Oil revenues cushion the GCC from any major food crisis but with the region still reliant on imports, countries face real supply chain risks.
By Mary Sophia | This article appeared in Gulf Business March 14, 2015
Food security has long been a burning issue in the GCC given the region’s over-dependence on food imports. according to a report by investment bond alpen Capital, countries such as Qatar, Bahrain and the uaE import anywhere between 80 to 90 per cent of their food, leaving them dangerously vulnerable to an increase in global food prices.
How much the GCC was dependent on food imports was further laid bare during 2007, when a global food shortage forced many countries to halt exports, causing the price of staples to surge almost 59 per cent in the region.
In the past, such incidents have prompted the Gulf countries to ramp up their domestic agricultural production. Though such steps were necessary, the lack of arable land and scare water resources were serious obstacles.
Since then, many countries have also invested in agricultural farmland across the world in order to ensure food security. But such investments have often been accompanied by veiled criticisms of wealthy Gulf countries eating into the food supply of less-developed nations. Ensuring food security through such channels is a viable long-term option, some experts argue, while others believe that the region does not have an immediate threat of being cut off from food supplies just yet.
One of the biggest buffers that the Gulf nations have from food insecurity is their oil revenue, according to some experts. Thanks to their large fiscal reserves, GCC countries are able to purchase food reserves and store them for times of need. “Food security can be measured in two ways – there is national level food security which is mostly related to food availability, and then there is food security at the household level,” said Clemens Breisinger, senior research fellow at International Food Policy Research Institute (IFPRI), a Washington DC-based think tank.
“A common indicator of national level food security is how much foreign exchange reserve a country has in order to afford imported food.
“In this part of the world, only two to three per cent of foreign exchange reserves are being used to import food, unlike many other countries which spend about 20 to 30 per cent of their reserves in ensuring food security. So there should not be any problem of affordability.”
SECURING THE SUPPLY
The Gulf’s other real food security issue is risk to the supply chain. Most of the food supply coming into the Gulf utilises traditional trade corridors such as the Suez Canal and Strait of Hormuz. However, with recent geopolitical tensions, supply chain risks are back in focus. In an effort to counter such problems, food firms are looking to set up manufacturing plants in the region while many have upped their local investments to expand their capacity and distribution capabilities.
Saudi-based Aujan Coca-Cola Beverages Company (ACCBC), which produces beverage brands such as Rani and Barbican, recently announced plans to invest around $500 million in the Middle East and North Africa region over the next three years. UAE-based Al Ghurair Investment also inked a deal with Sohar Port and Freezone earlier this year for a 93,000 square metre plot in an effort to be close to points of production in the region and to cut food import costs. Growing regional food consumption has also attracted international players to set up local production facilities in the GCC.
In 2014, American food giant Mondelez International announced plans to build a $90 million biscuit plant in Bahrain. The plant, which will start commercial production in 2016, will have an initial capacity of 90,000 tonnes annually.
‘The plant is to address the opportunity not just in Middle East but in Africa as well,” said Alan Smith, managing director, Mondelez International, GCC and Pakistan. The company previously invested more than $75 million in a Kraft Cheese and Tang beverage plant in Bahrain.
“It is very clear that MNCs have a strategy of manufacturing in the GCC. One needs to be close to the consumers, provide quality products and ultimately wants to have control of one’s supply chain. That is very important for us,” said Smith.
FOOD AVAILABILITY HIGH
Food availability at the household level has also been quite strong in the region, according to IFPRI’s Breisinger. “If you only choose these standard indicators to measure food security, then the Gulf countries cannot be termed as food insecure,” he argued. The food policy expert said that even if there were a sudden jump in food prices across the world, the large fiscal reserves of the Gulf countries would insulate them from major shocks. Moreover there was also a strong correlation between oil prices and food prices. “It is estimated that correlation coefficient (of oil and food prices) is 0.93, which means oil prices and food prices move together. So in this part of the world, worrying about food prices is not an issue because oil prices bring in a lot of money…and there is also a significant effort to build stocks here.”
That effort is paying off. The Global Food Security Index, prepared by the Economic Intelligence Unit, featured both the UAE and Kuwait for the first time in its list of food secure nations in 2014. The report ranked the UAE and Kuwait at 30th and 28th in the world respectively, and third and second in the region. “Both countries earned excellent to moderate scores in all indicators except for public expenditure on agricultural R&D and, for the UAE, volatility of agricultural production, which were weaknesses,” the report said. Overall, Gulf countries scored well in terms of offering food at affordable rates for their population, the report added.
But despite not being an immediate concern, Breisinger noted that food security could still be a problem if certain countries slapped an export ban due to internal reasons. “The main countries that export wheat and rice are relatively concentrated,” he said. “There are only four or five wheat exporting countries and if there is trouble in any of these countries, then there is an inherent risk to the global food system.” Conflicts could also negatively impact food security through disruption to market supply, leading to a global food shortage, the expert said. In a bid to counter such problems, he believes the Gulf should be more active in international organisations that shape global food policies. “Stronger collaboration between Gulf countries will be critical simply because they will have more power in the international institutions,” he said.