Focus on sustainability: Shifting production to less-water-intensive and higher-value crops

Saudi Arabia is one of the largest producers and exporters of agricultural goods in the region. Although agriculture accounts for a relatively small proportion of GDP and overall land use, and although the Kingdom has a negative trade balance when it comes to agricultural goods, it is nonetheless self-sufficient or close to self-sufficient in a number of areas; for example, Saudi Arabia is a substantial exporter of milk and dairy products, and is one of the top producers of dates in the world.

The local agricultural sector faces a number of challenges, the foremost being the scarcity of water. With average precipitation of just 59 mm per year, according to the World Bank, Saudi Arabia is one of the world’s driest countries. To reduce water consumption the authorities are moving to phase out the domestic production of wheat (in which the Kingdom was previously self-sufficient) and encouraging the production of high-value crops in its place. To maintain food security the government is also seeking to secure farmland abroad and provide incentives for Saudi companies to invest in foreign agricultural ventures, as well as expand grain storage capacity to accommodate rising imports and consumption (see analysis).

Economic Contribution

In 2013 Saudi Arabia’s agricultural GDP (including forestry and fishing) stood at $13.77bn, according to numbers from the Central Department for Statistics and Information (CDSI). This figure was up 3.65% on the previous year before taking inflation into account; in real terms, growth was a more modest 0.84%.

The 2013 farming output represented 1.8% of total GDP, unchanged from the previous year. Over the longer term, the relative contribution of agriculture to the economy as a whole has been falling, from 2.3% in 2008 and over 4.5% in 2003 (and more than 5% in the two years preceding that). The sector accounted for just under 4% of non-oil GDP in 2012, down from around 6% in 2007 and 8.4% in 2002.

However, this downward trend is a result of faster growth in other sectors – and in particular rising oil receipts, which have also stimulated growth in related sectors such as petrochemicals – rather than a decline in the absolute value of agricultural output as such, and in fact masks growth in the sector. The compound annual growth rate (CAGR) of agricultural GDP over the decade to 2012 stood at approximately 2% before inflation, with the sector having recorded real growth of 2.17% and 1.28% in 2011 and 2012, respectively. In 1999 constant prices, the sector accounted for 3.3% of GDP in 2013.

The sector’s contribution to employment is larger than its share of GDP; the total number of agricultural workers in the Kingdom in 2012 stood at 458,811, according to data from the Ministry of Agriculture (MoA). This is equivalent to around 4% of the country’s overall labour force, and of these, 44.6% were Saudi nationals. Employment in the sector has been falling in recent years, however; the figure stood at 600,287 in 2007.

Farming

The land area suitable for agricultural use in the Kingdom amounts to around 1% of the total. The area devoted to growing crops stood at 743,742 ha in 2012. This figure has fallen steadily in recent years, having stood at around 1.07m ha in 2007.

Riyadh is the largest province in terms of the area under crop cultivation, and is home to around 32% of the total, followed by Al Qassim Province (13%), Al Jouf (11%) and Hail (10%). The central areas of Al Kharj in Riyadh Province and Al Qassim Province are widely viewed as the heartland of Saudi agriculture; however, some agricultural niches are concentrated in other parts of the country. For example, local olive production is concentrated in Al Jouf Province in the north of the Kingdom, which hosts 13,508 ha devoted to the crop, or around 62.5% of the total land given over to olive production, according to figures from the MoA, while fruit growing mostly takes place in the south-west, near the Red Sea coast.

Although Saudi Arabia runs an agricultural trade deficit overall, it does meet a substantial proportion of its domestic requirements in several categories. For example, it is more than self-sufficient in milk and eggs, with ratios of 112% and 117%, respectively, according to figures from the MoA. The country is also nearly self-sufficient in vegetables with a ratio of 88% in 2012, rising to 110% for aubergines and 119% for potatoes, and supplies more than half of the fruit consumed (57%, rising to 107% for dates, one of the Kingdom’s best-known crops). The country’s self-sufficiency ratio in meat in 2012 stood at 41.2%. By contrast, it remains overwhelmingly reliant on cereals imports, with a self-sufficiency ratio of 7.4% – a figure that is set to fall further due to plans to end local production of wheat.

According to figures from the UN Food and Agriculture Organisation (FAO), the largest category of agricultural production by value (based on international commodity prices) in the Kingdom in 2012 was chicken meat, with a total output of $815.1m, followed by fresh cows’ milk ($546.1m) and dates ($536.2m). The country ranked as the world’s third-largest producer of dates in 2012, behind Egypt ($750.7m) and Iran ($544.1m).

Turning to the volume of agricultural output, local cereals production stood at 1.09m tonnes in 2012, according to data from the MoA. Most of this (854,000 tonnes) was accounted for by wheat production, which is gradually being phased out, suggesting overall domestic cereals production is set to fall substantially in the coming years. Total production of vegetables stood at 2.65m tonnes, with major products including tomatoes (549,000 tonnes), potatoes (405,680 tonnes), and cucumbers (240,584 tonnes). Fruit production stood at around 1.64m tonnes, led by dates (1.03m tonnes), while citrus fruit accounted for 108,000 tonnes.

International Trade

Saudi Arabia is, overall, heavily reliant on imports of agricultural goods and as a consequence, it runs a large agricultural trade deficit. Nevertheless, it is also a substantial net exporter of agricultural goods in absolute terms as well as by regional standards.

Farming exports stood at around $5.2bn in 2012, according to data from the World Trade Organisation (WTO), ranking the Kingdom as the third-largest exporter of agricultural products in the Middle East and North Africa region.

CDSI data put the total value of food and live animal exports at $3.11bn in 2012, up from $3bn the previous year. The largest category of exports was dairy products and eggs, which were worth $1.05bn for the year, up from $1.02bn in 2011, followed by vegetables ($687.8m) and cereals and cereal products ($458.55m). Most food and beverage exports fell under the category of processed food for household consumption ($2.45bn). Fellow GCC countries were the largest purchasers of Saudi agricultural goods. Total GCC imports of animal and agricultural products from the Kingdom stood at $2.02bn.

The value of Saudi Arabian imports stood at $29.3bn in 2012, according to data from the WTO, or approximately 19% of total merchandise imports. This ranked Saudi Arabia as the largest importer in the region and the 14th-largest importer in the world. Brazil was the largest exporter of agricultural products to the Kingdom in 2011, according to data from the FAO, with $2.7bn, followed by the UAE ($1.15bn) and the US ($1.14bn).

Dairy

The dairy industry is one of the major success stories of Saudi agriculture. As noted above, milk is the second-most-important agricultural product by value in the Kingdom, which is also a net exporter of dairy products. Total fresh milk production stood at 1.87m tonnes in 2012, allowing for net exports of 206,000 tonnes. There were 486,503 cows in Saudi Arabia in 2012, according to MoA data, up from 426,204 the previous year; this included 171,671 milking cows at specialised dairy farms.

The dairy industry is concentrated in Riyadh Province, which is home to just over 60% of the Kingdom’s cows, and in the Al Kharj area of the province in particular, followed by Eastern Province with 20%, according to MoA statistics. Specialised dairy projects produced 1.71bn litres of milk in 2012, up from 1.68bn litres in 2011; Riyadh Province again led the field, accounting for 75% of national output.

The establishment of modern large-scale dairy production in the Kingdom goes back to the 1970s, when the McGuckian family of Ireland helped to establish an indoor dairy farm in Al Kharj. The facility went on to become the main farm of Almarai, the largest dairy company in the Middle East; the firm is also the world’s biggest integrated dairy group, with total revenues of SR11.22bn ($2.99bn) in 2013.

The sector is characterised by high levels of production; average milk output per cow at the main dairy belonging to Almarai is around 40 litres per day, or twice the average of European cows. However, the water-intensive nature of the operations has cast some doubt over their sustainability in the long term. To address this issue local dairy firms are moving towards 100% reliance on imported feed, with some companies investing directly in establishing their own feed production facilities abroad as part of a wider government initiative to encourage the acquisition of foreign farmland.

The three largest companies active in the Saudi dairy sector are Almarai, Al Safi Danone (owned by Al Faisaliah and the Danone Group), and the National Agricultural Development Company (Nadec). According to Salman Al Hajjar, general manager of Al Safi Foods Company, Almarai has around a 45% share of the domestic dairy market, while Al Safi Danone has about 18% and Nadec is on 9%.

Price Pressure

One challenge for producers selling into the local market is the fact that the government sets prices for most dairy products (with some exceptions, such as fruit yoghurt). “The cost of production is rising thanks to growing demand for feed from China and India, so there is a need for economies of scale,” said Al Hajjar. “Many small players have therefore left the market in recent years, often having been acquired by larger companies.”

Firms have been pushing for greater government subsidies on feed such as alfalfa and maize due to global market price fluctuations and to remain profitable given the fixed price of finished products, albeit without success so far. This has pushed them to try to reduce costs by other means.

“Innovation is the solution to problems in the dairy industry arising from fixed low prices,” argued Al Hajjar. “Innovation in the industry is taking a number of forms, such as the development of new products – for example, high-protein dairy products – and increased efficiency in packaging. Previously, dairy companies tended to buy pre-formed cups for yoghurt packaging, but now most buy plastic sheets to produce the cups themselves.”

In addition to selling into the local market, the major dairy companies in the Kingdom all export to the GCC region and in some cases beyond, with key players also looking to expand further.

“Iraq is a very promising export market for Saudi companies,” said Al Hajjar, whose company has plans to open a dairy factory in Erbil in northern Iraq in 2014. “It has a large population with substantial purchasing power, and local production is not of good quality, as the country’s manufacturing infrastructure has been under development for the past 10 years. The Libyan market is also booming.”

Fisheries & Aquaculture

Given that the country’s coastline extends for more than 2400 km along the Red Sea and the Gulf, it is unsurprising that the Kingdom is home to a local fishing industry. According to data from the MoA, total fish and shrimp production in Saudi Arabia stood at 89,999 tonnes in 2012, down slightly on recent years – the figure peaked at 100,471 in 2009 – but well up over the longer term (for example, production stood at 56,071 tonnes in 2000). Local fish farms, around four-fifths of which are salt-water farms, accounted for 20,951 tonnes of output, or some 23% of the total. Of fish caught at sea, 38,360 tonnes were caught in the Gulf, while 25,583 tonnes were taken from the Red Sea. Most marine fishing is of the traditional small-scale variety, with industrial fishing accounting for just 14% of the total marine catch in 2012. The sector employed 28,310 people in 2012, largely unchanged on previous years, according to the MoA.

While these numbers are relatively small, the authorities have plans to significantly boost local fish farming: in December 2013 the MoA announced that it intends to invest some $10.6bn in the aquaculture segment over the coming 16 years, with the aim of eventually reaching annual production of around 1m tonnes. The move comes against a backdrop of a rapid rise in fish farming activity across the GCC region in recent years, with some estimates suggesting total output in the Gulf has grown fivefold over the last decade.

Ensuring Supply

Saudi Arabia was for many years self-sufficient in wheat production, an achievement the country was able to attain by means of government purchases of the commodity from local farmers at well above the international market price. However, in 2007 the authorities decided to begin phasing out local production, with the intention of ending all domestic wheat cultivation by 2016, as part of a broader effort to reduce pressure on the Kingdom’s water reserves.

Renewable fresh water reserves stood at just 86 cu metres per capita in 2011, the seventh-lowest level of any country in the world. Agriculture currently accounts for close to 90% of water consumption in the Kingdom, and more than 90% of water used in the sector is non-renewable fossil water.

In a study published by the Arabian Journal for Science and Engineering in February 2013, scientists warned of the impact that rising temperatures triggered by climate change could have on Saudi Arabia. The study said temperatures in the Kingdom could edge up by as much as 4°C by 2050, which estimates suggest would result in a 15% increase in demand for water from the agricultural sector alone, based on current production levels.

As domestic production has been scaled back in recent years, imports have risen to compensate. By 2012 wheat imports had reached a total of 2.21m tonnes, or around 70% of local consumption; the EU was the largest supplier, accounting for 38% of imports, followed by Canada (28%), Australia (16.8%), and the US and Argentina, both on 8.5%.

At the same time, domestic consumption of wheat has been growing strongly in recent years, rising from 2.49m tonnes in 2007 to 3.16m tonnes in 2012. In 2011 the authorities predicted consumption would reach 3.34m tonnes by 2016, though that figure may now be on the low side, as 2012 consumption levels were higher than forecast.

Investing Abroad

To ensure domestic supply of wheat and other key staples, in 2009 the authorities launched the King Abdullah Initiative for Saudi Agricultural Investment Abroad, which provides incentives to Saudi firms to invest in farming in around 35 foreign countries, in particular (but not limited to) those in Africa, Eastern Europe and East Asia. In February 2014 the director-general of the initiative, Saad Khalil, said that to date 31 countries had approached the Kingdom to discuss hosting Saudi investments in the sector.

The initiative targets eight agricultural products, namely wheat, rice, feed barley, yellow corn, soybean meal, oil seed, sugar, and livestock and poultry. The government is allocating around $22.1bn of funding towards the plan, and in 2011 it established a new firm – the Saudi Agricultural and Livestock Investment Company, which is controlled by the country’s sovereign wealth fund, the Public Investment Fund – with paid-up capital of $800m to support the initiative. As of 2012 the authorities said that Saudi firms to date had invested $10.66bn in agricultural projects in Latin America, Africa, Eastern Europe and Canada under the initiative.

According to a mid-2012 report released by Standard Bank, 70% of major investments by Saudi firms in foreign agricultural projects were in African countries, amounting to around 800,000 ha of farmland. North and East African countries, notably Sudan and Ethiopia, have seen particularly heavy investment; for example, Saudi Arabian firms are estimated to have invested around $3.47bn in farming projects in Ethiopia, which has made a total of 4m ha of land available to foreign investors from a range of different countries. Companies participating in the initiative include Saudi firm Iktifaa, which in January 2014 announced plans to establish several projects in Sennar and Northern States in Sudan. Other recent major deals include the acquisition of around 1600 ha of land in northern Sudan by four companies from the Kingdom – Almarai, Al Safi, Tabuk Agriculture and Al Jouf Company – also in January 2014.

Such efforts face a number of challenges, as both Saudi investors and those pursuing similar plans, such as China and India, have found, in particular in relation to African projects (which account for the bulk of Saudi investments so far). The state of infrastructure in Sudan, Egypt, Ethiopia and other countries targeted by Saudi Arabia and neighbouring Gulf states with similar initiatives, for example, has proven to be an obstacle, as noted by a 2011 report from the Ministry of Industry and Commerce, which also pointed to other problems as well, such as barriers to investment in many countries.

In May 2013 Saudi Arabian company Hadi Property Investment suspended plans to produce wheat in Sudan because of restrictions applied in practice by the Sudanese central bank to the repatriation of profits, and in December 2013, several investors from the Kingdom were reported to be withdrawing from projects in Ethiopia, saying they could not meet the lending conditions.

Foreign agricultural projects in Ethiopia – both Saudi and otherwise – have also faced a number of problems, including financial difficulties, which have resulted in delays to development plans, and opposition from local people to the large-scale allocation of land to foreign farming operations.

Sustainable Agriculture

Since the early 2000s the authorities have been trying to encourage more sustainable farming practices, in particular as regards the conservation of the Kingdom’s extremely limited water resources. To do so the authorities are encouraging farmers to use less-water-intensive forms of irrigation, such as drip irrigation, and to concentrate on high-value crops to maximise the economic returns from water usage.

Organic farming is also emerging as a plank of the Kingdom’s sustainability strategy. Organic farming methods can help to improve the water retention capacity of the soil, reducing the amount of water needed to irrigate crops, and can also help to limit soil degradation over the long term – though activity in the segment currently remains small-scale in nature. A Department of Organic Farming was set up within the MoA in 2008, and in 2011 the ministry established national regulations and standards covering the organic segment.

As of mid-2012 there were 78 registered organic farms in the Kingdom and 16,400 ha of land being cultivated according to organic regulations; more than 280 farms had also applied to convert to organic status. By January 2014 the MoA put the number of active organic farms at 81, with another 26 registered and planning to begin production.

Much of the activity in the segment takes place in Al Jouf Province, where 6982 ha are dedicated to organic output, and to a lesser extent in the provinces of Al Qassim and Riyadh (2395 and 1027 ha, respectively). Some 21 so-called pilot farmers are taking part in the Kingdom’s Organic Farming Project, which has seen them receive special training to promote organic farming practices. Prominent Saudi businesses active in the organic segment include Al Watania Agricultural Company and fellow local firm Al Khaledia. Major dairy producer Nadec also has significant organic operations in the Kingdom.

Challenges to the development of the segment include low levels of popular awareness about organic products locally and a lack of specialised organic traders and processors, meaning organic farmers tend to have to market their own goods directly. Most inputs for the segment are imported; however, several local factories including Nabat Al Aradh Factory, which is owned by Al Mahalliah, and Proteina Factory for Organic Fertilisers also produce inputs such as fertilisers and plant protection products.

Government Support & Initiatives

The government allocated around $15bn of funding towards agricultural projects and initiatives in 2013. One of the major government-backed institutions active in the sector is the Agricultural Development Fund (ADF), which effectively acts as a state-backed agricultural bank, financing farming projects in the Kingdom by providing both short- and medium-term loans. The institution provided a total of $82.86m of financing to agricultural projects during the course of 2012, according to ADF figures provided by the MoA. Of this, the largest individual specified category of funding in 2012 was financing for greenhouse projects, at $14.13m, or around 17% of total ADF loans made during the year.

The ADF is also responsible for implementing a seven-point government strategy for the development of the agricultural sector. One of the key planks of this is the creation a new agricultural information system by the Agricultural Information Centre (AIC, an initiative of the ADF), in cooperation with the Dutch Agricultural Economic Institute.

The aim of the project is to improve the availability of up-to-date and live information about the sector in order to facilitate decision-making on the part of the authorities. The system will include a detailed register of farms in the country, to be updated several times a year, as well as a platform that provides real-time information on market prices.

As regards the development of the latter, the AIC is currently sending inspectors to three markets in Riyadh to update prices six times a day and hopes to be able to provide full coverage of markets in the capital by the end of the year.

As part of the project the AIC will also provide clients with economic analysis on the agricultural sector. In addition to the government, the centre will make the information available to clients and stakeholders, such as farmers, investors and international organisations, some of it on a paid subscription basis; the centre hopes to start making data available to clients by 2016.

As of February 2014 the AIC had established a data centre as part of the initiative near Al Kharj in Riyadh Province; the organisation intends to open a further five such centres during the course of 2014 and between five and 10 the following year. In the long term the AIC plans to eventually raise the total number of centres to around 25.

Other elements of the ADF’s strategy include efforts to improve the conservation of water in irrigation; the creation of marketing and handling entities for the vegetable, fruit and fish segments; the provision of cooperative insurance for livestock production; better marketing of the Kingdom’s dates; and the creation of a new firm to breed cattle.

Outlook

Domestic wheat production will soon be ended altogether, freeing up valuable resources for other, higher-value activities and less-water-intensive crops. With production winding down, imports of wheat and other cereals are consequently set to increase, as is investment in agricultural production abroad, though the extent to which Saudi Arabia can achieve its goals of securing supplies of staples through such investment remains unclear in light of apparent challenges in some of the countries most heavily targeted for investment. The Kingdom is set to remain a major regional dairy producer and exporter in the coming years, though in the longer term the future of the dairy segment will depend on its ability to sustain its water consumption levels.