Ismail of the International Center for Biosaline Agriculture in Dubai.

Explaining the willingness to invest over the long term, Ismail said the Gulf countries are cooperating with developing countries that have similar cultural, religious and political backgrounds, and with whom they have had longstanding ties. "They could get basic commodities at relatively low prices, thereby reducing their dependency on Western countries; and food-exporting counterparts get investments that could offset hardships related to increasing cost of land, water and fertilizers."

The Gulf countries unsuccessfully attempted to convert Sudan into their breadbasket in the 1970s after the US threatened to cut food supplies following the oil boycott.

This time, however, media reports indicate that the UAE government and private entities like Abraaj Capital have already acquired about 324,000 hectares of farmland in Pakistan. As incentive, Islamabad is offering legal and tax concessions to foreign investors in specialized agriculture and livestock "free zones" and may also introduce legislation to exempt such investors from government-imposed export bans.

The Gulf countries are increasingly receptive to such arrangements because they view this as an opportunity to import food at 20% to 25% less cost, thereby addressing domestic inflationary pressure, which was officially about 12% in the UAE last year and perhaps double unofficially.

Since self-sufficiency is not an option, apart from dialogue with exporter countries and investments in agricultural projects abroad, "buffer stocks of basic food items should be contemplated to reduce exposure to market volatility," the Dubai-based Gulf Research Center's Food Inflation Report recommended in May.

With oil prices likely to remain well over $100 a barrel, the Gulf countries are estimated to reap a cumulative windfall of about $9 trillion by 2020, allowing them to intervene in the market through various measures ranging from price caps to subsidies.

But one of the chief reasons grain prices have increased is due to a rise in production costs, particularly from higher energy expenditure, estimated at about 40%. Thus, "what makes the UAE's export earnings increase is also what causes its imported food to increase apace," Dalton Garis, of The Petroleum Institute in Abu Dhabi, explained in the UAE's Gulf News last week.

Commenting on the viability factor of the new initiative, Ismail explained, "India, Pakistan and Sudan have closer ties with the Gulf compared to [major rice grower and exporter] Thailand. While political stability would be a factor in Sudan and Thailand, India and Pakistan are likely to be attractive destinations because of their relations with the Gulf countries, which pre-dates oil."

Encouraging the new public-private partnerships, Ismail said he preferred a proactive private sector role because "it can bring about significant results" quickly. The government, he said, should "serve as facilitator and oversee policies and regulations."

But questions remain about how such direct arrangements would work or how domestic shortages, inflationary pressures and politics in the food exporting countries would pan out in the long run.

Anticipating a second wave of trouble as the Gulf region's population booms in the years ahead, Ismail stressed that "with all limitations to make agriculture sustainable in this region, efforts should also be made to produce vegetables [in greenhouses], fruits and other crops. There should be clear prioritization for primary agricultural products [grains and pulses] and secondary products [fruits and fodder]. It is possible to make the latter sustainable with relatively marginal land and water resources."

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