Riyadh slashes wheat output

10 March 2010

Saudi farmers are leaving wheat cultivation faster than anticipated under a plan to save water

After three decades of government subsidies to encourage Saudi farmers to grow wheat, weaning them off growing the crop was always going to be a slow process. Saudi Arabia announced its intention to phase out wheat production in 2008 to reduce water usage in the kingdom. Riyadh outlined a plan to decrease production gradually by 12.5 per cent a year so that by 2016, the country would be completely dependent on imports.

But in the two years since Saudi Arabia announced the phase-out, the kingdom’s planted areas have fallen by 40 per cent –much faster than planned. Saudi farmers have abandoned cultivation much sooner than expected, offering opportunities to wheat producers around the world to become Riyadh’s supplier of choice.

Wheat production fell to approximately 1 million tonnes in 2009, from 1.7 million tonnes in 2008, and some 200,000 tonnes less than the 2009 forecast by the US Department of Agriculture.

Saudi Arabia consumes about 2.6 million tonnes of wheat a year, and so needed to import 1.7 million tonnes last year.

Water use in Saudi Arabia

Falling water supply

Few would question the logic behind Riyadh’s decision to end self-sufficiency in wheat production. The Ministry of Agriculture and Water has been surveying groundwater resources since the 1960s. It concluded in the 1980s, that there were considerably more groundwater reserves than had been previously estimated. The findings gave reason for the government to embark upon an plan to  turn parts of the kingdom’s desert green.

Promoted as a strategy to insulate the country from the risk of a possible wheat boycott by oil-consuming, food-producing countries, desert irrigation was put forward as a solution for Saudi food security and farmers were subsided to grow the crop.

The government subsequently decided to phase out wheat production after the country’s non-renewable fossil aquifers became severely depleted.

Under the intense desert sun, the water needed to irrigate a hectare of land to grow wheat is two to three times the volume needed to grow it under milder weather conditions. It takes more than 1,000 cubic metres of water to produce one tonne of wheat in Saudi Arabia.

Estimates of the amount of groundwater stored in the principal aquifers are controversial. According to some sources, before wheat imports resumed, water production in the kingdom halved to about 15 billion cubic metres a year, having reached a peak of
30 billion cubic metres a year in 1994. Some 90 per cent of the peak value came from non-renewable aquifers.  In January this year, the kingdom issued a tender for 500,000 tonnes of wheat for deliveries in March, April, May and June, to Jeddah and Dammam.

The question now is whether Saudi Arabia has a viable alternative solution to domestic production, that does not leave it open to the volatility of the global commodities markets. “Buying from the world grain market is nothing innovative,” says Abdolreza Abbassian, grains analyst at the UN Food and Agriculture Organisation (FAO) in Rome.

The FAO forecasts Saudi Arabia will import 1.9 million tonnes of wheat in 2010 from the open market, up 32 per cent on import volumes in 2009 of 1.3 million tonnes. By 2016, the kingdom will require some 2.5-2.8 million tonnes of wheat a year.

Waleed al-Khariji, director general of the Saudi Grain Silos and Flour Mills Organization (GSFMO), said in November 2009, the kingdom would import 3 million tonnes of wheat per year up to 2016.

The decline in Saudi Arabia’s wheat output has seen exporters rush to take advantage of an opportunity to be the supplier to the kingdom’s 28 million residents. “The CIS [Commonwealth of Independent States] is fighting for market share in the Middle East, but there are questions over quality. Producers want to get a foothold. If it ends up being completely sourced from one country, they are likely to become the supplier of choice for the future,” says a Dubai-based grains trader.

Canada has emerged as the most likely candidate, providing more than a third of Saudi Arabia’s wheat imports since the kingdom began to buy from abroad in 2009. It is unknown if they were the sole winner of the January tender. “Money is not a problem, but the Saudis don’t want to be subject to price movements in the world markets and obviously want wheat supplies at reasonable prices,” says Abbassian.

Currently, wheat prices stand at around $207 a tonne on a free-on-board basis.

“This is down 5 per cent from the beginning of the year, 15 per cent lower than the average price in 2009, and more than 50 per cent lower than the peak price in 2008,” says Abbassian.

The ongoing weakness of the US dollar has compounded the situation. Prices for wheat – which accounts for about 20 per cent of food consumed in the world – more than doubled from the start of 2007, reaching a peak of $440 a tonne in March 2008. 

Soaring energy prices boosted the costs of fertiliser and transport, while also increasing demand for grain-based alternative fuels such as ethanol. The wisdom of Saudi Arabia’s decision to reduce wheat production, at the peak of the market in 2008, has been questioned but Riyadh clearly made a decision to prioritise water management over domestic wheat production. “Saudi is not like other countries. They don’t pay too much attention to the price. Because of their water problems, they cannot keep producing,” says the Dubai-based grains trader.

One solution Riyadh has taken is to obtain tracts of land in other countries to guarantee supplies – a contentious solution given the existing food shortages in some of the countries in which Riyadh is investing.

In April 2009, the local Al-Rahji Group unveiled plans to invest more than SR1.5bn ($390m) by 2011 to produce wheat and maize in Egypt and Sudan. This includes production at a 42,000 hectare area in the Egyptian Toshka project and a similar sized area in Sudan.

Egypt’s Toshka project is an ambitious scheme to create a second Nile Valley, redirecting 10 per cent of the country’s allotment of water from the Nile river via a massive irrigation scheme. The project is part of the Egyptian government’s plan to increase habitable land from 5 per cent to 25 per cent by 2020.

Al-Rajhi also negotiated a 40-year land lease from the Sudanese government, with a $70m initial lump-sum payment.

Sticking point

Leasing vast areas of land to produce food crops are more controversial than direct investments in agricultural enterprises and leaves countries open to accusations of neo-colonialism, especially during times of high food-price inflation. The key is to ensure not all of the harvest is exported. 

Given the volatile price swings that grains markets have witnessed over the past few years, the kingdom along with its Gulf
neighbours, can hardly be blamed for exploring more controversial options than traditional imports. 

“If they have to import 3 million tonnes a year, the Saudis will want some control over the production. These investments have
certainly taken place. But there are issues in the host country with food price inflation,” says Abbassian.

“It must not be seen as a land grab,” says Chris Hawley, director at investment bank Rothschild, which has been advising companies and governments on food security. “The capital invested must be used to significantly increase the yield from the land. Governments have to decide how to present this to the local population.”

Food security is a sensitive topic, and Riyadh is understandably cautious about publicising their programmes, which leaves agencies such as the FAO in the dark.

The challenges of land rights and strict legislation in countries such as Australia, Brazil and central and eastern Europe, have made those markets unattractive to potential Gulf investors, says Hawley. Although they carry greater risk, the opportunities are greater in countries such as Sudan, Ethiopia, Indonesia and Pakistan. 

But at the same time as cutting back on wheat production, Saudi Arabia has increased production in other areas, even exporting animals, animal products, vegetables and oils to its Gulf neighbours.

Riyadh’s water management policy is at odds with this other food production – rearing cattle is highly water-intensive.

The Saudi government will need to comprehensively review its agriculture and food production policy as a whole, if it is serious about conserving the kingdom’s scarce water supplies for future generations. 

A MEED Subscription...

Subscribe or upgrade your current MEED.com package to support your strategic planning with the MENA region’s best source of business information. Proceed to our online shop below to find out more about the features in each package.

Get Notifications