GCC retail food prices show upward trend
GCC retail food prices show upward trend
Global food prices, as measured by the UN Food and Agricultural Organization (FAO) were relatively stable in 1990-2005. The peak and trough during this period only differed from average prices by about 15 percent. Moreover, in real terms, food prices in 2005 were about 50 percent lower than they had been in 1975, as a result of increased productivity and trade.
By 2007, however, a new trend emerged in the development of global food prices. Prices shot up by 25 percent that year, and by the time they reached their peak in June 2008, they had nearly doubled compared to 2005.
The global financial crisis sparked a sharp correction in the autumn of 2008, bringing prices down a third. Then followed 18 months of gradual recovery until August 2010, when growth accelerated once again, bringing prices to a new record high in February 2011, 6 percent above the 2008 peak.
Prices eased by 10 percent during the rest of 2011, but had been on the rise again in 2012, until the small (1.4 percent) fall recorded last month - it is too early to tell is this is a blip or the beginning of a new downward trend. The trajectory of price over the next year could have a significant impact on food security in many countries, and even political stability in some.
Numerous factors have contributed to the rise in food prices and their volatility over the last five years. These include demand factors, such as a growing global middle class that is able to afford more meat, and supply factors, such as droughts and floods. Two other factors are of particular interest.
Firstly, the conversion of crops to biofuels has reduced the supply for food. Over a third of the maize crop in the US (which produces 40 percent of the global harvest) is now used for ethanol production, up from just 6 percent in 2000. This happened as a result of energy security policies which required ethanol to be blended with gasoline - it now provides around 10 percent of US fuel-and provided farmers with large subsidies.
Maize is the largest of the world's cereal crops, equivalent to around a third of the 2.5 billion tons of cereal grown each year. As well as being eaten directly, is also used for cooking oil and as livestock feed. As a result, a reduction in maize supply can influence prices across four of the food categories underlying the FAO index: grains, edible oils, meat and dairy; the fifth category is sugar.
The second factor is speculation in commodity futures. Market deregulation since the 1990s has enabled speculators to take much larger positions in many commodities. The equity market crashes in 2000 and 2008 encouraged investors to diversify into other asset classes. Commodities, including food, have become a popular destination for this money as they are seen as having relatively low correlation with other assets. Excess liquidity resulting from low interest rates and, more recently, from quantitative easing, also increased the pool of money going into commodity index funds.
Economists have differed considerably on their interpretation of the significant of these and other factors on food prices. One recent econometric model from the New England Complex Systems Institute found that increased ethanol production could closely explain the longer-term trend increase in prices, while speculative flows explained the recent volatility. This broadly fits with conclusions from a number of studies from the World Bank.
The analysis is compelling, although the debate will continue and it is likely that the price rise was more multi-causal. However, QNB Group notes that the significance of these two factors is that they are closely linked to government policy. Therefore, they could be somewhat managed, unlike weather events and food consumption preferences, to mitigate future food crises.
If food prices remain near the current high levels, or even spike for a third time in 2013, then this could create substantial hardship in poorer countries and lead to unrest.
The end of a long-standing US subsidy on ethanol this year may play a positive role in avoiding another spike, and the Economist Intelligence Unit forecasts a decline in maize prices. But conversely, high crude oil prices should support the demand for biofuels.
A fall in global food commodity prices does not necessarily translate into lower retail prices for consumers. Much of the food they purchase, particularly in wealthier countries, is highly processed, so the global commodity price only represents one component of the final retail price. Also price controls and subsidies can create a lag between global and national price rises.
In the GCC as a whole, food (combined with beverages) makes up 20 percent of the weighted average basket of goods and services that determine consumer price inflation. Its importance ranges from 13 percent in Qatar to 30 percent in Oman, reflecting differing patterns of household consumption, subsidies and price controls.
GCC food retail prices have risen every year over the past decade. Stabilizing factors mean that, although their trajectory broadly follows the underlying trend in global prices, there is less volatility. Therefore, although they spiked by 15 percent in 2008, they did not fall back in 2009, but merely grew at a slower rate. The growth rate picked up again in 2010-11 and QNB Group forecasts 4.1 percent food inflation in 2012.
Merkel seeks united front with China amid Trump trade fears
- Merkel seeks common ground to ward off trade war
- Plans complicated by US policy moves
Chancellor Angela Merkel visits China on Thursday, seeking to close ranks with the world’s biggest exporting nation as US President Donald Trump shakes up explosive issues from trade to Iran’s nuclear deal.
Finding a common strategy to ward off a trade war and keep markets open will be Merkel’s priority when she meets with President Xi Jinping, as Washington brandishes the threat of imposing punitive tariffs on aluminum and steel imports.
“Both countries are in agreement that open markets and rules-based world trade are necessary. That’s the main focus of this trip,” Merkel’s spokeswoman Martina Fietz said in Berlin on Friday.
But closing ranks with Beijing against Washington risks being complicated by Saturday’s deal between China and the US to hold off tit-for-tat trade measures.
China’s economic health can only benefit Germany as the Asian giant is a big buyer of Made in Germany. But a deal between the US and China effectively leaves Berlin as the main target of Trump’s campaign against foreign imports that he claims harm US national security.
The US leader had already singled Germany out for criticism, saying it had “taken advantage” of the US by spending less than Washington on NATO.
Underlining what is at stake, French Economy Minister Bruno Le Maire warned the US-China deal may come “at the expense of Europe if Europe is not capable of showing a firm hand.”
Nevertheless, Merkel can look to her carefully nurtured relationship with China over her 12 years as chancellor.
No Western leader has visited Beijing as often as Merkel, who will be undertaking her eleventh trip to the country.
In China, she is viewed not only as the main point of contact for Europe, but, crucially, also as a reliable interlocutor — an antithesis of the mercurial Trump.
Devoting her weekly podcast to her visit, Merkel stressed that Beijing and Berlin “are both committed to the rules of the WTO” (World Trade Organization) and want to “strengthen multilateralism.”
But she also underlined that she will press home Germany’s longstanding quest for reciprocity in market access as well as the respect of intellectual property.
Ahead of her visit, Beijing fired off a rare salvo of criticism.
China’s envoy to Germany, Shi Mingde, pointed to a “protectionist trend in Germany,” as he complained about toughened rules protecting German companies from foreign takeovers.
Only 0.3 percent of foreign investors in Germany stem from China while German firms have put in €80 billion in the Asian giant over the last three decades, he told Stuttgarter Nachrichten.
“Economic exchange cannot work as a one-way street,” he warned.
Meanwhile, looming over the battle on the trade front is another equally thorny issue — the historic Iran nuclear deal, which risks falling apart after Trump pulled the US out.
Tehran has demanded that Europe keeps the deal going by continuing economic cooperation, but the US has warned European firms of sanctions if they fail to pull out of Iran.
Merkel “hopes that China can help save the atomic deal that the US has unilaterally ditched,” said Die Welt daily.
“Because only the giant emerging economy can buy enough raw materials from Iran to give the Mullah regime an incentive to at least officially continue to not build a nuclear weapon.”