Oil money stocks up the OPEC food larder
A scramble by oil-rich nations to spend their mounting petrodollars on food stocks and fend off price rises, which have triggered riots and revolution, could stoke wider inflation.
February 03, 2011 / 20:07 IST
A scramble by oil-rich nations to spend their mounting petrodollars on food stocks and fend off price rises, which have triggered riots and revolution, could stoke wider inflation.
As concern about contagion from Tunisian and Egyptian protests persists, Gulf Arab countries are moving fast to boost food imports via international markets and seeking more farmland investments abroad.Top oil exporter Saudi Arabia, which has a high unemployment rate among its native population of almost 19 million, said last week it was worried about global food inflation.Faced with a rising population as the biggest Arab economy attracts more foreign labour the kingdom already said it hoped to double its wheat reserves within three years.Saudi Arabia's wheat imports will rise beyond the two million tonnes in 2010, said Khalid al-Rwis, a professor at the College of Food and Agricultural Sciences at King Saud University in Riyadh."This year it could be 2.6 million tonnes," he said, adding that the kingdom would have to import three million tonnes of wheat by 2015The Saudi government has also said the kingdom will also need 3.8 million tonnes of barley, 1.25 million tonnes of rice and 0.78 million tonnes of sugar by 2015. Other members of the Organization of the Petroleum Exporting Countries have also focused on food.Algeria confirmed in January it had bought almost a million tonnes of wheat and had ordered an urgent speeding up of grain imports. Libya's most senior energy official Shokri Ghanem has repeatedly cited a broader rise in commodity prices as justification for expensive oil."It should be around USD 100 to compensate for the big increase in the food price," Ghanem told Reuters. "Prices of food have risen and it is tantamount to having a big cut in your income."The latest wave of food inflation has revived memories of the riots of 2007 and 2008 when commodity prices surged and oil hit a record of USD 147.27 in July 2008.Arid Gulf nations reacted by beginning a strategy of buying farmland in developing nations to improve security of supplies. "Social instability generated by food inflation was at a head in 2007. We're seeing inklings of that again," said Jan Randolph, head of sovereign risk analysis at IHS Global Insight."It's a very important, live wire issue that affects the Gulf countries."This is especially true for Saudi Arabia where social pressures are rising with the population and its growing economy is attracting more expatriates, while Saudis struggle to find work -- unemployment was 10% last year.Annual inflation eased to 5.4% in December but shoppers in Saudi Arabia complain about rising food prices, prompting the chamber of commerce in Riyadh to call on the government to build up reserves for nine basic commodities."Its very important to start with the strategic reserves and build up storages," said Rwis, the food researcher."Owing to their dependence on imports and the large weighting of food prices in the consumer price indexes, higher global food prices will definitely impact on inflation in the Gulf," said Paul Gamble, head of research at Jadwa Investment.Protecting incomeUS oil prices have risen by more than 40% from a low hit in May last to above USD 90 a barrel.US wheat rose to a peak of USD 8.63-1/2 a bushel last week, the highest for the front month in nearly 2-1/2 years, with prices more than doubling after since June 2010.For OPEC members, higher oil markets earned them net oil export revenues of an estimated USD 750 billion in 2010, which could rise to USD 847 billion this year, according to projections from the US government's Energy Information Administration.The rally across raw materials has also been driven in part by US policies that weakened the dollar, the main currency of commodity trade. In turn that can encourage the producer nations to seek higher oil prices to protect the value of their dollar income.Richard Batty of Standard Life cited as a rule of thumb that each USD 10 per barrel oil price rise potentially adds 1% to inflation and knocks 0.5% off gross domestic product. Oil prices also feed into agricultural costs as they drive up the cost of oil-based fertiliser, while the Gulf states tactic of investing in farmland abroad can also push up prices."If Saudi Arabia or Qatar takes farmland in Madagascar that can have a devastating impact on local prices," said Randolph of IHS.In 2009, Saudi Arabia set up a USD 800 million firm to help firms with farmland investments in more than 20 countries.Central Bank Governor Muhammad al-Jasser said last week Saudi investments abroad would help global food supplies as more land will be cultivated, but political analyst Ghanem Nuseibeh had doubts."The scale at which the GCC (Gulf Cooperation Council) and Saudi plan to buy land could potentially lead to food price inflation, especially in countries where they are buying land," added Nuseibeh, partner at risk consultants Cornerstone Global Associates and Head of GCC at Political Capital."The indications so far are that the GCC states' main aim is to secure food supplies for themselves, and sell any excess produce at profit on the global market. In this situation, I do not expect that the developing states will benefit," he added.(USD1 =3.750 Saudi Arabian Riyal) Discover the latest Business News, Sensex, and Nifty updates. Obtain Personal Finance insights, tax queries, and expert opinions on Moneycontrol or download the Moneycontrol App to stay updated!
