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Food prices are high globally and trending up in the GCC
Food prices are high globally and trending up in the GCC Global and GCC Food Price Indices (1990-2012) 240 FAO Food Price Index (global) GCC food CPI (from 2005, rebased) 220 Qatar food CPI (from 2005, rebased) 200 180 160 140 120 100 80 1990 92 94 96 98 2000 02 05 06 08 10 12* Source: FAO, GCC statistical agencies; *FAO average for Jan-Apr 2012 and QNB Group full year forecasts for Qatar and the GCC Despite a slight easing in April, the price of (1.4%) fall recorded last month—it is too early to tellfood in global commodity markets remains near is this is a blip or the beginning of a new downwardshistoric highs. In the GCC, retail food prices continue trend. The trajectory of price over the next year couldto trend upwards. QNB Group notes that the global have a significant impact on food security in manyfood crisis that began in 2007 may be far from over. countries, and even political stability in some. Global food prices, as measured by the UN Numerous factors have contributed to the riseFood and Agricultural Organisation (FAO) were in food prices and their volatility over the last fiverelatively stable in 1990-2005. The peak and trough years. These include demand factors, such as aduring this period only differed from average prices by growing global middle class that is able to afford moreabout 15%. Moreover, in real terms, food prices in meat, and supply factors, such as droughts and floods.2005 were about 50% lower than they had been in Two other factors are of particular interest.1975, as a result of increased productivity and trade. Firstly, the conversion of crops to biofuels has By 2007, however, a new trend emerged in the reduced the supply for food. Over a third of the maizedevelopment of global food prices. Prices shot up by crop in the US (which produces 40% of the global25% that year, and by the time they reached their peak harvest) is now used for ethanol production, up fromin June 2008, they had nearly doubled compared to just 6% in 2000. This happened as a result of energy2005. security policies which required ethanol to be blended The global financial crisis sparked a sharp with gasoline—it now provides around 10% of UScorrection in the autumn of 2008, bringing prices fuel—and provided farmers with large subsidies.down a third. Then followed 18 months of gradual Maize is the largest of the world’s cerealrecovery until August 2010, when growth accelerated crops, equivalent to around a third of the 2.5 billiononce again, bringing prices to a new record high in tonnes of cereal grown each year. As well as beingFebruary 2011, 6% above the 2008 peak. eaten directly, is also used for cooking oil and as Prices eased by 10% during the rest of 2011, livestock feed. As a result, a reduction in maize supplybut had been on the rise again in 2012, until the small can influence prices across four of the food categories 1
QNB Economics email@example.com the FAO index: grains, edible oils, meat another spike, and the Economist Intelligence Unitand dairy; the fifth category is sugar. forecasts a decline in maize prices. But conversely, The second factor is speculation in commodity high crude oil prices should support the demand forfutures. Market deregulation since the 1990s has biofuels.enabled speculators to take much larger positions in A fall in global food commodity prices doesmany commodities. The equity market crashes in 2000 not necessarily translate into lower retail prices forand 2008 encouraged investors to diversify into other consumers. Much of the food they purchase,asset classes. Commodities, including food, have particularly in wealthier countries, is highly processed,become a popular destination for this money as they so the global commodity price only represents oneare seen as having relatively low correlation with other component of the final retail price. Also price controlsassets. Excess liquidity resulting from low interest and subsidies can create a lag between global andrates and, more recently, from quantitative easing, also national price rises.increased the pool of money going into commodity In the GCC as a whole, food (combined withindex funds. beverages) makes up 20% of the weighted average Economists have differed considerably on basket of goods and services that determine consumertheir interpretation of the significant of these and other price inflation. Its importance ranges from 13% infactors on food prices. One recent econometric model Qatar to 30% in Oman, reflecting differing patterns offrom the New England Complex Systems Institute household consumption, subsidies and price controls.found that increased ethanol production could closely GCC food retail prices have risen every yearexplain the longer-term trend increase in prices, while over the past decade. Stabilising factors mean that,speculative flows explained the recent volatility. This although their trajectory broadly follows thebroadly fits with conclusions from a number of studies underlying trend in global prices, there is lessfrom the World Bank. volatility. Therefore, although they spiked by 15% in The analysis is compelling, although the 2008, they did not fall back in 2009, but merely grewdebate will continue and it is likely that the price rise at a slower rate. The growth rate picked up again inwas more multi-causal. However, QNB Group notes 2010-11 and QNB Group forecasts 4.1% food inflationthat the significance of these two factors is that they in 2012.are closely linked to government policy. Therefore,they could be somewhat managed, unlike weatherevents and food consumption preferences, to mitigatefuture food crises. If food prices remain near the current highlevels, or even spike for a third time in 2013, then thiscould create substantial hardship in poorer countriesand lead to unrest. The end of a long-standing US subsidy onethanol this year may play a positive role in avoidingTweets Global food prices, measured by the UN FAO, remain near historic highs despite easing slightly in April The conversion of food crops to biofuels and futures market speculation were probably the major causes of price spikes in 2008 and 2011 Retail food prices in the GCC are increasing broadly in line with the global trend, though with less volatility QNB Group forecasts 4.1% food inflation in the GCC during 2012 2