The Saudi Agriculture show on the outskirts of Riyadh in September 2012 was testament to the buzz surrounding one of the most interesting agricultural sectors in the Middle East. Investors from Europe and Asia were out in force, promoting everything from irrigation equipment to new animal feeds and fertilisers. It is not hard to understand the interest of the private sector in Saudi’s changing agricultural landscape. While the amount of cultivable land in the Kingdom may be shrinking and cereal production, which Saudi Arabia gained global recognition for in the 1970s and 1980s, is dwindling, investment in the sector is steadily on the rise. The Saudi government, mindful of the need to conserve water and ensure food security, is pushing for a leaner, more modern and, ultimately, efficient sector.
Best Laid Plans
This is not something that can be achieved overnight. The government strategy, laid out in the ninth development plan (2010-14) of the Ministry of Economy and Planning (MEP), as well as the draft for the tenth development plan, calls for a drastic reduction in water consumption, a ban on land distribution for agricultural use, and a rethink of the subsidy and incentives programme. This will be paralleled by an emphasis on research and development to bring new crop varieties, irrigation techniques and water sources, as well as a focus on strategic products, fruits, vegetables, livestock, poultry and fisheries, which can bolster food security using minimal water.
This transition will rely on significant investment, which is already being realised. While the area of land under cultivation dropped by 25% to 806,682 ha between 2006 and 2010, according to the Ministry of Agriculture (MoA), data gathered by the Riyadh Exhibitions Company (REC) indicates that agricultural spending increased by 13% in 2011, which was significantly above government estimates. According to the ninth development plan of the MEP, investment in agriculture will increase at an annual rate of 6.6% between 2010 and 2014. The government has placed a high priority on agricultural investment, announcing in the latest budget in early 2012 an allotment of $16bn for the sector, representing 8.6% of the total budget.
Much of this will focus on processing and storage infrastructure for Saudi Arabia’s increasing imports, particularly in the grain segment. There will also be sizable government revenue directed towards subsidies and incentives. According to the REC, some $1.1bn will be provided to the dairy segment in 2012, up from $57m in 2011, while $225m will be allocated for fisheries development. The government has had to look carefully at its subsidy and incentive programme, which has traditionally been based on a protectionist policy of fostering production growth, self-sufficiency, profit and employment among local producers. This has included a maximum 40% tariff on imports competing with local produce, subsidies for local producers and guaranteed prices for the local wheat harvest.
Importing Growth
However, with a greater emphasis on water conservation, the government is now seeking to phase out local wheat production and rely more heavily on imports to secure food supply. Fahd bin Abdulrahman Balghunaim, the minister for agriculture, told This is Africa, a Financial Times publication on the African business environment, “Food you can import, but water is very different. The government has taken – in my opinion – a courageous decision to give water priority over the food sector. We decided to lower our reliance on locally produced wheat [to be phased out by 2016]. The government said it will phase out buying wheat from local producers and go towards importing wheat.” Under decree number 335 of 2008, the Saudi government said it was hoping to reduce wheat production by about 12.5% per year, until the local wheat harvest is phased out by 2016. This follows the phasing out of barley in 2003. According to a December 2011 report by NCB Capital, a local investment bank, food imports are likely to more than double by 2020, reaching SR132bn ($35.18bn). With the risk of volatility in global food prices impacting domestic inflation and the profit margins of local food producers, the government has turned its attention to subsidising food importers and Saudi companies producing food for the local market overseas.
To do so, the government is incentivising the private sector to invest in farmland abroad and import the product into the Kingdom, thus reducing domestic agricultural water consumption. The policy was articulated in 2008 under the title, “King Abdullah’s Initiative for Saudi Agricultural Investment Abroad”. This initiative focuses on nine strategic products – rice, wheat, feed barley, yellow corn, soybean meal, oil seeds, sugar, livestock and poultry meat – in which the government is looking to build up stocks. The emphasis is on the private sector to initiate overseas investments, although an $800m credit facility managed by the Saudi Company for Agricultural Investment and Animal Production will be made available for such projects.
Feed Stock
The government has also been focusing on adjusting subsidies for the import of animal feeds due to the segment’s high water usage and the strategic importance of the livestock and poultry segment for the Kingdom. Following King Abdullah’s call for a 100% increase in animal feed subsidies, the Ministry of Finance introduced new regulations governing animal feed imports in July 2011. A new animal feed import subsidy list containing 31 products was drawn up, regulating the size of subsidies based on the energy and protein levels of each ingredient. As such, soybean meal received the highest subsidy at $202.13 per tonne, and barley straw received the lowest, at $49.33 per tonne.
The list will not only help the sector reduce its water consumption, but also decrease the dependence on imported barley, the price of which is highly volatile in the international market. According to private sector estimates, the use of locally grown feeds, such as alfalfa and other green fibres used in conjunction with barley, cost the Kingdom 7bn cu metres of water each year. As a result, there is a growing emphasis on the feed milling industry to replace the traditional animal feeding methods. One company looking to benefit from this trend is Arasco, a local animal and aquatic feed producer. The company’s premier product, Al Wafi, is a composite feed using as many as 30 different raw material imports. Arasco is hoping to bolster its production capacity to 4m tonnes per year within the Kingdom, a move that could replace as much as 50% of the country’s imported barley and 50% of the locally grown forage. This could save Saudi Arabia approximately 3bn cu metres of water and 10m ha of grazing land.
Given the water-intensive nature of animal feeds and other cereals, the emphasis on imports is understandable. However, Saudi food imports are beginning to increase across the board, as production in several areas tapers off. Food imports grew by 33.4% to 20.07m tonnes in the six years to 2011, according to the Saudi Ports Authority. It is also clear that trade is only likely to flow one way. Foodstuff exports through Saudi ports crept up 11.5% to 673,101 tonnes between 2009 and 2011. It appears, then, that the government is trying to minimise its number of agricultural exports.
Home Grown
As such, domestic production will be confined to the domestic market. While there is concern this may limit the profit margins and potential for local agricultural producers, the local Saudi market should provide ample opportunity for producers, as it is the largest market in the GCC region, with 29.2m consumers in 2012, according to the Central Department of Statistics and Information. With a population growth rate of 2.9%, produce demand is also likely to increase in the medium term. According to the ninth development plan, demand for wheat, milk, eggs and red meat is expected to grow at an annual rate of 2.1% up to 2014, while demand for fruit and vegetables will grow at 2.6%. Data from the REC for the Saudi Agriculture show has a higher estimate, suggesting annual growth in food consumption between 2011 and 2015 will average 4.2%. Changing eating habits in the Kingdom are also likely to play a part in demand, with Balghunaim telling Arab Newsthat the average per-capita calorie intake and the average per-capita protein intake have both increased substantially over the past decade.
This demand suggests that the agricultural sector can expect a bright future, as the local market should present plenty of opportunities for local producers, while the government has emphasised the strategic importance of the sector as an employment generator and a tool for slowing rapid urbanisation. Indeed, despite the fundamental changes to the sector, it continues to display healthy growth. According to the REC, the agricultural sector has grown at a compound annual growth rate (CAGR) of 5.9% in the past five years. Furthermore, the agricultural output in 2011 was valued at $12bn. It appears that, given these indicators, interest in the sector remains strong, with data from the REC indicating the number of permits for new agricultural projects in the Kingdom surpassed 200 in 2011.
Managing Growth
These new projects, however, are likely to have to operate in an altered landscape. According to DC Krause, the general manager of the Projects and Agriculture Services Company (PASCO), an Egyptian firm, “I cannot see the government looking to bring new land under cultivation”. As such, new and existing, projects will have to create new efficiencies, boost yields and bring greater professionalisation to their operations. This should provide opportunities for project management and advisory firms, such as PASCO, which can help to boost operational productivity. PASCO has significant experience developing new varieties of produce, as well as implementing standard international practices to boost yields. Krause points to standard practices in assessing the viability of projects and crops in developed countries that are still uncommon in the Kingdom. “We can bring things such as soil tests and classifications, which are standard in many countries, but which are new here,” he told OBG.
Krause believes that the re-evaluation of the sector in light of water scarcity should push it towards greater efficiency and a more professional approach. He also argues that the demands of the current market and the difficulties of farming in Saudi Arabia will lead to a pronounced trend of consolidation and commercialisation. “The market does not want small players anymore. They cannot support the investments required to make a living. The market supports volume. You need huge irrigation systems, as well as huge infrastructure, so you have to have a corporate approach,” he said.
Farming Data
The government is leading the way in bringing greater professional awareness to the sector. One of the first steps it has taken is to establish the Agriculture Information Centre (AIC), a new organisation under the Agriculture Development Fund (ADF), which is tasked with producing reliable data on the sector for future planning. It will develop a farm register, a farm accountancy data network, a price information system, as well as monitor farm income and inputs, such as fertilisers and feed. These new data sets should give the government a more accurate picture of the market and the viability of different types of farms. George Beers, vice-president of the AIC, told OBG, “I think the government has realised the importance of agriculture for employability. They are serious about tackling this issue and if you want this to be viable, you have to have a professional sector behind it.”
The government has already begun to think deeply about how water preservation will impact farming practices in the country. In a draft national strategy on sustainable agriculture, which is now being merged with data and findings from the Ministry of Water and Electricity, the MoA has highlighted key produce that fits with its policy of reducing agricultural water consumption while maintaining a profitable and viable agricultural industry. The paper lays out the economic returns to water consumption for various products, finding that higher value crops, such as grapes, pomegranates, dates, lemons and olives, all have a return above SR5 ($1.33) for every cu metre of water used, compared to a return of SR0.34-0.53 ($0.09-0.14) per cu metre of water for wheat and fodder. The report also finds that livestock such as goats give a high return to water usage at SR4.5 ($1.2) per cu metre.
Given these findings, a picture is beginning to emerge of strategic sectors that are likely to form the core of the country’s agricultural policy over the coming years. Livestock, dairy, poultry, fruit and vegetables, as well as fisheries and aquaculture, should receive the most attention from policymakers and provide the best incentives for investment in the near future.
Poultry
Recent developments in the poultry segment are a good example of this. The industry has held a strategic importance for the government for some time. There has been strong policy support for companies operating in the sector, including land grants, low rent prices, and interest-free loans and subsidies on a range of inputs, such as feed and equipment. There have also been Customs exemptions for machinery and infrastructure services, and over the course of more than 30 years, the ADF (previously the Saudi Arabian Agricultural Bank) has extended loans worth more than SR2.9bn ($772.85m) to the industry.
As a result of these policies, the industry has grown substantially over the past 40 years, increasing from 8000 tonnes of poultry meat in 1973 to 447,000 tonnes in 2010, according to the MoA. There has also been a steady growth in table eggs, with the country achieving a self-sufficiency ratio of 109% in 2010. However, with chicken consumption increasing at the expense of red meat, there is still some way to go until the country is self-sufficient; in 2010, the Kingdom had a self-sufficiency ratio of 41.2% for poultry meat.
Indeed, the industry still presents a number of policy headaches for the government. In the second half of 2012, poultry prices rose significantly due to supply shortages and feed cost increases, according to Balghunaim. As a result, in October 2012 the government introduced an export ban on poultry in a bid to bolster supply in the local market. With almost 60% of supply coming from imports, which are taxed with a 5% Customs tariff, the domestic market is still dependent on international price dynamics and transport costs.
The introduction of Almarai, one of Saudi Arabia’s most successful agriculture and food firms, into the poultry segment should help boost local supply in the market. Almarai announced its entrance into the poultry business in 2009 with the acquisition of the Hail Agriculture Development Company, and in 2011 developed a bold expansion plan with an estimated investment of SR4bn ($1.07bn). Almarai has set a target of developing an integrated poultry business, which will be able to process 150m birds per year by 2014. It has already set up half of the 800 growing farms that it plans to develop and began full operations at its first hatchery in June 2012. The hatchery is one of the largest in the world, with a capacity of 2.76m eggs per week. A second hatchery is being now built, as well as a slaughterhouse, with a capacity of 36,000 chickens per hour, and a feed mill, producing 80 tonnes of feed hourly.
While the poultry division only accounted for 4% of Almarai’s revenue in 2011, this is likely to grow significantly. Indeed, according to Quantum Investment Bank (QIB), the poultry division has been growing at a CAGR of 168% since 2009, bringing in sales of SR319m ($85.01m) in 2011. While the division has yet to break even, according to QIB, it is expected to do so in 2013 and has taken a 19% market share in the industry.
Dairy
With Almarai crediting the division as one of the main drivers of its 5.2% increase in operating profit for the first nine months of the year, the prospects for the segment look promising. Nonetheless, the firm will be reliant on its core dairy business for some time to come. Indeed, Almarai is the market leader in dairy and juice products throughout the GCC and has achieved sales growth at a CAGR of 24% over the past six years.
The dairy industry remains a key area of focus for the government. Milk production in the Kingdom has grown from 349,000 tonnes in 1980 to 1.76m tonnes in 2010, achieving a self-sufficiency ratio of 103.4%. It now has 13 dairy factories supplying the local and regional markets. However, pricing is also becoming an issue. In July 2011 Almarai tried to increase its two-litre fresh milk and laban (buttermilk) pack from SR7 ($1.87) to SR8 ($2.13), but the Ministry of Commerce and Industry invoked the regulation of food supply for extraordinary situations, which bars price hikes and threatens punishment for violators. Almarai complied with the regulation, but stated in a press release that “the rationale and justification for the price increase is still valid”.
Ups & Downs
In September 2012 Abdulrahman Al Fadley, CEO of Almarai, expressed concerns about the rising costs of producing milk, particularly for animal feed. He argued that local and regional consumers are likely to feel the effects of commodity prices. The price of fodder has been impacted by drought in the US, low rainfall in Russia and a poor monsoon season in India. According to QIB, Almarai lost 180 basis points from its gross margin in 2011, largely due to commodity prices.
The rapid growth in dairy sales has also slowed. Almarai fresh dairy sales growth dropped from a CAGR of 22% in 2005-08 to 12% in 2008-11. Likewise, long-life dairy sales growth fell from a CAGR of 33% in 2005-08 to 15% in 2008-11. Direct material costs account for over 70% of the company’s cost of sales, which have grown significantly in recent years. In 2011 costs grew by 18% to SR3.5bn ($932.75m), largely the result of feed prices. For example, corn costs rose 66% in 2011, according to QIB. The concerns of Almarai should reflect the local industry as a whole, considering the company alone has more than 135,000 Holstein cows and an average annual production of 900m litres of milk.
Almarai has been trying to take steps to mitigate cost hikes. Its main strategy to achieve this is in line with the Vision 2020 master plan. In January 2013 it announced that it was buying its Argentinian counterpart, Fondomonte. The deal, worth $83m, saw Almarai acquire operations, including three farms on 30,000 acres, ahead of the imposition of strict new rules governing foreign ownership of productive land in Argentina. Fondomonte had grown corn, soybeans, barley, rice and sorghum on the land, and Almarai is expected to use it to produce feed for chickens and cattle. The firm said in a press statement that the deal was in line with Saudi’s policy of “securing supplies and conserving local resources”. This illustrates the attempt to dovetail the strategic interests of the country with the commercial interests of its leading producers. Almarai stands as one of the country’s success stories in the food sector, not only providing food to the nation, but also offering a sound bet for investors. However, it is not the only success story. While aquaculture is a fairly new sector for the Kingdom, the National Prawn Company (NPC) has emerged as a global player in this market. The MoA told OBG that it has focused on aquaculture “to reduce the food gap caused by the decline in production from traditional fisheries, and to meet the steady increase in demand for fish products as a result of population growth and rising income level, as well as changing consumption patterns as a result of the awareness of health nutritional value for marine products”. The leading player supporting this strategy, NPC, operates one of the largest fully integrated prawn farms in the world, producing over 19,000 tonnes of white prawn per year.
Outlook
Companies such as Almarai and NPC – large-scale commercial operations that operate modern infrastructure – point the way forward for the Saudi agriculture sector. Such companies meet both food and employment needs in the Kingdom, while minimising their water footprint in the country.
The days when Saudi was a large-scale wheat exporter and cereal producer may well be behind it, but the government is keen to ensure that the sector remains vibrant and competitive. The strategic shift towards certain sectors, and the attempts to shift the incentives framework towards water importers, may take some time to fully bear fruit, but when it does, it should ensure that the government achieves these goals.
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