Saudis to phase out wheat production

Saudis to phase out wheat production

By Andrew England in Riyadh

Published: April 11 2008 03:16 | Last updated: April 11 2008 03:16

What started as an ambitious dream, for a desert nation bereft of rivers and lakes to become self-sufficient in wheat, became a reality with the aid of billions of dollars from the first oil boom in the 1970s.

Today, however, Saudi Arabia is preparing to phase out production by 2016. The volte face could make the Gulf nation one of the world’s top 15 importers of the cereal – even as countries across the globe grapple with high wheat prices.

Officials say they had few options – it was wheat or water, the most precious of resources in Saudi Arabia. Now that the kingdom is enjoying a second oil boom, they say, the government has the financial clout to ensure it meets its cereal requirements from international markets. It is expected to begin importing wheat for the first time in more than 20 years in 2009.

Others say the scheme dreamed up by the government in the late 1970s was one of the country’s first big white elephants, a project that was bound to fail in the long term.

The current plan, passed by the government earlier this year, is for Saudi Arabia to reduce its production by 12.5 per cent annually to 2016, with imports making up the shortfall.

There was some speculation that high global wheat prices might cause the government to consider phasing out production – currently at about 2.5m tons per year – more gradually.

But Abdullah al-Obaid, the deputy minister for agriculture, told the Financial Times the plan would move ahead as scheduled.

“There are no rivers, no lakes and the rainfall is very scarce, less than 100 millimetres per year, which is not enough by any means for agriculture.

“We are depending mainly on non-renewable water resources from deep aquifers. Really, it’s a critical situation,” Mr Obaid said. “I think the government is in a good position this year, with the oil price increasing, to finance such policies because we are choosing between either that or deplete our resource, which is water. So it’s a kind of trade off.”

Still, he says, agriculture – which employs about 600,000 people – remains an important sector for Saudi Arabia, noting that the wheat project helped settle Bedouin and others in rural areas.

By the 1980s the government was subsidising the sector by paying farmers about six times global prices, helping annual production to rise from virtually zero to about 4m tons and enabling the kingdom to export and donate wheat to poor and friendly countries. The government spent SR60bn-SR70bn on the project over the long term, Mr Obaid estimates.

At the time, wheat was absorbing about 40 per cent of water used for agriculture – a sector that accounts for 85 per cent of the kingdom’s total water consumption.

The government banned exports in 1986 and has gradually reduced the amount it pays farmers, who today receive about SR1,000 ($270) per ton, Mr Obaid says.

His concern is that wheat farmers will switch to crops that consume even more water, such as alfalfa, used as forage for livestock. To discourage this, the government imports about 6m tons of barley, about 40 per cent of barley available on international export markets. It pays SR1,200 per ton, then subsidises the barley for livestock herders by 60 per cent, Mr Obaid says.

He says the answer is for farmers to switch to growing vegetables in greenhouses, or dairy, date or poultry farming. But he accepts that some may quit farming.

“It’s a bad decision to put more pressure on agriculture because the people of these areas will come to the main cities and will cause a lot of problems and will cause the government to pay more than it was paying for agriculture before,” he says.

John Sfakianakis, chief economist at SABB Bank, says that, however high the wheat price, the government should not backtrack.

“The cost over the long term is much higher; the depletion of water resources is irreversible,” he says. “One of the ways in which the oil money was shared with the people [in the first oil boom] was through agriculture, so they manufactured a sector that had no reason for existence in Saudi Arabia.”

Per capita demand for water is increasing by about 7 per cent annually, with agriculture relying on fossil water, while desalination plants provide for domestic and industrial use, Mr Sfakianakis says.

“If they continue at the current pace they will have no more fossil water 20 years from now.”