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GCC not at risk of food insecurity but inflation as Ukraine crisis disrupts supply

RIYADH: The ongoing war between Russia and Ukraine is creating major disruptions in the global food supply, creating fear of food insecurity and inflation in some heavily import-dependent countries amid rising food prices. energy costs.

The two countries rank among the world’s top three exporters of wheat, maize and sunflower oil, among others, according to a new document from the United Nations Food and Agriculture Organization, or FAO.

Moreover, Russia is also one of the main exporters of fertilizer, an essential material used in agriculture.

These disruptions, combined with rising transport costs due to rising energy prices, could lead to food insecurity for many countries in the Arab region.

“With the Ukraine crisis, we face constant changes in the availability of raw materials used in finished (food) products,” said Sasha Marashlian, managing director of Imagine FMCG, an international distributor covering GCC markets.

He said food-exporting countries are now blocking or capping commodity exports. “This translates into a lack of availability of certain products and a massive rise in food prices due to supply and demand dynamics.”

“In my view, every food item will be affected,” he added, pointing out that food prices could increase by 17-20% over the next 18 months in the GCC.

Food protectionism

As food protectionism spreads, many countries have begun halting the export of essential food products to secure domestic supplies amid growing concerns over the global supply chain.

On March 14, for example, Russia temporarily banned grain exports to ex-Soviet countries and most of its sugar exports. This follows Hungary’s decision to ban grain exports on March 5. Egypt followed suit by banning exports of strategic products for three months, namely lentils and beans, wheat and all kinds of flour and pasta.

Food-producing countries are using export bans to preserve stocks of essential goods amid what is turning into a severe global crisis.

Rising fuel prices are making the situation worse, leading to higher transport and freight costs. “Shipping costs are now four to five times higher than two years ago, and freight cost is at an all-time high,” Marashlian said.

The international retailer believes that the impact will be fully integrated, after Ramadan, once local safety stocks start to run out.

“The countries most at risk in the MENA region are Lebanon, Egypt, Yemen, Iran, Libya and Sudan,” warned Devlin Kuyek, a researcher at GRAIN, who focuses on monitoring and lending. analysis of global agribusiness trends.

The expert who spoke exclusively to Arab News believes that Saudi Arabia and Oman will be impacted to a lesser extent, as they have the means to source supplies elsewhere.

The impact of food supply chain disruptions will depend on each country’s access to imports. “Price is less of an issue for GCC than supply,” Kuyek said.

However, he pointed out that during the food price spike of 2007, GCC countries struggled to access the food they needed, at any price, as food-producing countries began block exports in order to control domestic prices.

“Another question worth asking is: will these countries continue to source from Russia? he mused.

Russia continues to export, although at a lower capacity. Due to their relatively good relations with Moscow, some MENA countries may continue to source grain from Russia.

GCC preserves food safety

History shows that when food prices soared in 2007, GCC countries responded to global disruptions by taking certain steps to maintain and protect their food supplies.

“Sovereign wealth funds (in these countries) have countered (higher food prices) by buying up farmland in Africa and securing more supplies,” said Aliya El-Husseini, Senior Associate – Equity Research at Arqaam Capital, in an interview with Arab News.

Since then, she said, they have started to build up strategic reserves and local production capacity, which is reflected in the more subdued inflation figures this year.

The researcher added that even though the GCC still imports nearly 85% of its food supply, it continues to be considered one of the safest regions in the world.

The food supply had already started to be disrupted by the COVID pandemic, El-Husseini pointed out.

This prompted regional governments at the time to launch immediate measures to safeguard food security, including financial exemptions and credits to farmers and agribusinesses, movement exceptions for farm workers during strict lockdowns and support to packaging and distribution, she explained.

“Subsidy schemes in the region have helped keep inflation down for several years, but many subsidies have been removed since 2016, while some subsidies remain and are being extended to help mitigate price increases,” El added. -Husseini.

Saudi Arabia capped local fuel prices last June, she said. This helped keep transport inflation under control, but El-Husseini stressed that this was not enough to offset price increases in the other major food basket categories.

“The partial cancellation of the VAT, which increased from 5% to 15% on July 1, 2020, in Saudi Arabia, could be a key measure to help contain prices further, as the GCC runs budget surpluses, thanks to the high oil prices. and relatively tight fiscal spending plans,” she pointed out.

Other factors that could help the GCC countries overcome the food crisis is that they have been outsourcing agriculture to other countries for years. This allowed them to exercise more direct control over grain trading companies.

In order to meet the demand of their local population, GCC countries have acquired agricultural land from foreign states in Africa and Asia, as well as from Arab countries in the Nile basin, according to an article titled “The land grabbing re-examined: Gulf Arab agricultural commodity chains and spaces of extraction” by researcher Christian Henderson.

Still, Kuyek doesn’t seem to consider this particular strategy as complete proof. “I don’t think buying land in other countries has done much to dampen GCC import demand. Many overseas projects have collapsed or never started,” he observed.

Projects underway could also face significant challenges in the form of export bans imposed by foreign countries. Sudan, home to a number of GCC mega-farms, is an example where such a scenario could occur.

However, the GCC countries have gone a step further by taking stakes in large food companies.

“Abu Dhabi took a 45% stake in Louis Dreyfus last year, and part of the purchase was based on prioritizing trade with the UAE,” Kuyek said.

In 2016, Fondomonte California purchased 1,790 acres of farmland in California for nearly $32 million. Fondomont’s parent company is none other than the Saudi food giant Almarai.

“While we see upward pressure on prices in the region, inflation is unlikely to reach the levels seen in other emerging or developed markets,” concluded Arqaam Capital’s El-Husseini.

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