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Sun 2 Sep 2007 04:00 AM

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Price hike

The Middle East's Fast Moving Consumer Group sector feels the pressure as global food prices rise.

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.

Today, human consumption is competing with energy and the energy market is much bigger than human consumption requirement.

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.
This issue is also a bugbear for Mahmood Abdollahi, marketing manager at the Abu Dhabi Vegetable Oil Company. Abdollahi said the price of corn oil has risen by about 70% in the past year, mainly because of an increase in the amount of crops being used to produce bio-fuels. He is frustrated that it often seems difficult for producers to pass on these costs to the consumer quickly enough - a situation that could leave producers in danger of operating at a loss.

"The trade needs 60 days notice to raise prices but price fluctuations are too volatile," he said. "But in the long term you are either going to close down your industries or accept the realities of the market.

"During the last part of the year, we tried to keep the retail price the same in the hope that prices would come back down," he said. "But it looks like it is not going to change. In the first quarter of the year we told retailers. Some of them accepted it, some didn't. Price increases will rise by at least 50%."

Furthermore, many brand owners are also annoyed that they must seek approval from government agencies in order to increase their prices.

For example, Deepak Thawani, of Tilda International, which produces a popular basmati rice, said the municipality should differentiate between commodities and brands when it comes to price hikes. "Brands and commodities are different. When it comes to basmati, it cannot be treated as a commodity. It is at the upper end of all the rice so you need to have a demarcation, whereas long grain and other varieties could be treated as commodity," he said.

But he also fears that restriction on price increases could lead to an increase in problems such as the adulteration of food items, including basmati rice and milk powder, with unscrupulous dealers diluting premium foodstuffs with cheaper varieties.

Producer’s viewAmr W Farghal, Fonterra's hub general manager for the Middle East and Africa: "The dairy industry is going through unchartered territories where the commodity prices have more than doubled. The reason for this is a serious shortage of supply driven by a drought in Australia that hit dairy farmers. Australia represents a sizeable percentage of the dairy exports worldwide. India had banned dairy exports as well, to help satisfy domestic demand and it is one of the top-five producers of dairy.

The Europeans are also lifting the subsidy on dairy, so most of the problem is that manufacturers prefer to get into value-added products such as cheeses, so this left us with quite a big challenge and a severe shortage of dairy products. As a result we have these price increases that we are seeing around the world.

New Zealand has not been affected by drought and has seen a 3% rise in production. Our challenge is to try to meet the demand. We buy our ingredients from Fonterra's ingredients business like anybody else, so we are treated like all the other key customers of Fonterra. This is the sort of fairness that Fonterra is trying to bring into the equation so as not to upset key customers."

Graham Lyon, marketing manager for Middle East and Africa, for Fletcher International Markets, an Australian meat producer: "Drought had the effect of making farmers keep less stock than they would usually keep. That means the population of livestock in the country has fallen. We have been very lucky though this year. The whole country as of now has received plentiful rainfall and we are now starting to see an expansion of our population of livestock. This will enable us to continue to supply consistently."

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