The Kingdom’s agricultural sector is a little unusual by the standards of emerging markets. Whereas in many countries the major challenge is turning primary production into higher-value end products, Saudi Arabia is faced with the opposite issue. The Kingdom has developed a highly successful processing industry. However, this sector is restrained to a certain extent by a reliance on imports of raw materials.
Focus On Water
Ever since the government made the strategic decision to focus on water security in 2008, the major challenge has been securing a consistent and sustainable supply of agricultural produce and raw materials for the food processing industry. As recently as 2008, the Kingdom produced more than 2m tonnes of the grain as part of its self-sufficiency drive. However, as Waleed Al Kuraiji, the former minister of agriculture, told the local press in Jeddah in December 2014, “The Kingdom has been undergoing a strategic move for the past seven years to conserve water, therefore we head to international markets to import products that are water-consuming, including wheat.” As such, wheat production has been on a steady controlled decline, falling at an annual rate of 12.5% in the last seven years. In 2016 Saudi Arabia will rely solely on imports to meet its wheat requirements. Imports have grown from 300,000 tonnes in 2008 to 3m by 2014. The Kingdom is acutely water-stressed, and given that it also has a young and growing population, self-sufficiency as a means to food security is no longer feasible. Food consumption is expected to rise by 55.3% by 2016, according to the Saudi Agriculture Exhibition.
The rapidly escalating food consumption trends, coupled with the problems of water scarcity, create a challenge for policy makers. The country imports almost 70% of its food requirements and has a food import bill worth SR90bn ($24bn) annually. Given these factors, the government is looking at measures to facilitate sustainability and ensure food security. The primary policy, in this regard, is overseas investment in farmland and agricultural infrastructure, so that Saudi firms can control the supply chain and protect the country from exogenous shocks related to commodity price spikes. The government set up the Saudi Agricultural and Livestock Investment Company ( SALIC) in 2011. The rationale was to allow the government to partner with private agribusinesses globally to develop products for the home market. The early signs are encouraging. Saad Khalil, director-general of the late King Abdullah’s Initiative for Saudi Agricultural Investment Abroad, told The Wall Street Journal, “We are very proud to say that 31 countries have approached us and requested to host Saudi investments.”
One of the most fruitful locations for Saudi agricultural investment thus far has been Sudan. In January 2015 it was announced that the Kingdom has doubled its investment in the Sudanese agricultural sector in the last 24 months. Investments have surpassed $13bn and constitute 34% of all investment in the local industry, up from 7%, according to Ahmed Shawor, the secretary-general of the National Agency for Investment in Sudan. The focus of the investment in the East African nation has been on grains and fodder, with two projects established by the Saudi businessman Suleiman Al Rajhi expected to produce 600,000 tonnes of wheat annually by themselves.
The Kingdom is working to replicate this strategy globally. SALIC, which was established with a paid-up capital of $800m, has defined a number of target countries including Egypt, Ethiopia, Bulgaria, Hungary, Kazakhstan, Kyrgyzstan, Poland, Romania, Russia, Ukraine and Uzbekistan, according to the UN’s Food and Agriculture Organisation. However, it is not only in strategic, water-intensive crops such as wheat that Saudi investors are getting involved. For example, in September 2014, it was announced that Horizon Plantations, in which the Saudi businessman Mohamed Al Amoudi has a majority stake, plans to invest $500m in Ethiopian coffee plantations over the next five years. The company already owns two plantations in the East African country that rank among the biggest in the local market. Limu comprises six farms over more than 12,000 ha in the Jimma Zone of Oromia Regional State. Horizon believes that through training and capital investment it can push up production at these formerly state-owned farms. The company additionally owns a 5-ha processing facility, the Coffee Processing and Warehouse Enterprise, for which it is seeking further investment. Kemal Mohammed, operations director at the facility, told Bloomberg, “We need very good, genuine partners who can work with us and support us to make competitive processed and packaged coffee. To penetrate the foreign markets is not an easy task.” Horizon has a potential target of doubling production to around 1.5 tonnes of coffee per ha in the next five years.
The Saudi food and agriculture industry’s foreign investments go beyond the strategic imperatives of the government. Although they support the Kingdom’s aims of food security, they are also based on the ambition of growing revenues and market share in abroad. This is particularly evident in the dairy segment, where Saudi Arabia has developed substantial expertise. Companies such as Almarai and Al Safi Danone (a joint venture between the local Al Safi and the multinational Danone) compete on a regional basis. The industry locally remains strong.
“The dairy business is still growing. Most of the contribution is coming from labna, which is experiencing almost double-digit growth,” Salman Al Hajjar, food business development director at Al Safi Danone, told OBG. Al Safi as a company expects growth of 4-5% next year, according to Al Hajjar. Looking beyond that into the medium term, the general demographic situation in the country is giving the leading dairy firms optimism about sustaining growth rates at this level or higher.
However, the local market is not without its potential difficulties. “Profitability is the real challenge because prices are restricted by the government,” Al Hajjar told OBG. Most of the traditional product lines, such as yoghurt and labna, have a price cap that has been in place on many products for 30 years. Given that the traditional offerings accounts for as much as 70% of the leading dairy firms’ portfolio, this presents a real challenge to these companies’ bottom line. “The smaller companies have problems of efficiency and distribution and can’t compete because of the price cap on products,” Al Hajjar told OBG.
Given the difficulties in the domestic market, dairy firms are looking abroad to grow business. Al Safi, for example, serves 11 markets and is particularly optimistic about the potential of value-added products in its export markets. In June 2014, the company made an active investment in Iraq and established its first factory outside the Kingdom. The project will initially have a capacity of 59,000 tonnes of dairy products per year. Its leading competitor in the local Saudi market, Almarai, is also making overseas investments. In June 2014, the company announced that it planned to invest $560m in Egypt over the next five years through its subsidiary International Company for Agricultural Industries. This will involve projects including a juice factory, an expansion of its sales network as well as a new dairy farm.
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