How Do We Face Rising Food Prices

March 2, 2011 How Do We Face Rising Food Prices Studies Directorate

بسم اهلل الرحمن الرحيم " صدق اهلل العظيم )األعراف 31 ( 2

This presentation addresses the following questions: What is the situation of the global food prices? What is the situation of local food prices? Why did food prices rise? What are the groups most affected by high food prices? How do we face rising food prices? (the government's role - the consumer s role) 3

The Global Status of Prices (2008-2011) 250.0 200.0 224.1 Food Price Index (2002-2004=100) 230.7 The rate of change in the General Standard for Food between June 2008 and January 2011 amounted to 3% 150.0 100.0 50.0 Strategic stock shock absorber 0.0 Source: FAO 4

General Food Prices Index (Jan 2010 -Jan 2011 28.3% 250.0 Food Price Index 200.0 230.7 150.0 179.8 100.0 50.0 0.0 1/2010 2/2010 3/2010 4/2010 5/2010 6/2010 7/2010 8/2010 9/2010 10/2010 11/2010 12/2010 1/2011 5

Grains Price Index (January 2010 - January 2011) 43.7% 300.0 250.0 200.0 150.0 100.0 50.0 0.0 يناير 2011 ديسمبر نوفمبر اكتوبر سبتمبر اغسطس يوليو يونيو مايو ابريل مارس فبراير يناير 2010 Source: FAO 6

Meat Price Index (January 2010 - January 2011) 170.0 165.0 160.0 155.0 150.0 145.0 140.0 135.0 130.0 125.0 يناير 2011 ديسمبر نوفمبر اكتوبر سبتمبر اغسطس يوليو يونيو مايو ابريل مارس فبراير يناير 2010 Source: FAO 18.1% 7

Dairy Price Index (January 2010 - January 2011) 230.0 9.5% 220.0 210.0 200.0 190.0 180.0 170.0 يناير 2011 ديسمبر نوفمبر اكتوبر سبتمبر اغسطس يوليو يونيو مايو ابريل مارس فبراير يناير 2010 Source: FAO 8

Oil Price Index (January 2010 - January 2011) 300.0 64.5% 250.0 200.0 150.0 100.0 50.0 0.0 يناير 2011 ديسمبر نوفمبر اكتوبر سبتمبر اغسطس يوليو يونيو مايو ابريل مارس فبراير يناير 2010 المصدر: FAO 9

Sugar Price Index (January 2010 - January 2011) 11.9% 450.0 400.0 350.0 300.0 250.0 200.0 150.0 100.0 50.0 0.0 يناير 2011 ديسمبر نوفمبر اكتوبر سبتمبر اغسطس يوليو يونيو مايو ابريل مارس فبراير يناير 2010 Source: FAO 10

Why did World Food Prices Rise? -Increase in demand for food commodities and -non-elasticity of demand. - Climatic conditions that affected many crops. - Lack of global food stocks. - Increase in the demand for bio-fuels. -Export ban in some countries. The Russian wheat export ban led to the rise in price of wheat in global markets by 50% during the period of two months, June - August, 2010) Source: International Grains Council -Change in policies, in agricultural countries, and reduce the levels of agricultural support. - Interdependence with the non-agricultural market, such as energy markets. -All these factors have contributed to increasing food prices to a recordhigh, which surpassed the food price rise during the 2008 crisis. 11

World Prices of Agricultural Commodities Where to? - The Food and Agriculture Organization (FAO) believes that current market conditions is a cause for concern because the world's food supply is very low, and because global food balance is critical. - The Food and Agriculture Organization (FAO) and the Organization for Economic Cooperation and Development (OECD), issued a medium-term forecast for major agricultural commodities, published in July 2007, which indicated that prices would increase during the period 2007-2016, compared to the nineties of last century. Source: FAO 12

The Status of Local Prices Rate of Inflation in the Emirate of Abu Dhabi during the period 2005-2010 (%) 2007=(100) 20 15 10 5 0 14.9 10.7 8.3 6.2 3.1 0.8 2005 2006 2007 2008 2009 2010 Source: Statistics Centre - Abu Dhabi, Consumer Price Indices and Inflation Rates 13

What is Inflation? Inflation is defined as the continuous rise in the general level of prices, measured by the change in consumer price index. What is the Importance of Measuring Inflation? The measurement of inflation is necessary, as it helps in the formulation of policies and economic plans. The rate of inflation is one of the criteria for evaluating the investment climate in any country. Used by some governments and organizations to modify the pay scale, Used as a stabilizer in the preparation of national accounts at constant prices, for the accuracy of comparison between different years. 14

The Contribution of the "Food and non-alcoholic beverages" to the Rate of Inflation in 2010 "Food and non-alcoholic beverages," contributed about 36.8% to the rate of inflation which marked 3.1% in 2010, due to the rise in prices of food and non-alcoholic beverages by 6.9%; and due to the weight of this item, which constitutes 16.1% of the structure of consumption expenditure. 15

How much did food prices increase locally? The computation of the change in prices is influenced by two main factors: The relative weight of the commodity in the structure of expenditure (Income and Household Expenditure Survey, which is every 10 years). The change in the price of the commodity. Food and Non-alcoholic Beverages Group Relative Weight in expenditure structure % Relative change% Contribute to the inflation rate% 2009 16.1-3.2-69.1 2010 16.1 6.9 36.8 16

Items Groups prices of which increased Groups prices of which decreased Number of food groups The relative importance% Relative Weight in expenditure structure % Rate of price change% 94 65.7 67 148.8-0.2 44 30.8 29 70.9-0.1 Rate of prices of selected food commodity Groups with stable prices 5 3.5 0.04 Included bread, different kinds of milk and Nescafe 7.4% The number of subgroups of food commodities considered 143 100 96 Based on the commodity price data published by the Statistics Center- Abu Dhabi 17

What are the reasons for the high domestic prices? High prices are due in general to several reasons, the most important are: Increased domestic demand Modest local production High cost of production Heavy reliance on imports )Demand inflation( (Cost inflation) 18

The Value of Food Commodities Imports and Domestic Consumption of in the Emirate of Abu Dhabi (2008 2009) AED (Thousands) Items 2008 2009 Rate of change % Imports 5,597,785 6,330,408 13.1 Total exports and re-exports 665,816 486,938-26.9 Exports 536,540 396,460-26.1 Re-exports 129,276 90,478-30 Imports intended for domestic consumption 4,931,969 5,843,470 18.5 Estimated domestic consumption 7,332,576 7,722,189 5.3 Proportion of imports to estimated domestic consumption (%) 0.67 0.76 Source: calculated by the researcher depending on the Statistical Year Book 2010, and household Income & Expenditure Survey 2008/2007 19

Effect of Change in Supply and Demand on Prices d 1 Price d d d 1 p¹ p¹ p¹ 1q q 1q Quantity 20

What are the Effects of Rising Food Prices on Standards of Living The increase in prices adversely affects the level of real incomes of consumers, especially the low income group, reducing the purchasing power of consumers, and adversely affecting their standard of living. 21

What are the groups most affected by rising food prices? In terms of income: Items Proportion of salaries and wages to average income% Less than AED 36 thousand a year (Lower Category) The income accruing from wages and salaries is characterized by relative stability, which makes people with salaries and wages most vulnerable to price increases, particularly that the salaries and wages represent 95.6% of the sources of income of the low-income group. Source: Household Income & Expenditure Survey 2007 / 2008 AED 36 thousand and more per year )Upper Category( 95.6% 61.5% 22

What are the groups most affected by rising food prices? In terms of spending: Items Less than AED 36 thousand a year (Lower Category) AED 36 thousand and more per year )Upper Category( Percentage spent on food, drink and smoke relative to the average consumption expenditure of households 26.6 % 14.4% The table above shows that low-income groups, are most affected by fluctuations in global prices of food commodities, due to the high proportion of their spending on food. Source: Household Income & Expenditure Survey 2007 / 2008 23

The most important government policies to curb global rise in food prices: Reduction of customs duties on imports. Reduction or banning of exports. Releasing quantities of commodity stocks to stabilize prices. Raising the prices crops bought from farmers to encourage them grow crops. Adoption of policies to encourage agricultural investment locally and abroad. Using and encouraging modern technologies to increase. productivity (increasing quantity reducing cost or both) Subsidizing primary commodity in cash or in kind. 24

Contd. The most important government policies to curb global rise in food prices: Stabilization of commodity prices (forced pricing) Determine profit margins as a percentage of the cost of the commodity. Activating the role of cooperative societies and agricultural marketing centers to sell at low profit margins. Reducing goods circulation chain to allow selling products from producer to consumer directly. Encouraging agricultural manufacturing, to reduce waste and ensure availability of goods throughout the year. Raising awareness of consumers to rationalize consumption 25

How do we face rising food prices? Can be handled locally Mechanism Increased demand (inelastic demand). Rationalization of consumption. Instability and rise in world prices. Creating strategic stock. Low agricultural support. Encouraging & subsidizing agriculture. Unjustified increase in prices Rise in prices of imports subject to customs fees. tightening control over markets and activating role of cooperative societies Reduction or elimination of customs duties. Reasons difficult to deal with locally: Climatic conditions that affected many crops. Increasing demand for bio-fuels. Banning export by some countries. Interdependence with non-agricultural markets, such as energy markets. 26

Mechanisms to cope with rising prices.. The role of government. The role of the consumer. 27

Government's role in maintaining the stability of domestic prices Article No. (4) of the Federal Law No. (24) for the year 2006 stipulates that the Consumer Protection Department shall exercise several functions including: Coordination and cooperation with stakeholders for raising consumers awareness. Monitoring, controlling and curbing price hikes. Exemption of most imports of food commodities from customs duties, as some commodities are subject to customs duties such as frozen chopped beef, meat of sheep and goats, some types of fish, natural honey, temporarily stored and uncooked frozen vegetable, some grease and fats and oils, lentils, beans, spices and tomato sauce. There is no doubt that customs duties increase prices of imported goods, where customs duties are calculated based on the new high price of the commodity, thereby increasing burden on consumers. Complaints submitted to the Consumer Protection Department in 2009 on high prices, accounted for about 60% of the total number of complaints, which included food commodities, medicines, mobile phones, cosmetics clothes, cars etc 28

Cont. Government's role in maintaining the stability of domestic prices Developing a strategy for food security Distribution of food commodities to citizens at subsidized prices (such as rice, flour, water) that quotas are currently being disbursed according to family size, so that the per capita share of rice, for example, ranged from 6.5 kg per month (family of 6 persons) to 20 km (per person). 29

Cont. Government's role in maintaining the stability of domestic prices Abu Dhabi is currently working on promoting agriculture activity to increase its contribution to GDP, and support its role in achieving food security by increasing domestic production, and stabilizing price level, through the following: The integration of agriculture activity into the Abu Dhabi Food Control Authority. Development of new agricultural policy. The opening of the Farmers' Services Centre (FSC). Increasing foreign investments in agriculture activity. Increasing farmers 'income (Reg. 7/2010 on UAE Farmers' Income Improving Program). 30

Cont. Government's role in maintaining the stability of domestic prices The Environment Agency EAD The Comprehensive Soil Survey in the emirate, which was conducted, showed the availability of large areas suitable for agricultural expansion. has conducted The Comprehensive Soil Survey- Abu Dhabi" and concluded that there are approximately 400,000 hectares suitable for agricultural expansion; while the cultivated area in the Emirate in 2008/2009 did not exceed 738 thousand hectares - representing about 18.4% of the total area suitable for agricultural expansion in the Emirate. 31

Cont. Government's role in maintaining the stability of domestic prices The need to have strategic stocks of essential commodities, in order to achieve the following: Mitigate the increase in local prices of goods. Secure a strategic stock to be used in the case of shortage in imports. 32

Cont. Government's role in maintaining the stability of domestic prices The responsibility for the Centre services farmers to develop agricultural marketing centers will help achieve the following objectives: The provision of locally grown products Supporting farmers through creation of centers for marketing their products at fair prices. Raising the percentage of self-sufficiency in vegetables and fruits Linking local agriculture, with consumers needs of vegetables and fruits Reducing the marketing chain of vegetables to direct contacts between farmers and consumers. Developing a mechanism for collecting milk from small farms, to raise the level of self-sufficiency and raise the incomes of the owners of these farms. 33

The role of consumers in achieving price stability: Rationalization of consumption (purchasing as needed - reducing waste). Informing authorities of any unjustified increases in prices. 34

Needs Dietary Energy Supply per person per day Needs of Dietary Energy The amount of food energy for an individual to maintain body functions and normal health activities. Dietary Energy Supply DES Food available for human consumption, measured in kilograms per person per day (calories per capita per day), calculated at the country level on the basis of the food remaining for human use after deduction of all types of non-food consumption (exports, feed and industrial use, seeds and wastage). 35

Calorie: A calorie is a unit for measuring the quantity of an individual s demand for energy. The body will benefit from produced energy to involuntarily perform activities such as the dynamic movements of the heart and lungs; and voluntarily for the performance of other different activities. A woman needs an amount of energy between (1800-2400 calories); and a man needs more energy than women, amounting to (200-300 calories), due to his physical conditions. http://www.alphastat.org/ar/calories-need.htm # 36

Average per capita calorie (global and regional (Calories per person per day) Husnu 2500 food 2500 calories Region Year 1999-1997 2015 World 2803 2940 Maximum average standard Difference 3.8 Source: FAO, Mobilization of Resources for the Agricultural sector to support food security Developing Countries 2681 2850-0.7 Near East and North Africa (UAE) 3006 3090 11.3 2700 Sub-Saharan Africa 2195 2360-18.7 Industrialized countries 3380 3440 25.2 Source: Arab Organization for Agricultural Development, Report on Arab Food Security 2009 37

Reasons for increase in per capita calorie intake, above the maximum recommended per capita intake Per capita quantities of food for direct human consumption, (Average per capita dietary energy supply) Increased waste Overconsumption 38

Food waste constitutes 34% of the total waste in the United Arab Emirates. The direct losses due to waste food (example) The cultivation of one kilogram of rice consumes, on average, 1325 liters of water, Equivalent to 883 bottles of water (1.5 liters capacity). ¹ In addition to other costs most importantly: Costs of planting and harvesting. Opportunity cost of production of other crops. Transport and marketing costs. Import costs. Costs for cooking (ghee, water, fuel, etc....).. (1) UNESCO-IHE Institute for Water Education, Delft, the Netherlands in collaboration with University of Twente, Enschede, the Netherlands, and Delft University of Technology, Delft, the Netherlands 39

Some of the effects of excessive consumption on society: -Increases demand for commodities leading to higher prices which will burden low-income groups and reduces their purchasing power. - Reduces savings which in turn reduce financing of investment and increases supply of goods. - Reduced savings reduces the amount of Zakat, which helps the poor in securing basic needs. 40

Thank you for your attention 41