Riyadh outsources wheat industry

Middle East Business Intelligence | 03 October 2008

Adal Rafiq Mirza

Saudi Arabia is phasing out its domestic wheat growers and seeking to shift production overseas.

Saudi Arabia has been self-sufficient in wheat production since 1985 when, flush with petrodollars, it embarked on an ambi-tious plan to expand its agricultural sector. Its bid to boost agricultural output has reaped rewards, producing enough wheat to meet its domestic needs and turn the kingdom into an exporter of grain, rather than an importer.

But the cost and environmental reality of producing wheat in Saudi finally came to bear in January 2007, when Riyadh announced that wheat imports would resume from spring 2009. This February, it said wheat production would be phased out completely by 2016.

The United Nation's Food & Agriculture Organisation (FAO) estimates that imports in 2009 will amount to 325,000 tonnes, and this is set to increase to more than 3 million tonnes a year by 2016.

The Agriculture Ministry says from 2009, it will reduce the price it pays for home-grown wheat by 12.5 per cent each year as it seeks to wind up the sector.

Riyadh is also considering outsourcing wheat production through agreements with several countries to farm their land in a bid to secure long-term grain supplies.

At the heart of the policy shift is the high cost, in environmental as well as economic terms, of sourcing water in the kingdom. Water supplies are being prioritised for sectors that offer the greatest returns. In short, by winding up wheat production, Riyadh relieves itself of the financial burden of subsidising it.
Irrigation costs

It takes more than 1,000 cubic metres of water to produce a single tonne of wheat. The kingdom currently produces about 2 million tonnes of wheat a year. The water needed to sustain current levels of wheat production is a colossal 2 billion cubic metres a year.

Without significant annual rainfall, the government has, since the 1970s, relied on drawing water supplies from ancient aquifers to feed its agricultural industries. But these underground reservoirs are being drained too quickly to naturally replenish or support commercial grain production.

Wheat production places heavy demands on underground non-renewable aquifer water, resulting in an imbalance between the volume of water going into the aquifer from rainfall and the volume of water being taken out. As a result, the water level in the aquifers has fallen sharply in grain and forage-producing regions.

Large-scale wheat production in the kingdom has always depended on subsidies from the government, largely because of the cost of irrigating the crop. "The Agriculture Ministry is involved in everything," says Shukri Ahmed, a senior economist at the FAO. "It set the farmers production levels, and the price at which the government will buy from them, and finally the retail price."

"[Riyadh will] pave the way for Saudi investors to go abroad to use their experience"
Abdullah al-Obaid, deputy agriculture minister

Cash crops

At the height of subsidies in the mid-1980s, the government was easing farmers' costs of production by almost $1,000 a tonne, but the subsidy has since been in steady decline.

In 2005, a moratorium was placed on the granting of new agricultural lands, the same year that Saudi Arabia's membership of the World Trade Organisation (WTO) was approved. Some analysts attribute this decision to WTO pressure to phase out subsidies.

Today, Ahmed says, it costs Riyadh $267-267 a tonne to produce wheat domestically, depending on the type, compared with global market prices of $148-207 a tonne.

"The government subsidises both sides, the farmers and the consumers," he adds.

In 1975, agricultural water consumption in Saudi Arabia was estimated by the Economics & Planning Ministry at a little below 2 billion cubic metres. This jumped to almost 19 billion cubic metres in 1995 and has remained relatively steady since, with the last estimate, in 2004, at 17.5 billion cubic metres.

The Agriculture Ministry estimates that the return on the use of water for wheat is much lower than for municipal or industrial purposes, or even other crops.

"They need to move to less water-intensive crops, such as fruit or vegetables, which can be grown in greenhouses," says Eckart Woertz, economics programme manager at the Gulf Research Centre in Dubai.

The Gulf countries are now more able to secure food supplies than at any time in the past, because of the huge sums of cash generated from oil.

"Their capacity to access what they need, especially wheat, has increased," says Ahmed. "Accessing it could be through production or importing it. It does not matter. It does not even matter whether it makes economic sense as they can keep pouring money into it."

How Saudi Arabia plans to make up for the shortfall in its own production is the key question to which market watchers have been waiting for an answer.

The government's objectives have certainly not been transparent in this regard. The most significant feature in Saudi Arabia's agricultural strategy is the plan to outsource the production of wheat.

Deputy agriculture minister Abdullah al-Obaid said in June that his government was in talks with Egypt, Pakistan, Sudan, Turkey and Ukraine to allow Saudi companies to farm their land. "[Riyadh will] pave the way for Saudi investors to go abroad to use their experience, know-how and money to invest in such countries to bring produce here," said Al-Obaid.

"We have to be sure we have enough food coming to the country later on."

But how the kingdom will combine traditional imports with outsourced production is unclear. There is enough capacity in the world's wheat markets to provide for Saudi Arabia's needs, says Amy Reynolds, an analyst at the UK-based International Grain Council.

Meeting demand

But after world wheat prices hit $1,257 a tonne in March, the kingdom will not be alone in seeking ways of exercising control over where is buys from, and at what price.

"The point for me as a grain analyst is how many of these announcements have come as a reaction to the record high wheat prices we saw earlier in the year?" says Abdolreza Abbassian, analyst at the FAO.

The timing of Riyadh's announcement to wind down domestic wheat production lends further weight to this belief. "This time last year, there were no announcements from any countries in the GCC [over] lowering wheat production]," says Abbassian. "

If prices continue to fall, we will see whether they [the announcements] are just sound bites or something they have thought seriously about

With global wheat prices down 40 per cent in early September from their highs in mid-March, and analysts forecasting further falls, the momentum for outsourcing could be lost.

The absence of clear policy statements from Riyadh throws up further questions.

"There are more political issues involved that we do not know anything about," says one analyst.

For Saudi Arabia and other GCC members, this means they will "need to deal with their dependence on food imports and geo-economic vulnerability more proactively", says Woertz.

The increasing dependence on imported foods comes at a time when agricultural surpluses across the world are in decline.

"[The GCC must] carefully assess how large the food export potential in African and Central Asian countries can really be," says Woertz.

Most of the potential outsourcing countries are currently net food importers and face similar problems in feeding their own rapidly growing populations.

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