While few people involved in the FMCG sector would dispute that food commodity prices are rising, the reason for this inflation, and estimates on how long it will last, appear more difficult to ascertain.
Certainly, the sudden rise of bio-fuels is a big factor. As oil prices spiked towards the US$80 a barrel mark last year, so governments around the world – particularly in the Europe and the USA – started setting targets on the use of bio-fuels. The European Union, for example, has set a target that bio-fuels should account for 5.75% of transport fuel by 2010.
The problem with this is that as demand for bio-fuels increases, it becomes more attractive for farmers to turn their land over for the cultivation of grain such as corn to produce ethanol, rather than food.
This is certainly cited as one of the main reasons for rising commodity prices by many industry insiders in the Middle East. Ibrahim Al Ghurair, a commodities trader at Al Ghurair, the UAE’s biggest flour producer, cites the combination of high oil prices and the rise of bio-fuels as the two main threats to food prices.
The knock-on effects of this inflation will be felt across the industry, with meat and dairy prices likely to be hit soon.
Furthermore, the current price rises are likely to be the tip of the ice-berg. In the Middle East, producers have initially allowed their profit margins to fall in order to avoid passing on price hikes. But with consumers now starting to see the price increases in stores, few food producers see an early end to the situation.
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