Qatar imports 97% of its food, while Saudi Arabia produces 20% locally
Prepared by Francisco Quintana, Senior economist at Asiya Investments, an investment firm specializing in emerging Asia investments
The ongoing crisis in Ukraine has so far had little impact on international financial markets and oil prices, the two indicators that traditionally react faster to situations of instability. Global stock markets rose by 1.5% since the beginning of the year and by 0.8% in the last month in spite of the annexation of Crimea by Russia and the increasing likelihood of some sort of military conflict in the region. Furthermore, even though Russia is the second largest exporter of oil in the world, Brent oil prices decreased by 4.6% in the first three months of the year, most of it in the last month. However, the deterioration of the political situation in Ukraine did have some impact in international markets in the form of rising prices of agricultural commodities. Ukraine is the origin of 16% of global exports of corn, the third largest exporter in the world, and 9% of global exports of wheat, making it the 6th larger exporter. Fearing a disruption in Ukraine’s exports, corn prices rose 20% year-to-date, while wheat prices increased by 13.5%.
These developments are relevant to the Gulf countries because the region is among the most vulnerable in the world in terms of food dependency. Due to its harsh climate conditions, the region has historically imported almost the totality of the food needed by its population. According to a World Bank report on food prices in the Arab world, the Gulf Cooperation Council (GCC) countries import on average 90% of their food consumption. Qatar leads the dependency ranking, with 97% of its food being imported, while Bahrain imports 92%, Kuwait 91%, and the UAE and Oman 89%. Saudi Arabia is the most self-sufficient country as it produces domestically 20% of its consumption. However, in the coming years the level of self-sufficiency will probably go down, not up. A report about food security in the GCC published in 2013 by the Chatham House found that the cost of wheat production subsidies in Saudi Arabia had exceeded $5 billion per year in the period between 1984 and 2000. Poor soil endowments, water scarcity and adverse weather resulted in production costs four times higher than international prices. At some point, in 1992, Saudi Arabia had become the sixth larger wheat exporter in the world. But the rapidity with which farmers were depleting water resources forced Saudi authorities to abandon the policy of increasing domestic production. As a result of the decrease in government support, production started to decrease in 2008 and is expected to stop completely by 2016. Saudi Arabia is not the only example in the region. Several countries pursued similar programs in parallel to their industrialization and diversification plans, in an effort to reduce the vulnerability of their economies to changes in the food and oil prices. UAE has been very active in this field since the 1970s and Qatar is still hoping to reduce its dependency to 70% by 2023 by using new green technology to desalinate water and grow plants without soil. The reality is that these plans are unlikely to reduce the necessity of constant and massive imports of food. But, in spite of recent technological developments, water remains a scarce resource. Agriculture absorbs close to 90% of total water use in the region. Developing a sustainable agricultural sector is expensive and inefficient and, following Saudi Arabia’s example, the GCC countries will have to look for alternatives to increase food security.
The most obvious alternatives are the accumulation of food stocks and the acquisition of agricultural resources outside the region. The latter saw a massive increase in interest from GCC countries following the 2008 food crisis. Africa, and more specifically Sudan, has traditionally been the focus of interest for Gulf’s institutional and private investors. According to the non-profit organization Grain, GCC investors bought more than 2 million hectares in Sudan between 2006 and 2012, approximately three times the area bought in the second country of the ranking, Australia. In spite of being a key provider of food, Asia has received little attention from the Gulf to date. China and India are the source of 22% of coarse grains, 30% of wheat and 46% of rice imports in the GCC, according to the FAO. Yet neither India nor China appear among the top 15 countries where the GCC is investing in agricultural resources. Unlike the rest of the countries in the Middle East and North Africa, GCC countries are enjoying a fiscal surplus equivalent to 10% of GDP on average. Given the comfortable fiscal situation of the Gulf countries and the complicated local conditions, it is reasonable to expect further purchases of agricultural businesses across the world. Gulf investors have usually chosen investing in American and European assets, but the 2008 crisis made evident that geographic and sector diversification should be a priority in the region. The recent price increases in food commodities have put the regional structural dependency on the spotlight again and it will revive institutional interest in these investments.
IMPORTANT DISCLAIMER: The information contained in this report is prepared by the Research Department of the Asiya Investments is believed to be reliable, but its accuracy and completeness are not warranted. Research recommendations do not constitute financial advice nor extend offers to participate in any specific investment on any particular terms. Investors should consider this material as only a single factor in making their decisions.
About Asiya Investment:
Asiya Investments is a subsidiary of KCIC which was founded by an Emiree Decree with a capital of KD 80 million and a mandate to invest in domestic demand-driven sectors in Asia, namely energy, real estate, healthcare, infrastructure, and financial services. KCIC is the Parent Company of a Group that includes Asiya Investments Dubai Limited and Asiya Investments Hong Kong Limited. Asiya Investments Dubai Limited serves as the investment advisory hub for KCIC. Asiya Investments Hong Kong Limited is fully equipped with a skillful and experienced investment team which has further demonstrated KCIC’s commitment to the Asian markets. The publicly-listed Group employs a team of Asia specialists and currently manages assets in excess of a billion. Key shareholders of KCIC include the Kuwait Investment Authority (Kuwait’s Sovereign Wealth Fund), National Investments Company (one of the leading investment banks in the Middle East), and Alghanim Industries (one of the largest conglomerates in the Middle East).