Supermarkets weep

Aziza Rahman is filling her shopping basket with rice. The Egyptian mother of two usually shops in the co-op down the road where it’s cheaper because of the price caps that have been put in place by the government. But the shelves are always empty by the time she gets to the shop.

I never used to have to think about how much rice to buy, but now it’s a problem,” she says.

According to the World Bank, the cost of food has risen by 80% in the last three years. In 2007, dairy products worldwide were up 80%, cooking oils by 50% and grains by 42%.

Food prices are skyrocketing, leading to shortages and even rioting in countries from Egypt to the Philippines. Now the impact is being felt in the Gulf as regional states impose price caps on an increasingly wide range of goods.

Economists are warning that further price increases are likely to emerge this year as retailers that have been forced to cap the cost of some food items, seek to raise the cost of other goods to maintain profit margins.

“It will probably get worse and we will feel it through even higher food prices over the next few months,” says John Sfakianakis, group chief economist at Saudi British Bank and a former World Bank analyst.

We are at a historical low point because food stocks have gone down more than at any other time since the 1970s, so it will take a little bit of time for food to be reproduced and meet demand.

Major food retailing groups in the UAE and other Gulf states are capping food items as they seek to rein in near-record inflation. Abu Dhabi-based Bani Yas Cooperative became the latest UAE-based food retailer to introduce caps this week, maintaining a basket of 56 basic food commodities at 2007 prices.

It follows similar moves by other retailers including the Carrefour and Lulu groups.

“Rice, bread, sugar, chicken, paper products – we receive price increases from the supplier for most of our products,” says Nabil Kadi, purchasing manager at UAE-based Lifco Supermarkets.

“It’s not a matter of a policymaker waking up one morning in the mood to change prices, there are many external factors at play and customers have a right to complain about higher food prices now.

Food commodities are being sold at exorbitant prices when compared to just a few years ago. Wheat is at its highest price since 1980, causing shortages in bread and pasta, and corn has doubled in price since 2006. Two years ago, a metric tonne of white beans would have sold for US$235 but now sells for US$1160.

Stocks of rice, one of the world’s most consumed foods, are also being severely affected. The World Bank estimates the cost of rice has risen by 147% in the last year, with global supplies at their lowest since 1976.

“We are stocking as much as we can of products like rice that go quickly, taking into account the expiry dates, but there’s not much,” says Kadi at Lifco. “We are seeing the shelves emptying with people trying to get certain products before they run out.

Consumers like Aziza Rahman are being hit the hardest. “The consumer is baring the brunt of it,” agrees David Berrick, general manager of retail for Abela supermarket in Abu Dhabi. “There isn’t a week that goes by when we are not inundated with price increases,” he adds.

The World Bank estimates that as many as 100 million people who had previously no need for assistance are now in danger of falling into the category. Aid organisations are struggling to cope with the demand.

In February, the World Food Programme announced it was US$500m short in its budget for food rations because of rising costs.

“It could end up being a disaster in the short-term, especially for the poorest of the poor, in India and Africa,” says Milan Sallaba, director and office head at management consultant Oliver Wyman.

Those most affected are being forced onto the streets. In Egypt, 11 people have died in rioting caused by the bread shortages.

In Indonesia, 10,000 demonstrators have hit the streets to protest against rising soya bean costs which have soared 125% in a year, and in Mexico, locals have rioted in response to the cost of corn used to make tortillas.

The head of the International Monetary Fund recently warned that the global food crisis could lead to social unrest so severe that governments could be toppled.

But it is not just consumers who are feeling the pinch in their pockets, commentators are becoming increasingly concerned about the effect the crisis is having on the economy.

“All [of the factors causing the costs] are making food shortages a serious issue that will cost the retail industry more money,” says Patricia McCall, a financier who was formerly employed by the World Bank’s International Finance Corporation.Last week, Brazil suspended its rice exports, following in the footsteps of the world’s number two rice exporter, India and the number three, Vietnam.

Thailand, which accounts for nearly a third of all rice consumed globally, has yet to impose any such curb, stressing it has enough in stock to meet requirements.

“It certainly hampers economic growth,” agrees Sallaba. “In the Middle East and in the UAE specifically, it is the poorest that are most affected, specifically labourers.

The construction industry in the Middle East, which relies on labourers whose staple diet includes rice, is also expected to be affected. “The inputs into the construction and development sectors are becoming more expensive, further fuelling inflation,” says Sallaba. The industry is already suffering from soaring construction costs.

With consumers in developed countries spending an average of 10-20% more on food, the services industry is likely to suffer as a result of increased spending in supermarkets.

“The impact on the economy is coming through with inflation, we’ve seen the rise of raw material prices, and consumers are subsequently spending more on food rather than services,” says McCall.

A number of supermarkets in the region have signed price cap agreements in a bid to control rampant food inflation, but many analysts say the caps won’t solve the crisis.

“In the short term price caps may help the inflation issue, but in the long-term its unsustainable for the whole retail chain because it will affect the profit margins,” explains Sfakianakis.

“They cannot sustain low profit margins for a long period of time, they will eventually have to pass higher costs onto the consumer.”

As a result of maintaining prices of basic foods, the cost of other foods is expected to rise. “The price of other foods will have to make up for the fixed prices of staple foods, basically contributing to inflation,” says Sallaba.

While the food retailing industry is feeling the impact of rising prices, the agricultural sector is in a period of monumental upheaval, with global farming patterns changing fast.

“The problem is not price caps and government policies, it’s agriculture,” agrees Duncan Macintosh, a spokesperson for the International Rice Research Institute.

Climate change and extreme weather conditions have led to diminishing harvests while the surging cost of crude is reducing the acreage of land available for food crop cultivation as farmers instead opt to grow biofuels such as ethanol.

“Bangladesh is a particular example of how extreme weather conditions affect rice production,” says Macintosh. “Normally it is a self-sufficient country, but this year it is looking to import from international markets. [As a result] traders noticed an increase in demand and prices rose.

He adds: “High oil prices feed into two areas: high transportation costs and higher cost of fertiliser to cultivate land for rice production.

Global demand is also driving the price increases – in particular the emergence of a new middle class, with unconventional dietary habits. The average person in China now consumes 110 pounds of meat, compared to 44 pounds in 1985.

The impact on the wheat industry as a result is staggering. To produce one kilo of meat, you need eight kilos of wheat. With higher disposable incomes, people’s eating habits are not expected to change and the new stratum is expected to continue to grow.

The Brookings Institution estimates that by 2020, the global middle class will increase by 1.8 billion people, constituting 52% of the world’s population.

These people not only consume more food but also require housing too. “There has also been the urban development of land which was used for rice production,” says Macintosh.

The emerging trends are forcing a hasty rethink of what we consume on a global scale. “A logical decision needs to be made: do we feed people or do we feed our cars?” asks Sfakianakis. Can the situation be resolved?

The World Food Programme estimates that the current food shortage will last between three and five years.

“There is no need to panic,” assures Macintosh. “People need to understand the cycle of food production. It is not like oil.

Analysts agree the key will be how to best control the situation, particularly in the GCC with its currency pegged to the US dollar.

“It has taken a decade of mismanagement to come to where we are today so solving it won’t be easy,” says Marcus Prior of the World Food Programme.

In the meantime, Aziza Rahman will be doing her best to ensure she gets to the supermarket early, before the shelves are emptied of rice, sugar and other price-capped food.