Highlights
– Saudi Arabia created a SR2 billion fund for international agricultural investment
– Saudi wheat production to be phased out by 2016
– Possible locations for Saudi owned and operated farms include: Sudan, Egypt, Ukraine, Pakistan and Turkey
On August 24, 2008, Saudi Arabia Agriculture Minister Fahd Balghunaim announced the kingdom would establish in the coming two months a SR2 billion holding company for international investment in agriculture. Saudi Arabia’s decision reflects a trend in the kingdom and the Arab Gulf toward outsourcing food production to poor countries better suited for the agriculture industry. By investing in farms or buying large swaths of arable land in foreign countries, Saudi Arabia hopes to ensure its food security and feed its rapidly growing population in a more cost effective manner.
As the kingdom begins to phase out wheat subsidies and combat growing food and housing inflation, increased international investment in agriculture is seen as a long term solution to the kingdom’s growing food and water demand.
Goodbye to Costly Wheat
Following US threats in 1973 to cease wheat export to Saudi Arabia in response to the kingdom’s participation in the 1973 Oil Embargo, Saudi Arabia instituted an ambitious agricultural development program to ensure national food security domestically. Saudi Arabia’s largest investment was in wheat production. With the help of significant subsidizes and the utilization of fossil water, Saudi Arabia was a net exporter of wheat by 1991.
Agricultural subsidies and crop production’s water demand, however, proved too costly. Saudi Arabia’s rapidly growing population requires increased crop production and placed undue strain on Saudi Arabia’s already scarce water resources—largely provided through costly water desalination plants. By the summer 2008, it was clear Saudi Arabia would join its neighbors in outsourcing its food production to countries with better suited climates. In May 2008, Saudi Arabia’s Ministry of Agriculture announced its decision to phase out subsidized wheat purchases by 12.5 percent each year, with plans to begin importing wheat by the spring of 2009 and to end wheat subsidies by 2015.
Investment Abroad
Agriculture Minister Fahd Balghunaim announced the agricultural investment firm would combine both public and private investors and focus on products that either cannot be grown in the kingdom, such as rice and sugar, or are water intensive, such as wheat, barley and animal fodder. Deputy Agriculture Minister Abdullah Al-Obaid told reporters the kingdom is in talks with Sudan, Egypt, Ukraine, Pakistan and Turkey to allow Saudi companies to establish farms on their territory. Possible agreements include scenarios in which the Saudi government will receive a certain percentage of exports produced or in which Saudi Arabia would barter oil exports for food imports. Another possible scenario would include agreements through which Saudi Arabia increases the nation’s overall food production by providing cheap fertilizer—produced with Saudi oil products—in exchange for land leases.
For the Saudi government, the financial gains of the deal, if feasible, are far less important than its ability to ensure its investment will not be subject to nationalization. Given the current environment characterized by global food shortages, Saudi officials are faced with scenarios in which host countries could chose to cease Saudi crops in order to avert rioting and domestic civil unrest. Saudi Arabia can best avoid such outcomes when engaged in a barter agreement with the host country for oil, fertilizer, or humanitarian aide, creating necessity on both sides of the aisle; an example of which are ongoing talks with Pakistan, in which Saudi Arabia reportedly offered a $6 billion relief package in exchange for a large swath of farm land.
Future Outlook
Foreign agricultural investment is likely to become the norm among countries with large cash reserves and limited domestic resources. Though less secure than domestic food production, agreements can be crafted that foster mutual reliance and in which both parties benefit. For Saudi Arabia and many countries in the Middle East and North Africa, outsourcing food production is the only answer to increased demand and rising food prices.
Saudi Arabia will likely throw a broad net when researching possible farm locations, but will chose the host country that represents the greatest yield capacity and the least risk. Agricultural investment in Sudan has proven unprofitable over the years, making Sudan an unlikely host. Likewise, Pakistan’s unfolding domestic political turmoil makes it an unlikely host for the near-term. Egypt and Turkey, on the other hand, are countries with which Saudi Arabia has longstanding ties and which have demonstrated their ability to maintain order in the midst of food crises.
For both countries, Saudi Arabia would likely barter oil and fertilizer in exchange for land and/or a high percentage of food exports.
