Saudi boosts food security as it shuts down wheat industry

The Kingdom of Saudi Arabia is on target to have more than a year’s reserves of grain by 2015, compensating for the shutdown of local production capacity and possible turmoil on the world grain market.

Increased Imports

The Grain Silos & Flour Mills Organisation or GSFMO – the government agency in Saudi Arabia responsible for managing the wheat programme, setting guaranteed prices for local production as well as importing wheat – imported more than three million tonnes of wheat over a twelve-month period in 2013/2014, an increase of 58 percent over the comparable period in 2012/2013.

The reason for the drastic increase was the attainment of the agency’s goal to increase its reserves from six months to twelve months, an increasingly realistic goal as the Kingdom dramatically expands its storage capacity.

The production of a kilo of poultry requires two kilos of wheat; a kilo of beef requires 7 kilos

Meanwhile, local production for 2013/2014 is down to 600,000 metric tonnes, a decline of 14 percent by comparison to the comparable period in 2012/2013 and will fall to 500,000 metric tonnes in 2014/2015 before subsides – and therefore production – cease completely in 2016.

Self-Sufficiency

In the 1980s, Saudi Arabia implemented a policy of achieving wheat self-sufficiency, offering generous subsidies and producing a crop that is 100 percent irrigated. The crop was sown between mid-November and January and harvested between April and June, to take advantage of relatively cooler weather. The policy to phase out wheat production was introduced in 2008, in response to the rapid depletion of the country’s water reserves.

Wheat is a key ingredient in the Saudi diet, consumed either as flat bread or as western-style bread, such as baguettes or pizza base. Saudis consume an average of 250 grams of wheat per day, or around 88 kilograms annually. The wheat is purchased on the world markets and is imported through Jeddah and Dammam. Australia and Lithuania each supply around 20 percent of the wheat to the KSA, with Brazil, Canada, the US and Poland all providing another 10 percent each.

The government has already removed subsidies for the import of wheat for use in animal feeds, so local feed producers have removed it from their ingredients. The government is encouraging agricultural companies to invest in countries that have a comparative advantage in producing cereal and forage crops, for re-import back into Saudi Arabia.

Bakery companies must offer an expanded product range of value added products in order to capitalize on more profitable bakery market segments.

Impact on the Local Bakery Sector

Flour is exclusively produced by GSFMO in Saudi Arabia. GSFMO predicts continued growth in demand for flour to 3.6 MMT in 2025 which is equivalent to 4.5 MMT of wheat. Currently variable flour quality creates ongoing challenges for the industry, in particular, for smaller bakeries. Versatility, experience and “know-how” of the baker is a key competitive advantage. As the flour mills are all state-owned, there is no competition between mills and the flour is subsidised.

With regulation under review but likely to continue into the near future, this makes it more challenging for the bakery sector to build a sustainable business based around staple bread products. Bakery companies must offer an expanded product range of value-added products in order to capitalise on more profitable bakery market segments.

World Production & Consumption

Food security is important to Saudi Arabia, however its vast cash reserves and its status as an oil exporter mean that it is in a far stronger position than oil importers such as Egypt, which is the world’s biggest wheat importer, and which has experienced political turmoil partly as a result a spikes in the cost of wheat.

The increase in world grain prices is largely attributable to a growing world population and a growing demand for meat-based food. The production of a kilo of poultry requires two kilos of wheat; a kilo of beef requires 7 kilos.

At the same time, consumption has grown from 2.2 billion to 2.38 billion tons, with CAGR in consumption over the period outstripping production by 0.23 percent. If this trend should continue over the course of a decade, production would no longer meet global demand.

Figure 1: Price ($USD) per Ton of Selected Crops and Outputs

Source: FAO/OECD

Long-Term Demand

This has had a knock-on effect in terms of price. Between 2009 and 2012, the price of wheat on the world market increased at a Compound Annual Growth Rate (CAGR) of 15 percent. A strong harvest in 2013 brought prices down by nine percent and allowed countries to replenish their reserves.

The growth in long-term demand for wheat is likely to continue.

On the one hand, bumper harvests in 2014 will push world prices down, while political turmoil in Russia and Ukraine will put upward pressure on food prices.

Conclusion

Despite the market’s vulnerability to random events, growth in demand is likely to continue and wheat prices will maintain an upward trajectory in the long term. Saudi Arabia’s strategy to smooth price volatility is well advanced. However, in order to militate against long term price increases, market players need to come together and collaborate in developing an efficient and effective wheat supply chain.

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