Saudi Arabia remains vulnerable to increases in food prices due to its high dependence on imports, according to a report.

In its new report analysing the impact of higher global food prices on Saudi’s food sector, NCB Capital, the kingdom’s leading wealth manager, believes that the inability to fully pass on higher costs to consumers will exert pressure on the margins of food companies.

Global food prices increased sharply in 2007/08 as well as over the past 12 months due to various structural reasons including growing demand, increased use of crops for bio-fuels and falling efficiency gains in terms of land use. 

“Although we expect food prices to fall in 2012, we believe over the longer term, inflation will be the norm,” said Farouk Miah, acting head of equity research. “The Food and Agriculture Organisation (FAO) believes that the prices of soft commodities over the coming decade will on average be 15 to 30 percent higher than over the past decade.”

The report highlights that Saudi Arabia depends significantly on imports to meet its food requirements with food imports set to more than double to SR132 billion ($35.2 billion) by 2020 from SR63 billion ($16.8 billion) in 2010.

The reliance on imports is set to remain given that domestic production is restricted due to the scarcity of water and unfavorable weather conditions. Between the 1970s and 1990s, the Saudi government policy was for self-sufficiency in key crops. However, this has been abandoned with the current aim to work alongside countries which have fertile land but lack the financial investment required to benefit from this.

“Any rise in global food prices remain a key concern for Saudi Arabian food companies due to their exposure and reliance on this as a key raw material,” said Miah. “The recent rise in global food prices has seen the profitability of Almarai and Savola, the two largest listed players in the Saudi food sector, severely impacted.”

Margins of both companies declined in 2008 and 2011 by an average of 200bps year-on-year due to higher raw material costs. Costs account for a major share of revenues for Almarai (61 percent) and Savola (84 percent).

On the whole, Saudi food players have historically been able to pass on cost inflation to end consumers. However, with overall Saudi inflation remaining relatively high, this has become increasingly difficult.

The report said that the Saudi government faces the challenge of limiting inflation amid a spike in global food prices. “Food prices account for a 26 percent weight in the consumer price index used to measure inflation in the kingdom, thus any increase in food prices substantially impacts overall inflation in Saudi Arabia. To counter this challenge, the government has undertaken different measures,” said Miah.

The government has been actively tracking retail prices of key food products such as barley, milk, wheat, sugar and flour. This is done by continuous inspections and imposition of penalties on retailers that increase prices without a valid reason, the statement said.

“Some of the mentioned measures prevent companies from fully passing on increased raw material costs to consumers. The Saudi government restricted food inflation to 5.4 percent in August 2011 despite a 26 percent rise (according to the FAO food price index) in global food prices,” concluded Miah. – TradeArabia News Service