Investing overseas: Private firms encouraged to look abroad to ensure food security

As Saudi Arabia scales back on domestic agricultural production in key staples such as wheat and alfalfa (for animal fodder), the country is becoming more reliant on food and agricultural imports. In a bid to mitigate the potential impact of international food price volatility, several Saudi companies, supported by government incentives, are looking to invest in overseas farmland. It is hoped that such a move will help the Kingdom achieve surety of supply and limit the impact of food price inflation on domestic consumers.

On The Rise

The country’s food imports have been increasing significantly over the past few years. In 2010 the Kingdom imported 20m tonnes of food, a leap of 5m tonnes in two years, according to data from the General Organisation of Ports. This figure represents 80% of the volume of food consumed in the country. According to NCB Capital, food and agricultural imports reached a total value of SR63bn ($16.79bn) in 2010, representing 15.8% of total imports. The country is particularly dependant on imports for some staple crops. For example, Saudi Arabia imports over 1m tonnes of rice per year, which is more than three times the level of China’s rice imports, according to the Standard Bank of South Africa (SBSA). In 2011 the Kingdom also had poultry imports of 680,000 tonnes, which is only one-fifth less than the total poultry imports into the EU. The country’s highest dependency, however, is in barley, a crop crucial for animal fodder. In 2011 barley imports were about 7m tonnes, accounting for more than 40% of the annual global barley trade, according to the SBSA.

This suggests that Saudi Arabia is becoming increasingly vulnerable to global food price volatility. According to a report by NCB Capital released in 2010, “The Saudi government has undertaken several initiatives to control inflation and ensure food security, but the global inflation and the recent weakness in the dollar pose a threat to domestic food prices.”

One of the main strategies to deal with this challenge has been a push towards securing farmland outside the Kingdom. This will not only lessen the burden on Saudi Arabia’s water resources, but should also help the country achieve guaranteed supply at preferential prices. The strategy was first adopted following the world food crisis in 2007 and 2008. The Kingdom, as with many countries in the developing world, was impacted by the substantial price spikes, and the government had to adopt some short-term measures to ease consumer pain, including subsidies on certain key foodstuffs and the removal of a number of import tariffs on basic commodities.

Achieving Security

Consequently, the King Abdullah Initiative for Saudi Agricultural Investment Abroad was launched as a more viable long-term attempt to deal with future food price volatility. Under the initiative, the government has committed to providing funding, a line of credit and logistics support for private companies willing to invest in overseas farmland. The government also drew up a list of 11 targeted products from wheat and barley to sugar, livestock and fisheries. It also stressed that it will support a number of investment arrangements, including joint ventures, contract agreements and outgrower schemes. To back this strategy, an $800m fund was established that can be used to secure buyer guarantees or as capital support by investors focusing on foreign farmland assets. The Saudi government hopes that through this initiative, it will be possible to build up a strategic reserve of basic food commodities in order to hedge against future food price instability.

The country has already made significant headway with this strategy. According to a September 2012 report by Al Watan, a local daily newspaper, Eid Al Ma’arik, the chairman of the Agricultural Investment Committee at the Saudi Council of Chambers, said that Saudi Arabia has already invested SR40bn ($10.66bn) in agricultural and livestock projects overseas, including in Ukraine, Brazil, Argentina, Canada and Sudan. Investors from the Arab state are following an increasingly prominent global trend. Since the year 2000, an estimated 70.2m ha of agricultural land have been sold or leased to private or public investors, according to the Land Matrix project, an international network of 45 research and civil society organisations. Africa accounts for the largest share of these deals (34.2m ha), with East Africa, in particular, providing a focus for investment. The region has seen 310 deals covering 16.8m ha since the turn of the millennium.

Looking Abroad

As such, Saudi Arabia is likely to face considerable competition for the limited availability of land in the region in the future. Indeed, the Kingdom has singled out East Africa as an area of focus, given its proximity to the Arabian Peninsula. Farmland in the region would provide investors with a cost advantage for export to Saudi Arabia, saving on transportation costs and carbon emissions. According to the SBSA, almost 70% of the 800,000 ha worth of deals over the size of 10,000 ha concluded and planned by Saudi companies in foreign farmland are located in Africa. This is largely a result of the commercial advantages of the location, but also due to the fact that the countries on the continent have been open to Saudi Arabia’s investment framework.

Indeed, the Saudi government has looked to establish a number of bilateral agreements in order to provide an overarching framework for private investment in foreign farmland. One of the primary purposes of such agreements is to establish the right to export much of the produce back to Saudi Arabia, with the government looking to achieve a minimum of 50% of produce exported. Saudi firms have already made several investments in North and East Africa.

In Egypt, Jenat, a Saudi consortium set up to invest in overseas farmland, has invested some $18m for the cultivation of barley, wheat and animal fodder on a 10,000-ha plot. In 2007 the Egyptian government also concluded an agreement for the production of wheat and fodder with the Al Rajhi Group. The initial agreement was for 10,000 ha with the expectation this would increase to 52,000 ha in the second phase.

There have been similar agreements in Ethiopia and Sudan. Tapping into the ambitions of the Ethiopian government, which hopes to lease 4m ha of land to foreign investors, Saudi Star Agricultural Development is currently holding 10,000 ha that it leased in 2008. According to a report by Businessweek, the company is planning to lease a further 290,000 ha in the same region, Gambela, in a bid to produce 1m tonnes of rice per year, as well as maize, sugarcane, oilseed and teff, an annual grass. The company will start growing rice on around 3000 ha of the 10, 000-ha plot in January 2013 and is expected to cultivate the whole area by mid-2014, according to