GCC states look abroad to meet food needs
Gulf oil producers have abandoned long-standing nationalistic policies of achieving food self-sufficiency and switched to a more realistic approach of using their strong financial muscle to invest in farm projects in fertile countries.
The policy shift means the six Gulf Co-operation Council (GCC) states, which control nearly 45 per cent of the world's proven oil wealth, will rely more on food imports but such projects will allow them to overcome natural constraints at home, according to a study by a key Saudi investment firm.
The study by NCB Capital, an offshoot of Saudi Arabia's largest bank – National Commercial Bank – coincided with an extensive drive by the UAE and other GCC members to tap the enormous farming potential of Sudan and other nations to meet the rapid rise in their food needs because of a steady growth in their populations. It also followed proposals floated recently by the GCC states and other organisations about the creation of a giant farm fund, establishment of joint agricultural projects and the setting up of strategic food stockpiles in the region.
"The GCC nations are shifting their agricultural policies away from the nationalistic goal of food self-sufficiency towards more flexible and broad-based efforts to ensure food security. The previous policies were ultimately undermined by acute constraints posed by the natural environment and resources on domestic agriculture," NCB Capital said in a 28-page study.
"This shift is translating into greater reliance on imports, outsourced agriculture and a greater focus on dry agriculture. Farming does not represent a significant component of the GCC economies as an exceptionally arid climate and low capital investments have limited its contribution to GDP and employment."
Its figures showed the agricultural sector accounts for only between one and four per cent of the GCC's gross domestic product, significantly lower than its 10–15 per cent contribution in relatively more water-rich Middle East nations such as Egypt and Turkey and 15–20 per cent in India and China.
In terms of employment, the sector is most important in Oman and Saudi Arabia, but of negligible importance elsewhere in the region, the report said.
Lower urbanisation in Oman and Saudi Arabia, coupled with a more aggressive regulatory push to develop the sector, has led to 35 and nine per cent of the economically active population, respectively, being employed in agriculture. "Strategic reserves are increasingly talked about as a mechanism for managing price and quantity fluctuations. A growing number of proposals have been put forward in recent years, but the Gulf countries are also increasingly beginning to take unilateral action in this area," NCB Capital said.
Oman has an already functioning buffer for three to four months and both Saudi Arabia and the UAE are in the process of setting up similar systems. But the report cautioned that the system has its own risks given the much longer cycle of many harvests. Moreover, the absence of international co-ordination for a system with limited margins may merely serve to increase price volatility instead of mitigating it, the study added.
"However, broader international solutions, albeit attractive conceptually, may pose co-ordination problems and political as well as cost challenges," it said.
"In spite of the low value added, the agricultural sector's social and political importance remains considerable, not least because of food price pressures. Food consumption, especially of high-value products, such as meat and dairy, is growing as the population base expands, urbanisation rates increase and disposable incomes grow. On the other hand, domestic agricultural yields are declining, thus resulting in greater reliance on imports."
According to the study, the high and increasing dependency on food imports in the face of a tightening global demand-supply balance exposes the Gulf economies to external inflationary risks.
It referred to the food price shock of 2008 which, it said, was one of the main causes for a soaring inflation to record high levels in the GCC countries.
"The limited monetary policy autonomy of the regional central banks due to the dollar pegs, created considerable challenges for policymakers who were forced to resort to a combination of short-term measures with relative modest effects. Faced with simultaneous pressures of rising demand, falling domestic agriculture yields and what looks like a long-term secular trend of global food price inflation, the GCC nations require comprehensive food security plans."
The study expected a surge in the food import bill by the GCC nations in the coming years because of investment in overseas farm ventures, the limited agricultural potential at home, and rapid growth in the domestic population.
Its figures showed that in 2007, the GCC's import bill for agricultural commodities stood at around $10 billion (Dh36.70bn), nearly 1.3 per cent of that year's regional GDP and around 1.7 times the average value of net imports during 2000–2004.
At $4.9bn, Saudi Arabia's net imports accounted for half of the GCC's total farm imports by value in 2007 and were nearly 68 per cent higher than the average import bill during 2000–2004. The UAE contributed 28 per cent to the GCC's aggregate food import bill in 2007. Its imports of $2.8bn were 89 per cent above the 2000–2004 average.
"Apart from wheat, potatoes, vegetables, fruits, fish and dairy, more than half of all regional consumption needs of other food products is met through imports. In Saudi Arabia, the near self-sufficiency in wheat will give way to total import-dependency by 2016," NCB Capital said.
Despite extensive efforts to expand their agricultural sector over the past two decades, the GCC countries are still reeling under a painful gap between food imports and exports given the limited farm potential in the desert region and lack of interest in setting up joint farm ventures.
From around $8.9bn in 2001, the GCC's combined farm gap surged to $12.2bn in 2006 and is expected to have exceeded $15bn in 2008 because of low growth in the agricultural sector and a surge in imported food prices.
"The issue of food security has become a priority for the GCC countries in the current circumstances," the Dammam-based Federation of the GCC Chambers of Commerce and Industry said in a recent study.
"The steady increase in the farm gap has been due to lack of co-ordination and co-operation among member states in the agricultural sector and in the establishment of joint farm projects. It is time for the GCC countries to take measures to cover that gap by setting up farm projects in such fertile Arab countries as Sudan, Egypt and Yemen."
The study proposed signing of agreements between the GCC and those countries for the allocation of land to Gulf investors to set up farm projects.
"These projects could be run as joint ventures under the management of GCC companies, which could also market their products in the region," it said.
"Another step is that GCC citizens should be educated about the need to change their eating habits to match the new market and farm conditions. GCC governments should also negotiate with major food producers to obtain some supply and price privileges and allocate funds to offset price increases."
The GCC states of the UAE, Bahrain, Kuwait, Oman, Qatar and Saudi Arabia are the largest farm importers in the Middle East given their poor agricultural sector and high per capita income. Their food imports accounted for more than 70 per cent of the total Arab farm imports of about $19bn in 2008.
Although they have enormous arable land, Sudan and Iraq have remained key food importers as persistent conflicts have prevented them from investing in farm projects. Yemen's poor financial resources have also made it a net food importer.
Population growth keeps farm demand high
The demand for all food products has seen robust growth in the GCC. Total consumption of food products –crops, vegetables, meat, eggs, fish, fruits, sugar, oil, poultry and dairy – grew from an average of 28.9 million metric tonnes in 1999–2003 to 38 million tonnes in 2007.
Demand for agricultural produce in the GCC is driven by a growing population and rising per capita consumption. Population growth in the GCC – stimulated by oil-led economic growth and improving standards of living – is internationally high.
The regional population grew by around three per cent annually to nearly 40 million during 1998-2008. Saudi Arabia and the UAE accounted for 67 and 12 per cent of the regional population respectively in 2008.
Food consumption levels in the GCC states are likely to be well above the Middle East average.
The consumption of cereals and pulses, which accounted for 46 per cent of total GCC food consumption in 2007, grew to 17.4 million tonnes in 2007 from an average of 12.4 million tonnes during 1999–2003.
Consumption of animal products, such as meat, fish, eggs and dairy, reached 8.2 million tonnes in 2007, up from an average 6.4 million tonnes during 1999–2003 and made up 21 per cent of total consumption in 2007.
Beyond the broader trends, however, dietary patterns vary a great deal across the Gulf region:
- Cereals account for 52 per cent of total food consumption in Saudi Arabia. The kingdom is the largest consumer of agricultural produce in the region, accounting for 66 per cent of total GCC food consumption and for three-quarters of cereals consumption in 2007.
- Vegetables and fruits are the largest component (35 per cent) of food consumption in the UAE.
- Bahrainis are amongst the lowest consumers of cereals in the region. Their share of 15 per cent compared to 41 per cent for animal produce. Kuwait and Qatar are two other countries with a relatively high reliance on animal produce (36 and 39 per cent, respectively).
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