GCC nations working to improve logistics and supply chains

Since Saudi Arabia began reducing its domestic wheat production in 2008, the issue of food security has been high on the agenda for GCC governments. The Kingdom, which was once self-sufficient in the grain and even exported to the wider region, recognised something that is true across the whole of the Arabian Peninsula: it is quickly running out of water, and local production of many agricultural products is unsustainable. As preservation of dwindling water supplies threatens a secure domestic source of food, Gulf countries now have to wrestle with the challenge of ensuring a stable and cost-effective supply of food from foreign countries.

It is clear that the weather and climate in the GCC is not conducive to large-scale food production. The region has minimal rainfall. Rain-fed wheat production requires as much as 650 mm of rainfall per year in a hot climate. In the GCC rainfall ranges from 50 mm to 250 mm per annum, according to the UN Food and Agriculture Organisation. Furthermore, there are limited replenishable groundwater reserves with which to build irrigation systems. The average renewable freshwater per capita in the GCC is 89 cu metres.

The World Bank defines absolute water scarcity as less than 500 cu metres, and more than 95% of land on the Arabian Peninsula is subject to desertification. It is extremely difficult and costly to grow in this environment, and with the prospect of climate change, the situation is only likely to get tougher for the region.

Price & Supply Risk 

Given these facts, it is unsurprising that local food production is limited. Only 1.8% of land in the GCC is used for farming and it contributes just 1.4% to GDP. As such, the region is dependent on foreign suppliers for many basic and critical foodstuffs. The GCC bloc runs a 16m-tonne deficit of wheat and a 3m-tonne deficit of milk, for example. The lack of domestic agricultural supply, therefore, poses a serious threat to many countries within the region. The GCC food import bill will exceed $53bn by 2020, with imports accounting for as much as 90% of food consumption, according to the Economist Intelligence Unit. This represents a dramatic escalation given that the figure stood at $25.8bn in 2004.

Food import dependence poses a strategic challenge for Gulf economies. The prospect of poor harvests in export countries and supply chain problems, as well as commodity price spikes, is worrisome for all countries in the region. The region was given a wake-up call in 2007 and 2008, when prices in the global food market spiked, increasing by an average of 40%.

The food import bill for the GCC rose from $8bn to $20bn in the five years to the fourth quarter of 2008. This led to protests and rioting in more than 20 countries around the world, including some within the region, such as Egypt. In the GCC, the effects were less pronounced but they included shortages of staple supplies and inflationary pressure. The crisis sharpened the minds of policy makers in the region and led to the Riyadh Declaration to Enhance Arab Cooperation to Face World Food Crises, a document aimed at improving regional cooperation on food security.

Lessons From The Crisis

One of the conclusions from the food crisis, however, was that the Gulf countries have certain advantages that mitigate their high dependence on food imports. Indeed, given the accumulated wealth in the region, governments are well placed to absorb any unexpected price hikes on food. An average of 2-3% of foreign reserves are used to import food in the GCC against figures of 20-30% for many other countries. Indeed, given the local abundance of dollars in the Gulf, affordability is not a key issue. Furthermore, although the region could be susceptible to exogenous shocks that affect oil revenues, this is unlikely to have a significant impact on regional governments’ ability to purchase food. Globally there is a high correlation between oil and food prices – with an estimated correlation coefficient of 0.93 – so any decline in oil prices is likely to be mirrored by a drop in food prices.

Food Security

With food prices following a more stable path in the last few years, the issue of food security has received less exposure recently. However, the problem is not simply one of cost and price. As the global financial crisis of 2008-09 highlighted, the issue of availability and supply is just as important. During the crisis, many major rice and grain producers introduced protectionist measures to deal with the prospects of food price inflation. In total, 25 countries banned or restricted food exports. While this inevitably impacted prices, it also led to shortages for many importers. Many GCC countries effectively had their source of rice cut off.

Improving Supply

The initial response of regional governments was two-fold. First, many tried to increase their reserves of basic strategic foodstuffs. This has been an ongoing policy initiative. Oman, for example, is currently working on a $170m “agro-terminal” handling and storage facility at Sohar Port on the Indian Ocean coast. The facility is expected to be able to handle 700,000 tonnes of grain and 1.5m tonnes of raw sugar every year upon completion.

The second immediate response to the crisis was a concerted effort to gain control of the food supply chain all the way to the point of origin. As such, several Gulf countries began investing abroad, securing farmland in producer countries. Between 2006 and 2009 GCC countries purchased a third of the almost 20m ha of farmland that was sold globally, according to the International Food Policy Research Institute. Saudi Arabia explored deals with Turkey and Pakistan, while the UAE purchased 400,000 ha in Sudan and 324,000 ha in Pakistan, and Qatar procured 40,000 ha in Kenya. However, this investment slowed with the onset of the global financial crisis and the slide in oil prices that began to affect the GCC in early 2009.

The initiative was also problematic in other terms. The investments were sometimes framed as a “land grab” or “neo-colonialism” by the international press and think tanks. Furthermore, the prospect of securing supply during scarcity in a period of global economic downturn could still be an issue. As Robert Looney, professor of national security affairs at the Naval Postgraduate School in Monterey, California, wrote for the Middle East Institute, “For all the publicity given to Gulf investments in Sudanese agriculture, little in the way of production has taken place. Conflicts with local farmers are on the rise, and there is the growing realisation that exporting food from Sudan during periods of domestic food shortages would create a very volatile situation.”

Subsequent efforts have therefore largely focused on improving the supply chain at home. Many private sector food manufacturers, for example, are looking to increase their footprint in the region. Mondelez International, the US food and beverage giant formerly known as Kraft Foods, announced in 2014 that it is setting up a $90m biscuit plant in Bahrain. The facility, which will begin production at the end of 2016, will have an annual production capacity of 90,000 tonnes per year. Additionally, Al Ghurair Investment of the UAE, a food and animal feed producer and agricultural raw material importer, announced plans in early 2015 for a 93,000-sq-metre facility at Sohar Port and Freezone in Oman.

Hedging Risk

Such efforts to build logistics capacity and improve supply chains are becoming both vitally important and increasingly common in the region. The moves appear to be reaping rewards. In 2014 Kuwait and the UAE appeared on the list of food-secure nations in the Global Food Security Index of the Economist Intelligence Unit for the first time, ranking 28th and 30th overall, respectively. However, such progress is to some degree tentative and provisional.

The Gulf is still exposed to geopolitical risk that could rupture the supply chain and imperil food security. The region is dependent on clear access to the Suez Canal and the Straits of Hormuz to receive the vast majority of its food. In total, 81% of grains imported into the GCC economic bloc pass through the Suez Canal. Any disruptions here, or with Iran and the Strait of Hormuz, could have a major impact on food imports.

As such, while stockpiling and building new storage facilities have helped the situation, the region still has work to do to improve security of supply. Large-scale infrastructure plans in the region should help, including the expansion of numerous ports on the Red Sea, Indian Ocean and Gulf.

Rail Network 

The plans for a proposed GCC rail network are also likely to improve the diversification of supply routes. In a 2013 briefing paper, Chatham House noted, “A regional network of deep-sea ports on the Red Sea, Omani and UAE coasts, linked through a regional railway and strategically located silos, would provide governments with more routing options and hedge against the risk of maritime choke points being disrupted or closed.”

This may be the best suggested proposal to meet food requirements. Speaking on the planned 2117-km railway in June 2016, Ali Saleh Al Omair, the minister of public works, told local press: “The GCC leaders instructed their respective governments to attach great importance to this vital project, which will facilitate the movement of individuals and commodities among our countries”.