Analysis: The changing profile of food investment in the Middle East

Business Intelligence Middle East | 09-09-2008

Justin Smith

INTERNATIONAL. GCC countries face growing constraints in agricultural capacity. Structural factors are exacerbating pressures on food prices. A new report from Standard Chartered supports additional investment in agriculture.

The dramatic rise in agricultural commodity prices has been a recurrent theme over the past year. The latest data from the UN food index, comprising 55 agricultural commodity prices was up 37% year-on-year in July 2008.

Globally, central bankers have been unanimous in stating the inflationary impact of high food prices. This is
making monetary policy decisions more difficult against a sluggish economic backdrop. In the UAE, comments from central bank governor Sultan Bin Nasser Al Suwaidi have consistently singled out, with good reason, food prices as a source of inflationary pressures in the country. Due to the limited monetary policy choices in the UAE, the need for alternative options to deal with food inflation and assure food security is key.

One option gaining ground within policy circles is the need to invest in foreign agricultural land as a direct source of agricultural commodities. While this initiative is not a new one, it is important to understand the rationale and the tradeoffs from such a policy given the fact that this is now more eagerly articulated in the Gulf Cooperation Council (GCC). This three part paper reviews the factors responsible for rising food prices, the policy responses to inflation in the region and finally our policy recommendations.

Global, regional, local

A number of factors have caused global food prices to rise, with regional as well as local implications. Here the Standard Chartered report stresses three factors. One, structural changes in the agricultural sector due to changes in lifestyles, income and demographics with knock on effects on edible oils and meat, two, competition for acreage on finite arable land and three, changing international trade policies. All three factors have particular relevance to the Middle East in general and to GCC economies in particular.

Structural factors: In the UAE, Dubai’s population has increased from 182,000 in 1980 to over 1.5million in
first quarter 2008. Around 80% of the population is now made up of expatriates, mainly from South Asia. Over the last decade, per capita GDP has risen from US$17,118 to over US$50,000 in the UAE. The change in the demographic profile has led to a change in diet with greater consumption of edible oils like rapeseed and soyoil, none of which are produced in the UAE leading to bottlenecks in available stocks.

Limited arable land: Globally, the competition for limited acreage from row crops as well as the increase in
urbanisation in rapidly expanding economies like China is leading to an increase in agricultural commodity
prices. According to data culled from the US Department for Agriculture (USDA), harvested area for barley, rice and wheat in the Middle East North Africa (MENA) region is expected to fall to under 35 million hectares (mn ha) in the current season from over 40 mn ha in the 1997/1998 agricultural season.

What is most compelling is the shortage of fresh water resources in the GCC which is one of the reasons for the drop in harvested area. The breakdown of harvested area in the region shows an 8% estimated drop in wheat harvested area in Saudi Arabia for the current season to 450,000 ha from 490,000 ha prior and 508,000 ha in 2006/2007. In fact, Saudi Arabia expects to import all its wheat requirements by 2016 as it terminates a 30 year old policy of self sufficiency due to the significant strain of wheat cultivation on the country’s limited freshwater resources.

Latest statistics available from the UAE Ministry of Agriculture are also quite revealing and indicate contracting farmland. While total number of farms in the country rose by 10,000 to around 38,500 between
1999 and 2003, total cropped area in the country actually peaked in 2000 at 2,446,125 donums (604,280 ha).

However, total cropped area has been declining ever since reaching 2,144,216 donums (529,698 ha) in 2003. This decline in farmland, and consequent fall in local and national productive capacities, has been a catalyst for inflation, when viewed against the rising population growth.

Restrictive export policies: Earlier this year, a number of important grain exporting countries including
Egypt and India restricted their exports. Of particular importance for the region was India’s ban on non-
basmati rice exports. As the largest importer of rice from India, the consequences of the ban were tangible for Saudi Arabia. The UAE too lost an important source of its rice imports which affected a large proportion of its residents.

The impact of these three factors, structural changes, falling arable land and restrictive export policies, has been exacerbated by the fact that the GCC region is traditionally a net food importer. According to the Arab
Organization for Agricultural Development (AOAD), the food bill for the GCC grew by 25% from US$16 billion in 2006 to US$20 billion in 2007, accounting for 10% of the total GCC imports, and 15% in the case of Saudi Arabia.

According to USDA data Saudi Arabia, the UAE, Oman, Qatar and Bahrain will collectively import 682,000 tonnes (mt) of palm oil (up 4.7% year-on-year), 1.2mt of rice (up 4%) and 1.5mt of wheat (up 20%) in the current season.

The GCC’s peg to an ailing dollar has fuelled imported inflation across the region, food as a specific component in the inflation basket has pushed headline inflation up to record highs. Given that this could jeopardise the long term prospects of the region’s real economic growth local governments have embarked on a series of policy options.

Taking a pitchfork to the problem

Policymakers seem to be using a pitchfork 3C (cap, conserve and contract) approach to the threat of rising food inflation.

Cap: In the UAE, the government opted to impose price caps on agricultural products at, 2007 levels, on the
rationale that higher local prices would disproportionately affect lower income groups. Calls by rice importers for a 25% subsidy have been supported by the Emirates Society for Consumer Protection.

Researchers have since highlighted the view that price caps and subsidies are market distorting but acknowledge that given the time lag for adequate supply responses to high agricultural prices such a policy could be appropriate but only as a short-term stop gap measure.

Conserve: Most of the MENA countries and more specifically the GCC have limited amounts of arable land
and have one of the lowest fresh water resources in the world. The average level of fresh water available in MENA is around 540 cubic metres/capita/year while the threshold of water scarcity is three times higher at 1,700 cubic metres/capita/year. Per capita freshwater availability in the US is around 7,000 cubic metres.

Against this backdrop, the UAE government is working on its first federal water conservation law that will address water resources implementation and conservation. The UAE is looking at building 70 more dams in Dubai and the Northern Emirates to improve water retention and refill water tables and aquifers.

Moreover, the production of grain and meat, which form an intrinsic part of the diet in the region, are very
water intensive. Generally it takes 1000mt of water to produce 1mt of wheat and around 1,600 cubic metres for 1mt of beef. It is estimated that in the decade to 2006, Saudi Arabia exported around 37 billion cubic metres of virtual water (used to produce agricultural exports) which is over 15 times the annual household consumption. This has made the prospect of acquiring foreign land more attractive with GCC public and private investors looking at the acquisition of better endowed arable land as a precursor towards reducing their exports of virtual water.

Contract: The acquisition of foreign arable land by both institutional as well as private investors is not a new phenomenon globally, both as a way to diversify investor portfolio and as a long term hedge against inflation.

In the US, around 1% of all acreage is foreign owned. More recently the acquisition and FDI in arable land has gained added impetus as capital rich, net food importers like the GCC economies change the profile of
such investments, preferring them not as a financial investment per se but as a policy tool to generate agricultural commodities for their economies. GCC countries are typically looking to invest in countries such
as Sudan, Ethiopia, Turkey and Pakistan among others.

Global investment in agriculture should be encouraged and most of the investment required for agricultural
investment should come from domestic sources. However, in the absence of domestic investment in agriculture improved food production and food security will hinge on a shared international commitment. This commitment should aim to improve household food security in general, improve food security in low-income food-deficit countries and increase global food supply.

This need for additional agricultural investment is buttressed by the FAO which states that food energy
requirements primarily in net food importing countries should double by 2050. Yet official aid and public
spending on agriculture in developing countries have fallen sharply in recent years. After climbing from
around US$12 billion per year in the early 1980s to nearly US$19 billion per year in 1986, international assistance to agriculture in developing countries plummeted to less than US$10 billion by the mid-1990s. This trend will have to be halted to achieve improved food security.

Risk and reward, finding the balance

Despite the overall benefits of increased investment in agriculture valid concerns have been expressed about the shape, size and role of these investments. Some recipients or potential recipients of new or additional FDI in agriculture have sub optimal political, economic and social infrastructures. In Pakistan for instance, the USDA National Resources Conservation Services find that the long term risk of food insecurity is high if low farming inputs are used due to the fact that a lot of people are moving up the food chain. Yet this risk can be moderated if high quality farming inputs are used. High farming inputs will increase the population-carrying capacity of land in Pakistan from 5 million to 16 million for 70% of farmland. This suggests that targeted investment by foreign investors using high quality inputs could result in the optimal use of land and supports the case for more investment, foreign or local, in agriculture.

Overall, It is important that spillover benefits and positive multiplier effects be tangible in order for the long
term sustainability of such investments. Feedback from our discussions with officials in potential or current agricultural FDI recipient countries has been positive, even bullish. We believe this is premised on the benefit already accrued or perceived benefits in the host country. We agree with the stance that more will depend on developing, promoting and investing in a mix of technologies and policies that are economically and environmentally sustainable and on adopting a participatory approach with regard to such investments. Enhancing the role of local farmers as stake-holders can also improve the quality of investments.

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