Saudi Arabia has used its massive oil wealth to build a grain producing sector in some of the most unlikely terrain in the world. But now, despite the huge resources that come from having the world’s biggest oil reserves, economics finally appear to have defeated wheat production in the desert, with the announcement earlier this year that the government plans to phase out the industry by 2016.
The government started a program of encouraging farmers to grow wheat in the 1970s, achieving self-sufficiency in 1985, at which point imports of bulk wheat and flour were banned. The government will increase its purchases by 12.5% a year starting with the harvest of 2009. "The reason is water resources," the Reuters news agency quoted an official as saying.
A report from the U.S. Department ofAgriculture attaché in Saudi Arabia made the same point. "According to MOA (ministry of agriculture) officials, the main reason for change in the local wheat production policy was concerns over the depletion of fossil water, since the crop is grown on 100 percent central pivot irrigation," it said. "Wheat production places large demands on underground nonrenewable aquifer water, resulting in an imbalance between water recharge and water discharge. As a result, the water level in the aquifer has fallen in grain- and forage-producing regions."
According to the attaché, consumption will rise from 2.6 million tonnes of wheat in the 2009 marketing year to 3.4 million in 2016, while production goes down from 2.275 million tonnes, with imports of 325,000, to zero.
Abdolreza Abbassian, secretary of the United Nations Food and Agriculture Organization-Intergovernmental Group on Grain, told World Grain that Saudi Arabia should be able to handle the need for imports. "At the end of the day, you’re talking about 3 million tonnes," he said. "It’s not such a big burden when you consider the income that they have from petroleum products.
"They made their decision based on economics," he said. "They learned the hard way that this is not a land that you produce wheat on."
However, the support system for producing wheat had created a farming sector which was dependent on subsidy, one reason for the long phase-out period. "They don’t want to exert any shock to the system," he said, suggesting that some small-scale production may end up being carried on. "There is a possibility that not all of it will materialize. They may come out of two million tonnes and a million may still be produced. They may look after the smaller producers and let the bigger ones go."
It means a change in role for the Grain Silos and Flour Mills Organization (GSFMO), the government agency established in 1981 to operate not only grain silos and flour mills, but also animal feed processing plants. Under the present system, it also has had the job of allocating grain production quotas to farmers and buying wheat at the official price.
GSFMO has seven flour mills with a storage capacity of over 70,000 tonnes of wheat and five facilities that make more than 2,100 tonnes of animal feed a day. Under the new system, beginning in 2009, it will be responsible for importing wheat under tenders issued to importers.
The attaché foresees further change for the GSFMO, with the possibility of privatization of its mills, something that it has discussed with World Bank officials on several occasions. "When the mills are privatized, traders will be allowed to buy wheat on the world market and mill locally," the report said. "According to some reports, the government will continue the current wheat subsidy policy even if it goes out of the flour milling business." If the mills are privatized, the responsibility for buying and selling locally produced wheat, until 2015, is likely to go to the Ministry of Finance (MOF).
MOF will also manage imported wheat and wheat flour by paying rebates to importers for the difference between the government’s established wheat/wheat flour wholesale price and the C&F price for imported wheat/wheat flour, the report said.
GROWING GRAIN ABROAD
A revolutionary part of Saudi Arabia’s new strategy is a plan to grow grain outside the country. In June, the Reuters news agency quoted Abdullah al-Obaid, a deputy agriculture minister, as saying that the government was in talks with Sudan, Egypt, Ukraine, Pakistan and Turkey about allowing Saudi companies to establish projects to produce wheat, barley, soybeans, rice and animal fodder.
"The government would like to pave the way for Saudi investors to go abroad to use their experience, know-how and money to invest in such countries in order to bring produce here," he said. "We have negotiations with these countries and we have received some offers welcoming Saudi investors, but we want to be sure such investments are secure and governments will give logistical help to them. We have to be sure we have enough food coming to the country later on."
Abdolreza Abbassian, a wheat expert at the Food and Agriculture Organization, sees growing supplies abroad as potentially a bigger problem than phasing out Saudi production. "We don’t know how these deals are being organized," he said. "We also don’t know how they are negotiating the new deals. There are bilateral talks. We don’t know about them."
He said long-term investment decisions could be difficult, particularly in some of the more unstable regions of the world.
WORLD’S BIGGEST BARLEY IMPORTER
Saudi Arabia has a special role in the world’s barley market as by far the biggest importer. According to the International Grains Council, Saudi Arabia will import 6.9 million tonnes of barley
in 2008-09, up from 6.4 million tonnes the previous year. In a report on the grain market published earlier this year, the attaché pointed out that the nearly 7 million tonnes Saudi Arabia has bought annually since 2003, when it eliminated its barley production subsidy, is more than half the total world availability of feed barley.
The high level of imports is a result of traditional tastes, with Bedouins preferring to feed barley to their sheep, camels and goats. However, the process is wasteful and Saudi Arabia’s imports have pushed the price up to the point which the government decided to act to encourage the use of alternatives. On Jan. 1, 2008, the government announced a new program under which it would provide rebates of between $58.13 and $186.67 per tonne on imported feed.
"The Saudi government believes that including additional feedstuffs in the current subsidy program will provide local livestock producers with more nutritious feeds," the attaché said. There are already subsidies for the use of barley, maize (corn), soybean meal with a 48% protein content and sorghum. "The government anticipates that this will lead to a drastic reduction in the demand for barley imports," the report said. "Since the introduction of the new feed subsidy program, the demand for barley has decreased, resulting in larger stocks and reduced demand for barley imports."
The report said the ministry believed its new feed subsidy policy, which will cover palm kernel meal, wheat bran, soybean meal (44% protein), alfalfa hay, sugarcane molasses, rice bran and sunflower meal, will encourage the expansion of existing feed processors. "The MOA points out that livestock use of more feed concentrates mixed with barley are necessary to reduce barley wastage," it said. "The ministry indicates that when an animal consumes large quantities of barley, about 30 percent is eliminated without being digested, thereby providing no benefit in terms of weight gain or nutrition."
According to the attaché, the immediate result was an 8% fall in prices for barley for March arrival, to $385 a tonne.
Chris Lyddon is World Grain’s European editor. He may be contacted at:firstname.lastname@example.org.
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