Saudi Arabia Food and Drink Report Q3 2008

Food price inflation continues to dominate the headlines in Saudi Arabia, increasing the pressure on the government to take whatever actions necessary to keep prices down for consumers. In early April the government made the decision to cut customs tariffs by 15-20% on 180 products, including a variety of foodstuffs, building materials and consumer goods. The tariff on wheat was cut from 25% to zero, while dairy products, frozen chicken, vegetable oil, canned food and other products that were previously imported with a 20% tariff have had this cut to 5%. This was largely in response to inflation - barely an issue prior to the oil boom - reaching a 27-year high of 8.7% earlier this year.

Saudi Arabia has a major negative food and drink trade balance, as it is the largest importer of these products in the Gulf region. This trade balance has been the subject of significant government attention, as the oil-rich government has pumped millions of dollars into improving agricultural output. BMI believes that these efforts will begin to have an effect over the next five years, as we are forecasting growth of 102.4% in the value of Saudi's food and drink exports to 2012, with the majority of this revenue being generated from fellow GCC countries and by the country's more advanced dairy and beverage industries. This should help bring about a modest 5.5% reduction in imports. The country's hot and arid climate, however, will prevent any level of government investment revolutionising the agricultural industry entirely. As certain food and beverage-processing sectors grow, ingredients will need to be imported to meet demand, which means that the food and drink trade balance will remain negative.

With Saudi Arabia currently awash with oil revenues, the government is continuing to develop the non-oil sector, which includes agriculture. However, in a somewhat surprising move, in April the government announced that it will pull the plug on its massive wheat production scheme. Started in the late 1970s, the wheat programme has cost the government an estimated SAR60-70bn (US$16-18.7bn) over the years.

The wheat subsidies were started with the hope of making the country self-sufficient in this food category, and by the 1980s the government was paying farmers about six times global prices, until production rose to around 4mn tonnes annually. However, it is not the financial cost, but the use of scarce water resources that has prompted the government to abandon this project. At the height of the project, it was using around 40% of all agricultural water, a sector which itself uses up around 85% of all of the country's water consumption. This water is mainly coming from groundwater aquifers, a non-renewable source. In 1986 the government made the decision to ban exports and slowly started phasing out subsidy payments. It is now looking to reduce production by 12.5% annually to 2016. This means that soon Saudi Arabia will again become a wheat importer, and with world wheat prices at record highs, the government will need its abundance of petrodollars.