Political risks to Saudi farm investment abroad
It should forge strategic alliances with global food giants to facilitate access to land or to final products: BSF

Posted by Emirates247.com
By Nadim Kawach
Published Monday, August 23, 2010

The surge in food prices in 2008 served as an alarm for Saudi Arabia to embark on massive farmland investment in fertile countries. (SUPPLIED)

Saudi Arabia needs to consider political risks in its massive drive to invest in the agricultural sector abroad to meet its soaring food needs and cut a huge farm import bill, according to a key bank in the kingdom.

The world’s oil superpower should also try and finalise strategic alliances with major global food suppliers to ensure its farm needs in the long term and offset risks of shortages or disruptions, Banque Saudi Fransi (BSF) said.

In a study sent to Emirates 24|7, BSF said the surge in food prices in 2008 served as an alarm for the world’s richest country in oil and poorest in water to embark on massive farmland investment in fertile countries, including Turkey, Sudan, Ethiopia, Vietnam, Ukraine and Kazakhstan.

“Investing in agriculture abroad is easier said than done because the investments are often politically charged and local players could regard Gulf investors as potential ‘land grabbers’. Certain sub-Saharan African countries are themselves often net food importers, adding to the investment risk, particularly given severe climate changes occurring globally, the first half of 2010 was the warmest on record,” John Sfakiankis, BSF Chief Economist, said in the report.

“Private sector firms, meanwhile, would need support of local governments to develop infrastructure. The Food and Agriculture Organisation (FAO) estimates that, in addition to public investments, $209 billion in gross annual investments are needed in primary agriculture and downstream services in developing countries to meet global food requirements by 2050.”

BSF said for the Saudi initiative to succeed, private investors from the kingdom should have access to crucial investment information about target countries so they can base their decisions on geography, political risk, rule of law and domestic economic and infrastructure conditions.

It noted that the Saudi government has acted as a facilitator between investors and some of the countries under consideration.

“Even with these elements in place, the system would need to be tested during a food supply crisis at domestic and/or global levels,” it said.

“Private investors looking for higher profits could seek to export their crop to global markets instead of Saudi Arabia. Offtake agreements - signed between producers and buyers of resources - will need to be tested for how legally binding they are and whether the purchaser will be required to incur upfront infrastructure investments. Still, offtake agreements offer little investment risk, especially in mature and developed economies.”

The study said the desert kingdom, the largest Arab economy, could also look to strike “strategic alliances”, not necessarily based on equity acquisitions, with global food giants with decades of experience and local field knowledge.

It said these multinational companies offer “enormous” economies of scale, vertical integration, financing, research capabilities and global strategic alliances.

“Forging such agreements could facilitate access to either land in sub-Saharan Africa and elsewhere or to final products,” it added.

BSF said the vulnerability of Saudi Arabia, which relies on imports for about 70 per cent of food supplies, was heightened by its plan to phase out the production of wheat and some other water-intensive crops following decades of rapid depletion of non-renewable water resources.

It said the country needs about 2.7 million tonnes per year of wheat, around 800,000 million tonnes of rice and over 6.3 million tonnes of barley, nearly 45 per cent of total global exports. In total, it demands about 14 million tonnes of animal feed each year for livestock, it said.

Citing figures by the US-Saudi Business Council, it said up to 2008, Saudi Arabia was paradoxically a net exporter of wheat despite having one of the world’s lowest renewable water resources.

In order to face challenges of shrinking water resources and global food shortages, a government initiative was unveiled two years ago to reduce wheat production by 12.5 per cent per year until halting it completely by 2016.

BSF referred to King Abdullah’s agricultural Initiative, which took effect in early 2009. Backed by a SR3bn government-sponsored fund, the initiative aims to improve long-term food security by enabling private Saudi businesses to invest in agricultural projects in countries better suited for crop cultivation.

Saudi Arabia hopes to secure supplies of essential commodities such as sugar, rice, wheat, barley, soybeans and maize, livestock and animal feed.

“Given the scale of investments required, the fund would need to be enhanced if it is to achieve a stated goal of building a strategic reserve of basic commodities to avoid any future food crisis,” the study said.

It noted that Kazakhstan’s largest crop is wheat, ranking as the sixth largest in the world. However, agricultural lands were depleted of their nutrients during the Soviet era, which continues to impact production today, it said.

Ukraine provides opportunities for agricultural production (barley and wheat) but like Kazakhstan governance, infrastructure, and transparency issues pose challenges for potential investors, the study added.

“Similarly, Sudan’s agricultural potential could be significant but infrastructure, the hydropolitics of the Nile and stability challenges cannot be ignored. Turkey’s dynamic macroeconomic profile, stable politics and elevated rule of law has attracted foreign investors,” the study said.

“Wheat, first domesticated in southeastern Turkey, is widely produced although traditionally it imports Black Sea wheat from Russia. However, weak harvests are not uncommon due to drought and there is no legal settlement of the usage of the Tigris and Euphrates rivers by the riparian states, Turkey, Syria and Iraq.”

Turning to Vietnam, BSF said its attraction is due to its rice production capacity, being the world’s second largest rice exporter after Thailand. Vietnam is one of Asia’s most open economies and among the world’s fastest growing, it added.

As for Egypt, its agricultural potential is constraint by limited arable land, a growing population and water inefficiencies, BSF said.

“Finally, Ethiopia’s agriculture potential is vast but would require considerable infrastructure investments as well as better reorganisation. Ethiopia is often ironically referred to as the ‘water tower’ of Eastern Africa because of the many (14 major) rivers that pour off the high tableland. It also has the greatest water reserves in Africa, but few irrigation systems in place to use it.”

In 2008, the United Nations World Food Program helped feed 11 million people in Ethiopia, which suffers from crop failures and food distribution problems.

“However, there are other countries that need to be carefully examined, notwithstanding their own specific challenges, including Brazil, Argentina, Canada, New Zealand and Australia that offer predictability, rule of law and macroeconomic stability and an extensive farming experience,” the study said.

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