This report first appeared in Gulf Marketing Review's September 2008 issue. The full report with statistics is available for download at the bottom of this page.

Background

Inflation has become a concern for most the last few years and particularly this year. Food inflation has been steadily rising, and is speculated to be due to rise in energy prices and biofuels. The issue of food inflation is neither temporary nor transitory. Combating food inflation remains a big challenge.

Long-term subsidies, especially in the food sector, are inefficient – and also provide fiscal distortions and governance imbalances. Food-related subsidies, once in place, are difficult to remove – as disposable income adjust to different spending patterns and consumer opinions on prices. In an environment of rising food prices, governments should also not be tempted to increase wages to combat food inflation, as wage-price spirals in the private sector may develop, fueling further inflation.

Commodity forecasts by the FAO, OECD, USDA and World Bank do suggest that food crops prices will remain high. According to the World Bank, high prices for crops are likely to remain above the 2004 levels through 2015. Global agricultural prices rose sharply in 2006 and 2007 and, so far, have increased by around 30% in 2008.

Poultry and meat contribute significantly more to the overall inflation than other products. Fruit and vegetables lie somewhere between the weightings of rice and meat products, but their tendency to upward price fluctuations can also impact the overall inflation figure significantly. Rice has the least weightings relative to poultry and fruits & vegetables, despite the fact that rice is an essential foodstuff for about half of the world.

Given that the food exporters, such as India, are also faced with growing domestic demand and rising inflation, securing local demand will come first before the export of foodstuffs. This will not only lead to shortages in food-importing countries, but also create even more price-pressure.

Two of the important global developments that have a direct impact on the poultry and red-meat industries are the worldwide demand for corn to feed livestock first and to make biofuel. The USA is the world’s largest yellow corn producer – and the US ethanol industry uses only yellow corn for biofuels.

Globally, the cost of poultry production is estimated to have increased by 27% in 2007, partly due to the economic impact of ethanol on livestock. American corn product in 2008, according to the US Department of Agriculture, is expected to drop by 8%, potentially, sending prices even higher. Those higher corn prices will in turn lead to higher prices for meat, including poultry.

Saudi imported lamb from Australia and New Zealand increased by an average of 14% during the same period. This increase was not simply due to the rise in the cost of animal feed, but mainly due to the drought in Australia and the gradual shift away from meat production to dairy production in New Zealand, which has reduced the stock of meat.

The price of plastic packaging has increased over the past year by 15%. Between November and January, the price of concentrates increased by 20% globally. Skimmed milk powder has been facing a worldwide shortage and its price increased by 75% between December 2005 and December 2007.

Actions

United Arab Emirates
The UAE Ministry of Economy signed agreements with a number of supermarket chains in the second-largest Arab economy this year to keep prices of several basic food items at 2007 levels after inflation hit a 20-year peak of 11.1% last year.

Soaring food prices are thought of to be a main driver of inflation across the world’s biggest oil-exporting region, where most states, including the UAE, peg their currencies to the ailing dollar, which raises import costs, according to a press release by the government.

The UAE Ministry of Economy, as announced o the media, would soon unveil other measures to protect consumers from rising prices, but would continue with a no-subsidy policy.

Saudi Arabia
A Saudi cabinet decision on March was taken to reduce customs duty for a period of at least three years on 180 major foodstuffs. This was a shift from Saudi Arabia’s strategy of high agricultural tariffs to a policy of protecting consumers from rising food prices. This year alone, Saudi Arabia will spend more than SR12Bn in subsidizing foodstuff.

A greater portion of income per head in Saudi Arabia is now allocated to the purchase of food. The food category is significant as it carries biggest single weighting in the inflation basket, accounting for 26% in the cost of living index. However, this still represents a smaller component than in neighboring markets, such as the UAE (14.3%) and Qatar (18%).

Media Coverage

A total of 15 articles from newspapers in the UAE and Saudi Arabia were published. The messages consisted of the people’s sentiment that food inflation will remain and that global prices of goods are rising at alarming rates. The messages also included mentions that food costs along with housing and energy prices are the main drivers for the overall inflation. Rising food costs continuing to pressure KSA was a heavily repeated message.

Survey Findings

A sample size of 534 and 515 in Saudi Arabia and UAE respectively was conducted. The respondents were broken down by age and gender. They were all asked how they cope with inflation and whether they compromise quality, quantity, both or neither.

UAE respondents seemed less affected than those in Saudi Arabia, whereas 25% of UAE respondents would not compromise quality nor quantity, 16% of Saudis wont compromise either. This is particularly interesting when considering that inflation rose higher in the UAE than in Saudi Arabia. Age played a significant role in terms of dealing with inflation. The older the age, the higher the quantity compromise, the less the quality compromise and the less their indifference level. This can be expected, as the older they get, they are less willing to compromise on quality, and certainly with added responsibility are less indifferent about inflation.

18-25 year olds in the UAE would compromise more quality than quantity relative to their Saudi counterparts. 26-35 year olds in the UAE would compromise less quality and less quantity than their Saudi counterparts. 36-45 year olds in Saudi and the UAE were comparable. However, respondents in Saudi Arabia in that age bracket would slightly compromise more quantity.

Finally, Saudis of over 45 years of age, significantly compromise quality and quantity more than their UAE counterparts. Another interesting observation is that 22% of UAE residents of over 45 year olds are seemingly unaffected.

UAE females were the most unaffected relative to UAE males, Saudi males and females. They also would compromise quality the least. This can be attributed to the fact that there are more independent females in the UAE than in Saudi Arabia to be able to support this lifestyle. Culture may also be a factor in this pattern as well.

Expatriates in the UAE compromise quality as well as quantity more than UAE nationals do, while UAE nationals seem less affected by inflation. As for the Saudi market, it is interesting to note that they seem to have the same coping reaction to quantity, while both compromise a lot of quantity, the percentages are almost identical. Saudis, however, compromise a bit more on quality than expatriates do. Overall, nationality does not seem to be an active factor in the Saudi market as it is in the UAE market.

Conclusion

The media coverage on this issue will increase as it affects more people. Food inflation will continue to rise for a long time to come. Looking at the survey results, UAE nationals seem to be the least affected, thought not significantly so, and this can be attributed to the fact that the UAE government increased wages in the public sector, which is where most UAE nationals work.

Despite all efforts by the Saudi government, from subsidies to boosting local production, or the UAE government’s efforts of signing agreements with a number of supermarket chains to increasing wages, inflation’s impact will continue to grow. Some people are going to be hungry.