Feeding the Middle East

For decades, the agricultural policy of the Middle East and North Africa region has been extremely simple: hydrocarbon exports pay for carbohydrate imports.

As social and political unrest sweeps the region, the policy has two implications for commodities markets: countries will try everything to maintain high oil prices and will hoard food supplies, which will push agricultural costs higher.

This bargain – providing the world with oil and gas, in return for cereals – is clear in a country such as Libya, which is one of the world’s largest wheat importers per capita, as it is in Algeria and Saudi Arabia. It was no surprise that when the UN named its relief programme for Iraq, partially lifting an embargo after the 1990-91 Gulf war, it went for “Oil for Food”.

The Middle East and North Africa has little farmland and even less water, so over the past 40 years it became the world’s largest importer of food commodities, notably of cereals. Egypt is the world’s biggest buyer of wheat while Saudi Arabia is the top importer of barley. The region is also a leading importer of sugar.

This dependence on food imports is unlikely to change anytime soon.
The region’s hydrocarbon wealth, generated after the first oil crisis in 1973-74 – and its lack of political accountability – led the region to unsustainable solutions to resolve its food problem.

Saudi Arabia launched a programme to grow wheat in the desert, tapping fossil water aquifers. With plenty of money at hand and no questions about depleting water resources, Riyadh had an early victory. The kingdom was not only growing enough wheat to feed itself, but also harvesting a surplus for exports across the region. But the success came with a heavy price: Riyadh paid prices five times above international levels. And, in the end, it ran out of water. Two years ago, during the 2007-08 food crisis, Riyadh announced the phasing out of its wheat programme. Since then, the kingdom has become one of the world’s top wheat importers.

With a young and growing population, the need for food imports will only increase over the next decade in Saudi Arabia and the rest of the region.

Governments appear to agree: countries are building strategic stocks or even launching their own agricultural commodities trading houses. The slightest sign of any social trouble – particularly if accompanied by rising food inflation – is met with panic buying in the international food market, in an effort to flood local markets with supplies and push domestic prices down. All these factors help to keep global agricultural commodities prices higher.

With the region facing dearer food – and a higher bill for subsidies – they will have every incentive to keep oil prices high too. The Middle East and North Africa is facing a political crisis that for the rest of the world constitutes an inflationary threat.