Price hike

People in most developed countries have become accustomed to falling grocery prices in the past decade, with industrial farming and competition between food producers and retailers giving rise to historically low prices. The price of crude oil, which until recently had been relatively low, was also instrumental in helping food producers bring products to market cheaply and efficiently.

But with oil prices more than doubling in the past few years combined with poor harvest in many major food-producing nations, the cost of bringing food to market has surged. And the Middle East's grocery sector is certainly not immune from these trends. Food producers in the region are experiencing unprecedented price increases for raw materials, which they are now forced to pass on to consumers.

As a commodities trader at Al Ghurair, one of the UAE's leading flour producers, Ibrahim Al Ghurair has seen the cost of some raw materials double in the past year alone. "About 75% of our cost is raw materials and we have prices of raw materials increase 100% or more," he said. "Wheat for example was at around US$170 a year ago. It has now gone to between US$375 and US$380. We were dealing with edible oil at US$500 and now it is around US$900 to US$1000."

For Ibrahim, one of the main reasons for this level of inflation is the rising cost of oil, which increases the cost of food production directly, and also makes some food crops become financially viable as biofuels, which in turn pitches food into competition with fuel. "Recently there have been developments in bio-fuels and we have seen more and more agricultural commodities going to produce fuel," Ibrahim said.

"What has happened in the past is that all these commodities went for human consumption or animal feed. Today, human consumption is competing with energy and the energy market is much bigger than human consumption requirement. The competition is energy versus food."

High oil prices are also increasing the cost of transporting food, and with the Middle East, and particularly the Gulf relying heavily on food imports, it is almost impossible for local food producers to source raw materials locally. "We are at more than US $70 a barrel these days and whether we transport our wheat from Argentina, Canada or Australia, a big part of the transportation cost is fuel," Ibrahim said.

He added that this problem has also been exacerbated by rising costs for hiring ships. Al Ghurair has seen the price of hiring a ship increase from around US$25,000 a day just few years ago to a current price of about US$60,000 to US$70,000 a day.

Savio Almeida, general manager of W J Towell, an Oman-based company involved in FMCG distribution is also no stranger to the rapid inflation of food prices. He said basmati rice, edible oils, and canned fish have experienced the biggest price hikes, which he attributes to an increase in rental costs, fuel, finance, recruitment costs, and selling and distribution costs. He also cites global trends such as an increase in base raw material prices such as Paddy Prices for rice, which have increased by about 55%. Exchange rate fluctuations have also affected prices, Almeida added.

But while food producers and brand owners have been forced to confront these price increases, their situation is further complicated in the UAE owing to a lack of flexibility on pricing. Indeed, while food producers are free to increase their prices, they do have to justify any increases they pass on to the consumer to the UAE municipality. While this does not seem to be a big problem, it can make it more difficult for producers and brand owners to react to price increases for the raw materials that they rely on.

"In the short to medium term, the price implementation process can get a bit long drawn, however customers in today's day and age are well informed & support a genuine price increase," Almeida said.

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