Pressure of Commodity Prices and Future Perspectives.

Pressure of Commodity Prices and Future Perspectives

According to the United Nations (2008), global food prices have risen by forty percent in the past nine months and food reserves are at the lowest for thirty years. Poor harvests coupled with high population growth, rising energy and grain prices, the effects of climate change and a shift toward bio fuel crops are all cited as contributing to this trend.

The impact has been felt globally with food riots breaking out in Morocco, Yemen, Mexico, Guinea, Mauritania, Senegal and Uzbekistan. For the first time in two decades Pakistan has reintroduced rationing. Russia has frozen the price of milk, bread, eggs and cooking oil for six months. Indonesia has increased public food subsidies and India has banned the export of rice except the high-quality basmati variety.

Commodities are known for their volatile, boom-bust nature and according to the IMF's World Economic Outlook most food commodities have been experiencing a boom since 2004/2005. Table 1 shows a summary of price forecasts for a range of different commodity indexes compiled by the Economist Intelligence Unit in August 2007. It is evident from the table that the price of food and beverages (FFB) internationally is expected to continue to rise in the short-term future, although at a diminishing rate. Food prices are expected to continue to increase until 2015.

The UAE's semi-arid climatic conditions, poor soil quality and diminishing water supplies make growing food domestically expensive. As a result, the UAE is a net importer of foods; importing the majority of its food. In 2006, agriculture constituted of only two percent of GDP. Between 2002 and 2006 the US Dollar has depreciated by an average of 1.5% per annum with the Japanese Yen, 6.4% with the Euro, 4.8% with the British Pound, 1.7% with the Indian Rupee, 1.2% with the Chinese Yuan and 7.7% with the Australian Dollar (UAE Central Bank).

The sharp increase in food prices coupled with the weakening of the UAE Dirham against the currencies of major sources of food imports has put additional pressure on domestic inflation.

According to the Ministry of Economy, in 2006 the national headline inflation rate was 9.3%, with inflation for food being lower at 5.1%.

Graph 1: Percentage Change in Price of Basic Foodstuffs between Q1 2007- Q1 2008 in Dubai Source: Dubai Chamber database

However, the price of staple food products such as bread, flour, milk and rice, have increased considerably more than this. Over the past year (Q1 2007 - Q1 2008) the Dubai Chamber has been monitoring the price of food in Dubai.

Graph 1 compares the average increase in the price of ten different product groups considered staple for the diet. For each product group between 29 and 68 different products have been analysed on a quarterly basis. It is immediately evident from the graph that all ten major food groups have experienced a considerable increase in price.

Table 1: Price Forecast Summary of Major World Commodity Indexes, 2005-2009

Sugar has experienced the smallest at only 9.73 percent, only marginally above the UAE's headline inflation, whilst flour has experienced the highest with an average increase of 57.72% over the past year. Some brands of wheat flour have risen by as much as 145%, corn flour by 162% and wholemeal by 164% between 2007 and 2008.

Similarly, the price of rice, bread, eggs and powered milk have also increased over the examined period by 44%, 36%, 49%, 35% respectively. These are significantly more than headline inflation and are thus adding to the overall cost of living in the UAE. According to the weights in the Ministry of Economies Consumer Price Index food comprises 14.4% of the total basket.

The rise in prices in Dubai can therefore be attributed in part to the global trend in rising food prices which is then exacerbated by the depreciation of the UAE Dirham. In an attempt to alleviate some of the pressures, the UAE's Ministry of Economy has formed alliance with the Union Cooperative Society to freeze the prices of 16 food items at their 2007 levels. Following this, other large supermarket chains have also announced the implementation of similar programmes.

[c] 2008 Al Bawaba (www.albawaba.com)