Dr. Mohamed A. Ramady
Publication Date: 
Mon, 2008-06-02 03:00

The United Nation’s Food and Agriculture Organization (FAO) has predicted that the cost of importing food globally is set to top $1 trillion in 2008. This is an increase of 25 percent on the 2007 food import bill, and the FAO fears that rising food prices will hit hardest the most economically vulnerable countries of the world. Food shortages can trigger social and political instability with startling swiftness. It does not take long to starve to death. While there has been a sharp downward adjustment in wheat prices over the past few months, the world’s headlines have been dominated by sharp price rises in rice, dairy products, soybeans and sugar. The fall in wheat prices was due to a huge increase in planting of this basic commodity, as individual growers were tempted by high returns. The time has come for the Kingdom to seriously consider strategic food relations with countries around the world.

Given all this food supply uncertainty, some commodity producers have begun to talk about establishing their own “food cartels,” the latest idea being floated by Thailand which wants to form an OPEC-style rice cartel, to give rice producers more control over international rice prices.

Fellow rice producers such as Laos, Burma, Cambodia and Vietnam have been approached to establish this new producer cartel, but reaction has been muted from some potential members. Thailand and Cambodia - which is the second most hawkish on the idea - argue that by forming this association, they will prevent a price war and “exchange information” about food security. Not surprisingly there has been some strong reaction from some key rice importing nations. The Philippines - the world’s largest rice importer - has raised objections, arguing that the creation of such a powerful oligopoly will harm both producers and consumers. There is a fundamental difference however, between government oil companies and thousands of individual rice farmers, as one cannot control farmers growing or not growing rice, unless national governments force farmers to sell to government purchasing bodies.

Even rice producer associations in Thailand itself, with many years of private sector merchant relationships around the world, are not keen on the rice cartel idea.

This brings us then to the Middle East, and specifically, to Gulf food security. The recent sharp rise in domestic food prices in the Gulf has made the GCC governments look at food security with greater urgency. Egypt has announced a long-term wheat import agreement with France. Others are doing the same on a bilateral basis, causing even sharper short-term commodity price speculation. The key lies in longer term thinking on the matter. The Kingdom has announced plans for the creation of a strategic food reserve investment vehicle, and the Saudi private sector has been encouraged to seek food-growing partners in the Arab and wider world. Sudan is being looked at, given its proximity to the Gulf and its abundant land and water resources. However, ongoing domestic Sudanese political strife and uncertainty over investment regulatory regimes and guarantees are making some private sector investors hesitant. Over time, Sudan will overcome these investment hurdles in a more transparent manner, but until then other regions of the world beckon. Latin America and Brazil in particular offer a solution matching Latin American commodity production capacity with Arab petrodollars.

Thanks to the global boom in commodities, several Latin American countries such as Argentina and Brazil have seen a sharp reversal in their economic fortunes. In Brazil, several previously economically depressed federal states such as Mato Grasso are becoming the powerhouse of a resurgent Brazil. The country’s currency has hit a nine-year high against the dollar; inflation is under control, reducing from 2,490 percent in 1993 to around 4.7 percent now. Brazil has indeed arrived, and in May 2008, the “investment grade” status awarded to the country by Standard and Poor Rating Agency, propelled the local stock market to all time highs. Brazil now has more international reserves than foreign doubt, and the country’s commodity led boom seems to know no bounds, as the country is the biggest exporter of meat, sugar, fruit juices and the second biggest in grains. According to a study by the Boston Consulting Group, Brazil’s millionaire club grew from 130,000 in 2006 to 190,000 in 2007 - one of the fastest growth rates in the world. The above boom does not even take into account oil, as a series of huge offshore discoveries by the state-owned energy company Petrobas has propelled Brazil into a potential major oil producer.

To date, Gulf investors have tended to deal with countries and companies that are nearer to home, or with whom they have educational ties, language familiarity or personal investment connections. Brazil and other Latin American countries seem distant and unknown. The legal and economic systems are not tested by the GCC’s leading family companies and transactions are often on a government-to-government basis, such as the successful export of Brazil’s medium-sized civilian aircraft, the Embraer, so beloved by Saudi Arabian Airlines and others. The time has come to take a fresh look at establishing long term, sound economic relations with Latin America’s commodity-based economies so that strategic food supplies are assured for future generations. If the GCC does not move now, at both the governmental and private sector levels, others will surely do so to our regret.

(Dr. Mohamed A. Ramady is visiting associate professor, finance and economics at King Fahd University of Petroleum and Minerals)

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