Food prices could rise in 2013 as US drought continues

Updated 04 February 2013
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Food prices could rise in 2013 as US drought continues

Global food prices eased slightly in the second half of 2012. Good harvests in the southern hemisphere, particularly soy and corn in Brazil, together with a drawdown of stocks, partly offset the impact of lower than expected supply from the drought-stricken US.
However, prices remain high and could increase further in 2013, according to analysis by QNB Group. Existing concerns include record temperatures in Australia this month, signs that the US drought may persist for another year and low levels of food stocks. If climatic problems develop in any other key producing areas then prices could reach new record levels.
Global food prices have been both high and extremely volatile in recent years. The situation is particularly serious in regards to grains-such as corn, wheat and rice-which provide the majority of global food calories. Last summer wheat prices, for example, shot up by over 50 percent in the space of 6 weeks when the extent of the US drought became apparent. The grains’ component of the Global Food Price Index, produced by the UN Food and Agriculture Organisation (FAO), remains close to record levels. Meat prices are also close to historic highs, in part because of the cost of grains for animal feed.
Although the FAO’s overall food index in 2012 was on average 7.0 percent below the 2011 level, it was still 5.9 percent above the previous record set in 2008. The easing compared with 2011 was largely due to falls in some items such as sugar, which was down by 17.1 percent on average over the year, and dairy, down 14.5 percent. However, grains were only down 2.4 percent, because of a period of weaker prices first half of the year. In the second half of the year, by contrast, grain prices were 8.8 percent higher than the same period in 2011 and only just below the record average for a six-month period, set in mid-2008.
Food prices are of particular concern to the poorest third of the global population who spend over half of their income on food, and to countries that are highly dependent on food imports, including many Middle East states.
The drought in the US, the most widespread since the devastating Dust Bowl period in the 1930s, began widening and intensifying in June 2012. The proportion of the country (excluding Alaska) that was experiencing drought nearly doubled in the space of a few months, peaking in September.
The area experiencing drought has only fallen slightly to 57.6 percent of the country in late January, compared with an average of 31.3 percent during the 2000s. Moreover, the amount of land undergoing the most exceptional category of drought only peaked a few weeks ago, at 6.8 percent of the land area (nearly seven times the average in the 2000s). This is because winter rains have been more limited than usual in many places. As a result, the winter wheat crop appears to be growing poorly and there are signs that the drought could persist into the spring and summer, damaging other crops.
The US National Weather Service has just released its first forecast for the planting season that runs until the end of April. It expects the drought to persist in most of the currently affected areas, including major agricultural states such as Kansas. On the positive side, some improvement is expected in parts of the critical Corn Belt in the Midwest (where production last year was down by 13 percent). The drought is significant because the US is the world’s largest exporter of food, including of corn, wheat and soy.
Australia, the world’s fourth largest wheat exporter, is also seeing a period of exceptional weather. The last four months have been the hottest since records began a century ago. The heat wave peaked in early January, the height of the southern summer, with a string of days at record breaking temperatures. The heat triggered wildfires across the country’s agricultural belts.
Another factor of concern are global food reserves, which are relatively low. An FAO estimate in October put them at less than 74 days of consumption. Reserves are significantly lower in some countries and for certain food stuffs. US corn stocks, for example, would only last around 24 days, the lowest level on record.
If the climate during the next year or two is favorable in major food production regions then prices should ease somewhat, according to QNB Group. This will happen as farmers invest to plant uncultivated land, motivated by recent years of high prices. However, if the US drought continues to be widespread, and if there are significant droughts or floods in other key countries, then the conditions will be in place for a fresh price spikes.
Even if there is an improvement in the short term, extreme weather conditions and the associated food price spikes are expected to occur frequently in the coming years, as the global climate warms. Pricing pressure could be further exacerbated by a continuing trend towards using food crops as biofuels, speculative activity in agricultural futures market and growing demand driven by increasing affluence in some developing countries.
In this increasing food-insecure world, GCC countries will need to continue their efforts to diversify their food sources to minimize the risk of disruption to supply at times of shortage in specific producing regions. In any case, trends in global food prices will most likely impact inflation in the GCC, as food is the second largest component of consumer price indices in the region.


Gulf companies challenged by debt and rising interest rates

Updated 22 April 2018
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Gulf companies challenged by debt and rising interest rates

  • Debt restructurings on the rise, but below crisis levels
  • Central Bank of the UAE has raised interest rates four times since last March

There has been an uptick in recent months in heavily-borrowed companies in the Gulf seeking to restructure their debts with lenders. Although the pressure on companies is not comparable to levels witnessed in the region following the 2008 global financial crisis, rising interest rates will eventually begin to have a greater impact, say experts.
Speaking exclusively to Arab news, Matthew Wilde, a partner at consultancy PwC in Dubai, said: “We do expect that interest rate increases will gradually start to impact companies over the next 12 months, but to date the impact of hedging and the runoff of older fixed rate deals has meant the impact is fairly muted so far.”
The Central Bank of the UAE has raised interest rates four times since the start of last year, in line with action taken by the US Federal Reserve. The Fed has signalled that it will raise interest rates at least twice more before the end of the year.
Wilde added that there had been a little more pressure on company balance sheets of late, although “this shouldn’t be overplayed”.
Nevertheless, just last week, Stanford Marine Group — majority owned by a fund managed by private equity firm Abraaj Group — was reported by the New York Times to be in talks with banks to restructure a $325 million Islamic loan. The newspaper cited a Reuters report that relied on “banking sources”.
The Dubai-based oil and gas services firm, which has struggled as a result of the downturn in the hydrocarbons market since 2014, has reportedly asked banks to consider extending the maturity of its debt and restructuring repayments, after it breached certain loan covenants.
A fund managed by Abraaj owns 51 percent of Stanford Marine, with the remaining stake held by Abu Dhabi-based investment firm Waha Capital. Abraaj declined to comment.

 

Dubai-based theme parks operator DXB Entertainments struck a deal last month with creditors to restructure 4.2 billion dirhams ($1.1 billion) of borrowings, with visitor numbers to attractions such as Legoland Dubai and Bollywood Parks Dubai struggling to meet visitor targets.
Earlier this month, Reuters reported that Sharjah-based Gulf General Investment Company was in talks with banks to restructure loan and credit facilities after defaulting on a payment linked to 2.1 billion dirhams of debt at the end of last year.
Dubai International Capital, according to a Bloomberg report from December, has restructured its debt for the second time, reaching an agreement with banks to roll over a loan of about $1 billion. At the height of the emirate’s boom years, DIC amassed assets worth about $13 billion, including the owner of London’s Madame Tussauds waxworks museum, as well as stakes in Sony and Daimler. The firm was later forced to sell most of these assets and reschedule $2.5 billion of debt after the global financial crisis.
Wilde told Arab News: “We have seen an increasing number of listed companies restructuring or planning to restructure their capital recently — including using tools such as capital reductions and raising capital by using quasi equity instruments such as perpetual bonds.”
This has happened across the region and PwC expected this to accelerate a little as companies “respond to legislative pressures and become more familiar with the options available to fix their problems,” said Wilde.
He added that the trend was being driven by oil prices remaining below historical highs, soft economic conditions, and continued caution in the UAE’s banking sector.
On the debt restructuring side, Wilde said there had been a “reasonably steady flow of cases of debts being restructured”.
However, the volume of firms seeking to renegotiate debt remains small compared to the level of restructurings witnessed in the aftermath of Dubai’s debt crisis.
Several big name firms in the emirate were caught out by the onset of the global financial crisis, which saw the emirate’s booming economy and real estate market go into reverse.
State-owned conglomerate Dubai World, whose companies included real-estate firm Nakheel and ports operator DP World, stunned global markets in November 2009 when it asked creditors for a six-month standstill on its obligations. Dubai World restructured around $25 billion of debt in 2011, followed by a $15 billion restructuring deal in 2015.
“We would not expect it to become (comparable to 2008-9) so barring some form of sharp external impetus such as global political instability or a protectionist trade war,” said Wilde.
Nor did he see the introduction of VAT as particularly driving this trend, but rather as just one more factor impacting some already strained sectors (e.g. some sub sectors of retail) “which were already pressured by other macro factors.”

FACTOID

Four

The number of interest rate rises in the UAE since March 2017.