What factors have led to surge in food prices?

The beginning of 2022 kicked off with an inevitable fact that all nations are experiencing — rising inflation rates. According to the UN Food and Agriculture Organisation (FAO), the Food Price Index for global food commodity prices marked 29.8 per cent higher in April than at the same time last year. Higher cost of living trends is prevalent in both developed and emerging economies, and they are reflected in higher food prices globally. The rise in energy and food prices is to blame for the 9.2 per cent annual inflation rate worldwide.

Factors affecting food and beverage rate hikes

Numerous factors have led to the surge in food prices. Over the past couple of years, the dip in food production could not be matched with the increase in demand. Additionally, the Covid-19 pandemic and geopolitical situations have impacted global food markets.

FAO’s Food Price Index increased by 55.2 per cent between May 2020 and February this year, driven by a 159.4 per cent increase in the cost of cooking oils, which was followed by significant price increases for staples such as sugar, dairy and grains respectively.

Let’s explore some of the factors that contributed to this situation:

Firstly, extreme weather conditions accounted for droughts in countries such as the Western US, South America, Brazil, Europe and Russia. This impacted an influx in cost for commodities such as oats, wheat, sugar, corn, soybeans, coffee and livestock.

Secondly, the pandemic brought about cross-boundary restrictions which impacted freight operations and resulted in higher costs, while an increase in fuel prices has made things even worse. Concerns regarding food availability caused crop-producing countries to impose export restrictions which further affected developing nations that heavily rely on imports for their food commodities.

Lastly, the Russia-Ukraine crisis has undoubtedly brought about shockwaves throughout the globe. Ukraine produces more than 25 per cent of the world’s sunflower seeds and accounts for 10 per cent of global wheat exports. As a result, sunflower oil and its alternatives are witnessing a sharp hike in prices. Although food and transportation costs have risen, the conflict has also contributed to an increase in the cost of food production.

Instability in the food markets has caused many governments to adopt food protectionism, whereby they impose taxes or a ban on exports of several staple commodities such as grains, cooking oil and pulses, thus impacting import-dependent countries.

Impact on UAE food and beverage industry

Data from the UAE’s National Bureau of Statistics show that the annual inflation increased to 2.58 per cent in November 2021, from 1.86 per cent in the previous month.

According to Emirates NBD’s report, consumer inflation rose to 4.6 per cent in April 2022, when compared on a year-on-year basis. While the chief driver of inflation has been transportation costs (28.8 per cent), food prices (8.6 per cent) have been the second largest factor driving inflation in April this year.

Food and beverage (F&B) businesses have been facing major challenges with surging raw material and ingredient costs. Fitch Solutions reports an upward food price inflation in the UAE and the risk team forecasts the consumer price inflation to average 3.5 per cent in 2022 compared to 0.2 per cent in 2021. In addition to that, price increases have extended to other parts of the supply chain.

Components such as packaging with aluminium, plastic wrap and cardboard materials, logistics with increased freight charges and trade restrictions, and ultimately the cost of the finished product itself. This has made it difficult for F&B companies to maintain a competitive edge and gain sustainable margins. As a result, companies that can’t absorb the rising costs have no option other than to raise product prices, further burdening the consumers. 

The rise in cost is causing F&B manufacturers to review various elements of their businesses, including their product mix, supply chain and marketing strategies to cut costs. Several businesses are looking into investing in new product development and product innovation, sourcing sustainable packaging materials and renewable energy solutions.

Many F&B businesses, including brands that fall under the AWJ Investments umbrella, have been sourcing alternatives for raw materials, increasing their carrying levels of stock to maintain cost. They have also looked at re-engineering recipes to use alternative ingredients in place of expensive or hard-to-find products while maintaining quality standards, all in an effort to compensate for the price increase and to avoid passing this on to customers.

Furthermore, the UAE Ministry of Economy has taken tremendous measures to counter the rise in prices by imposing price caps on several thousand food items. Additionally, the UAE is encouraging startups and entrepreneurs to provide suggestions and solutions to food security challenges.

Contrary to certain developed countries, experts believe the UAE’s measures and practices are resilient and can withstand the shock to keep the economy stabilised. While the issue is largely global and not only regional, the solution cannot be attained by a single nation or regulatory body, but in fact, requires the attention and efforts of economists of all nations at a global level.

Manhal Naser is the CEO of AWJ Investments