IMPACT OF RISING FOOD/COMMODITY PRICES - UNITED ARAB

UNCLAS SECTION 01 OF 02 ABU DHABI 000562

SIPDIS

SIPDIS

STATE FOR EEB/TPP/ABT JANET SPECK

E.O. 12958: DECL N/A
TAGS: ECON EAGR EFIN ETRD EAID AE

SUBJECT: IMPACT OF RISING FOOD/COMMODITY PRICES - UNITED ARAB
EMIRATES

REF: State 39410


1. Summary: UAE imports 90 percent of its agricultural and food
product needs. Food prices over the last few years have increased in
a range around 20 percent. Overall inflation in the UAE is around 10
percent annually. The UAE Ministry of Economy (MoE) has taken steps
to curb prices of basic goods, including simplifying imports of 15
food items, coordinating with supermarkets to freeze prices of
specified staple food items, establishing a consumer protection
office, and reportedly developing a national strategy to build
sustained food reserves. However, these measures have not been
effective enough to curb soaring prices of basic staples. End
Summary.

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Main Food Consumption Goods
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2. Except for fish, UAE imports an estimated 90 percent of its food
and agricultural needs, either for further processing or for direct
consumption. Leading imports include meat, chicken, fish,
vegetables, fat, cooking oil, eggs, rice, tea, coffee, sugar, canned
food, milk, flour, bread, yogurts, cheese and beverages.

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Inflationary Pressure
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3. The inflation rate in UAE hit a 19-year high of 9.3 percent in
2006, and reached over 10 percent in 2007; most analysts forecast
2008 inflation in the 8-10 percent range. (Note: Union Bank of
Switzerland is estimating inflation at 11.6pp for 2008, with food
costs representing a full percentage point, and housing contributing
8.1pp of the total. End Note.) The Consumer Price Index (CPI)
relative weight for foodstuffs, beverage and tobacco in UAE is 14.43
percent, in comparison to 36.14 percent for house rent and related
housing costs. Between 2003 and 2006, food inflation increased
nearly 20 percent according to MoE statistics and preliminary
estimates point to a significant increase in 2007. Asian bans on
rice exports have been particularly problematic for the UAE in light
of the high per capita rice consumption. The UAE's peg to the dollar
has also contributed to the cost of importing food, according to
local importers. Despite an increase in food prices there has been
no discernable shift in consumption toward alternative goods as many
residents in the UAE enjoy high per capita income and a majority of
lower income consumers are fed directly as part of their employment
arrangements.

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Impact on the Market and Government Policies
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4. The MoE, in coordination with cooperative societies and UAE-based
cooperative supermarkets, has been taking measures since 2006 to
curb prices of food goods. In August 2006, MoE eliminated exclusive
agency agreements on 15 essential food items, enabling importers to
source directly from suppliers rather than local distributors. The
goods included dry milk, condensed milk, frozen and canned
vegetables, children's food, child milk, chicken, cooking oil, rice,
flour, fish products, meat products, tea and coffee. In March 2008,
the Union Co-Operative Society in UAE moved to prevent small grocery
stores from bulk-buying of certain items. The MoE has signed
agreements with four of the seven emirate cooperative societies to
freeze the prices of certain essential goods. In addition, two
hypermarkets have agreed to hold prices of a handful of basic
foodstuffs at 2007 levels. The MoE has also posted UAE-wide limits
on prices of key food items and is levying fines of USD 2,750 on
retailers who exceed posted prices. It is not clear how widespread
the imposition of fines has been, but many retailers report having
to justify certain price increases to the government.


5. In March 2008, Jamal Al Saeedi, Executive Director of the
Emirates Society for Consumer Protection, told the media that the
UAE Cabinet was studying a proposal to allow UAE nationals to buy
rice, bread, tea, sugar, milk, butter and other basic food items at
cost, and the UAE Ministry of Social Affairs would provide nationals
with cards to use at 16 cooperative supermarkets to be eligible for
the discount. The proposal is reportedly still under review.


6. Food safety and animal health issues have also contributed to the
higher cost of foods as avian flu findings among regional suppliers
have led to import restrictions on eggs and poultry. Nevertheless,
the UAE Higher Consumer Protection Committee, in its meeting on
February 6, 2008, rejected poultry company requests to increase the
price of table eggs by 15 to 20 percent and chicken by 25 to 37
percent. The Committee decided that the increase in prices should

ABU DHABI 00000562 002 OF 002


not exceed 10 percent for table eggs and 12 percent for fresh
slaughtered chicken.


7. Retailers can offset the cost of freezing certain prices through
listing fees, supplier concessions, and higher prices on other food
items. However, local distributors who handle the importation and
storage of a significant percentage of UAE food supplies find
themselves squeezed between rising global prices and the MoE price
mandates. A number have indicated that they may be forced to reduce
stocks rather than absorb losses. The MoE has reportedly stated that
it will penalize distributors who reduce stocks, but it is not clear
how effective this policy will be in the face of rising food prices
in supplying countries. (Comment: In discussions with the Head of
the MoE's Consumer Protection Unit, it appears that the UAEG is
struggling to reconcile the realities of market-driven price
increases with the desire to control prices through punitive
measures. End Comment.) On April 24, 2008, UAE Minister of Economy
Sultan bin Saeed Al Mansouri announced that the UAEG will begin work
on a national strategy to build sustained food reserves to cope with
rising global food prices. In addition, the MoE also chairs a
newly-formed 26 member consumer protection body made up of both
private sector and government representatives who will review
matters related to rising food costs and general inflation, and
other consumer-related issues.

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Public Protest
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8. There have been no public protests or violence related to food
prices except for various labor strikes protesting low salaries in
general.

Quinn