Bleak outlook for farming sector

18 December 2013

A lack of water resources together with the Saudi government’s crackdown on foreign labour threatens the future of the kingdom’s agricultural sector

In early December, scientists at the King Abdulaziz City for Science & Technology (KACST) in Riyadh announced they had mapped the entire genetic structure of the date palm tree, with the help of Chinese genome laboratory BGI. The data should help farmers to deal with diseases and the tough growing conditions Saudi Arabia’s climate throws at them.

Saudi Arabia should not be using water to produce goods that… could be produced outside the country

John Sfakianakis, Masic

KACST is also researching the genome of the red palm weevil, a virulent pest that threatens date crops in the kingdom and some other Gulf countries. Such work is important for the local agriculture sector because, based on the trend of recent years, dates are set to become Saudi Arabia’s most significant crop. Date palms now cover more than 172,000 hectares and production reached more than 1.1 million tonnes in 2012 – a figure that has been steadily increasing since the turn of the millennium.

Water resources

In contrast, wheat, the crop previously the most important for Saudi farmers, is in sharp decline. As a result of heavy public investment, the kingdom became self-sufficient in wheat production in the mid-1980s and in the following decade became a major exporter. The investment was driven by a desire for food security, but the rate at which wheat farmers were using up the country’s scarce water resources, particularly its fossil aquifers, forced a radical rethink in 2008.

That year, the government announced it would phase out wheat production by 2016. Since then, it has cut back on subsidies to the sector and production has fallen precipitously, from almost 2.6 million tonnes in 2007 to just 800,000 tonnes by 2012, according to the UN’s Food & Agriculture Organisation (FAO).

Over the period, the area devoted to wheat production fell from 450,000 hectares to 125,000 hectares.

But smaller wheat harvests have not solved the country’s water problem. As government support for wheat has been scaled back, farmers have turned to other crops that are often more thirsty, as the rise in date production shows. Production of fodder crops, such as alfalfa has also been rising strongly, to help feed Saudi Arabia’s large livestock herds, which include 7.3 million sheep, 3.2 million goats, 400,000 cattle and 240,000 camels.

Main agricultural indicators, 2011
Total cultivated area (hectares) 835,000
Area of cereal crops (hectares) 329,000
Area of fodder crops (hectares) 160,000
Area of vegetables (hectares) 107,000
– including greenhouses 9,000
Area of fruits (hectares) 239,000
– including dates 162,000
Number of farms251,000
Employment in agriculture (percentage of total employment)4.1
Source: GIZ

“A lot of farmers have simply switched to alfalfa,” says Eckart Woertz, senior research fellow at the Barcelona Centre for International Affairs and author of Oil for Food, which examines Middle East governments’ approach to food production. “It doesn’t make commercial sense to produce wheat because the government has cut the subsidies for wheat procurement. As long as the livestock sector is strong, and even expanding, there is still a market for alfalfa. But it uses up to five times as much water as wheat because you grow it all year round and not just for four months like wheat. Date production is also very water intensive. It’s a perennial, so it needs water all year round.”

Even more troubling is the fact some of these products are exported, which effectively means Saudi Arabia is exporting water. If these issues are to be solved, Riyadh will have to lead the way. Like other governments, the Saudi authorities have long played a pivotal role in the agriculture sector, offering subsidies and other support to farmers, although the scale at which it does this is one many countries would struggle to match. A recent report by London-based think-tank Chatham House, called Edible Oil: Food Security in the Gulf, stated that wheat subsidies alone cost the country an estimated $5bn a year between 1984 and 2000.

Top 10 crops by area harvested (hectares)
Melons, other11,52810,142
Pumpkins, squash and gourds6,6916,060
Source: FAO

The government also offers farmers soft loans through the Agricultural Development Fund. Since it was set up in 1964, it has provided 443,000 loans worth a total of SR44.2bn ($11.8bn). The government also spends heavily on consumer food subsidies, with a $1.1bn outlay in 2010, according to Chatham House.

High-value agriculture

Without such interventions, Saudi Arabia would struggle to have any agriculture at all. Few places present such unpromising terrain for food production as the Arabian peninsula, where the long-term average rainfall is just 59mm a year, according to the FAO.

The country’s high oil revenues ensure it can afford to subsidise the sector heavily, but money will not make groundwater aquifers replenish more quickly. A better long-term option might be for the government to encourage farmers to concentrate on higher-value agriculture, such as horticulture and more water-efficient methods of irrigation.

Top 10 crops by production (tonnes)
Cucumbers and gherkins259,977400,073
Melons, other208,569190,842
Pumpkins, squashes and gourds116,321122,193
Source: FAO

Indeed, fruit and vegetable production has been increasing in recent years, with output of crops such as tomatoes and cucumbers rising. But even if some of these crops can be grown in a more water-efficient manner than wheat or alfalfa, it is still debatable whether it makes sense for the kingdom to produce them at all.

“Saudi Arabia should not be using water to produce goods that otherwise could be produced outside the country,” says John Sfakianakis, chief investment strategist at Masic, a local investment firm. “You need to look at products that require very little water and you might say there aren’t that many. Hard choices have to be made. Water is not going to become more available in the coming years, it will become less available. They have to be very careful in safeguarding the water they have, which is in deep aquifers and non-replenishable. Once you use it, it doesn’t come back.”

Saudi livestock herds
Source: FAO

Sfakianakis suggests aquaculture is one area of the industry where Saudi Arabia could sensibly focus. His firm has invested in the National Prawn Company, which operates one of the world’s largest shrimp farms, at Al-Laith on the Red Sea coast. “Clearly Saudi Arabia cannot be self-sufficient in food,” he says. “But there are certain areas where it can excel and one of them is aquaculture. You need a lot of space and a clean sea and the Red Sea offers these things.”

Regulating consumption

Back on land, the government will have to take a tougher line to get to grips with the industry’s use of water at some point.

“They phased out wheat production and they will probably do the same with alfalfa,” says Woertz. “If they really want to cut down alfalfa, they need to go to the farms and say stop. They need to regulate water consumption and intervene much more directly with farmers. They can continue to try to produce fruit and vegetables in greenhouses and use drip irrigation; anything that saves water, but not cereals or alfalfa, and also less livestock.”

Whatever Saudi farmers produce, the local climate means they will never be able to fully meet domestic demand and the country will continue to rely heavily on imported food. Across the GCC, imports generally account for 80 per cent or more of food consumption. The plans of the state-owned Grain Silos & Flour Mills Organisation suggest Saudi imports will rise rather than fall in the future. It currently has storage capacity for 2.5 million tonnes of grain around the kingdom and plans to bring online 1.15 million tonnes more of storage.

The GCC countries also rely heavily on imported labour to produce what crops they do, an issue which has been causing difficulties in Saudi Arabia this year. The government has embarked on a strategy of removing illegal foreign workers in the hope that locals will fill the jobs left vacant. About 1 million people are thought to have left the country during an amnesty that ended in November, and tens of thousands more have been deported since then.

Riyadh has also been pushing companies to hire more locals by imposing quotas on the number of foreign workers they can employ. The agriculture sector, however, pays low wages and it is unlikely to attract significant numbers of locals any time soon. Woertz estimates just 1,800 Saudi nationals are employed in agriculture out of a total workforce of about 500,000.

The Council of Saudi Chambers (CSC), a business lobby group, has warned that the entire agriculture sector could become obsolete unless the employment rules are relaxed.

In a report issued in mid-2013, called The Status of the Agricultural Workforce in the Saudi Economy, the organisation pointed out that agriculture’s contribution to gross domestic product (GDP) has been falling in recent years, which it said was because of “a defect in the agricultural employment system, which could cause the sector to end up being an economically obsolete one”.

Saudisation strategy

The speed at which the government has been pursuing its Saudisation policies presents problems for the economy in general and in areas such as agriculture in particular. There has already been some anecdotal evidence of farms struggling because foreign workers have left, whether voluntarily or not.

“The Saudisation programme is controversial and could cause some hiccups,” says Michael Harris, head of frontier markets research at the US’ Bank of America Merrill Lynch. “Ultimately, we think it is going to cause a lot of wage inflation. We think it just accelerates Dutch disease,” he adds, referring to the problems in the Dutch economy in the 1970s, when high North Sea oil revenues led to other sectors such as manufacturing and agriculture losing their competitive edge.

As the CSC noted, recent GDP figures suggest the Saudi agriculture sector is in relative decline. The sector’s share of GDP dropped from 3 per cent in 2009 to 2 per cent in 2011, according to the central bank, the Saudi Arabian Monetary Agency (Sama). That pattern is repeated in many countries around the world, although in the case of Saudi Arabia it is also partly due to the current strength of the oil industry. Given the costs involved in subsidising the industry, and the difficulties presented by water and labour shortages, there is little reason to suppose the downward trend will be reversed any time soon.

Key fact

Date palms now cover more than 172,000 hectares and production reached more than 1.1 million tonnes in 2012

Source: MEED

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