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Pt 1: Saudi Arabia ended its domestic wheat production program that lasted for more than three decades

By AgroChart, March 2016

Report Highlights:

In MY2014/15, U.S. corn exports continued their dominance of the Saudi market, reaching 1.2 million MT and accounting for 41 percent share of the market. Saudi corn imports in MY2015/16 are forecast to increase by three percent, to 3 million MT.

In MY2015/16, Saudi Arabia ended its domestic wheat production program that lasted for more than three decades. A very small number of Saudi farmers, however, are expected to continue their wheat production to supply local artisanal mills.

Saudi wheat imports for MY2015/16 are projected to be around 3 million MT, a decline of about 14 percent from a year earlier due to large carryover stocks. Saudi barley imports in MY2015/16 are projected at 8.5 million MT, about 4 percent higher than imports in the previous year. Saudi rice imports are expected to increase by 4 percent, to 1.48 million MT.

Wheat


Production:

In MY2015/16, the Saudi government ended its domestic wheat production and purchase programs, as was specified in the decree # 335 of 2007.

The decree stipulated that the Saudi Grain Silos and Flour Mills Organization (GSFMO) would reduce wheat production quotas for registered farmers by 12.5 percent annually starting from MY2007/08 in order to end wheat cultivation by the beginning MY2015/16.

The main reason for the policy change was a strong concern over the depletion of the country's scarce water reserves, as the wheat crop is 100 percent irrigated. This policy was a drastic departure from the country's longstanding strategy of achieving wheat self-sufficiency that has been pursued since the early 1980s.

The GSFMO was restructured and renamed as the Saudi Arabia Grains Organization (SAGO) in November 2015.

USDA official estimate for the Saudi wheat production in MY2014/15 was revised upward, from 425,000 MT to 722,333 MT, based on SAGO's procurement data. As such, post has revised the Saudi wheat planted area for MY2014/15 to 120,000 HA.

The Saudi government is encouraging former wheat farmers to engage in alternative sustainable agricultural activities such as greenhouse farming and adopt advance drip irrigation techniques to produce fruits and vegetables. However, some small farmers may continue to produce small quantity of local wheat for sale to special customers for use in producing some traditional bakery products.

According to local agricultural experts, total annual domestic wheat production for MY2015/16 should not exceed 10,000 MT. Post reduced its domestic wheat production estimate for MY2015/16 by about 67 percent, compared to official USDA projection of 30,000 MT.

The production area was also revised to reflect the deceased domestic wheat production.


Consumption:

Wheat is an important item in the Saudi diet. It is mostly consumed in the form of flat (pita) bread or local hamburger buns known as 'Samoli' and other western-style bread such as French baguettes and pizza.

The average per capita consumption of wheat in Saudi Arabia is currently estimated at about 298 grams per day, or about 109 kg annually.

Total Saudi wheat consumption in MY 2014/15 was estimated at about 3.35 million MT and is projected to increase by 3 percent in MY 2015/16. It should be noted that Saudi Arabia has not imported feed wheat since MY2011/12. We project wheat residue to remain at about 55,000 MT in MY2015/16.

The bulk of wheat flour consumed in Saudi Arabia is white flour. In recent years, however, there has been a small but growing demand for whole wheat flour due to its perceived health benefits, particularly by health conscious consumers and those with some health conditions such as diabetes and obesity.

It should be noted that Saudi Arabia is one of the countries with high percentage of diabetes and obesity rates in the world. SAGO, the exclusive wheat flour miller in Saudi, has increased its whole wheat production in recent years to meet the growing demand.


Trade:

SAGO is the exclusive importer of food grade wheat in Saudi Arabia. The organization imports both hard and soft wheat directly through public tenders open to registered international exporters and it does not buy through grain brokers.

SAGO has been buying wheat from various origins including the EU, North America, South America and Australia. The organization imports wheat through two main ports, the Jeddah Islamic Seaport on the Red Sea and the Dammam King Abdul Aziz Seaport on the Arabian Gulf.

SAGO has been making plans to increase the number of Saudi seaports that can receive imported wheat to five by adding three smaller seaports in Diba, Jazan and Yanbu (all located on the Red Sea) by 2018.

This year, SAGO will import some wheat through the port of Jazan.

Trade data from wheat supplying countries shows that for the first six months of MY 2015/16 (July-Dec 2015) that Saudi Arabia imported a total of 1,170,441 MT, a decline of about 27 percent, compared to 1,608,150 MT imported in the same period of the previous year.

There are two reasons for the huge decline in Saudi wheat imports in the first six months of this marketing year; one is the increased purchase of domestically produced wheat from 425,000 MT to 722,333 MT and the other is the large wheat stocks at SAGO's silos in MY2014/15. SAGO said that it will resume its normal wheat imports in the second half of MY 2015/16 to import a total of about 3 MMT for the entire marketing year.

Accordingly, post has revised the MY2015/16 wheat import forecast downward to 3 MMT, compared with USDA's official estimate of 3.8 MMT, a decrease of 21 percent.

Wheat imports in MY2016/17 are projected to rebound by 17 percent, to 3.5 MMT to meet consumption needs and maintain reasonable strategic wheat reserves levels.

In the first six months of MY2015/16, Lithuania was the top exporter of wheat to Saudi Arabia with 658,307 MT, accounting for 56.2 percent of the total Saudi wheat imports.

Lithuania's wheat exports to the Kingdom increased by about 240 percent in the first six months of this MY, compared to its exports in the same period of MY2014/15.

Germany was the second largest exporter with 16.6 percent, and Latvia was the third largest supplier with 15.9 percent.

Canada and Poland equally accounted for 5.4 percent of the total Saudi wheat import in the first six month of this marketing year.



Saudi Arabia imported about 3.49 MMT of milling wheat in MY2014/15, an increase of 3 percent over imports in MY2013/14.

Germany was the leading wheat supplier to Saudi Arabia, with 28.1 percent market share, despite a decline of its exports by 27, percent compared to the previous year.

Poland was the second largest supplier with 27.9 percent, while Canada was the third largest supplier with 19.8 percent in MY2014/15. Both Poland and Canada increased their exports in MY2014/15, compared to their exports in the year before.

Wheat imports from Lithuanian, French, Australian and Latvian declined significantly in MY2014/15, compared to a year earlier. The Netherlands, Argentina Brazil and Finland returned to the Saudi market in MY2014/15 with a combined market share of 11.1 percent. SAGO's imports of U.S. wheat in MY2014/15 totaled 626 MT, all for experimental milling of white wheat.

Post has revised its U.S. wheat export estimate for MY2014/15 in the wheat PSD table accordingly.




Stocks:

The SAGO owns and operates silo complexes in major cities around the Kingdom with a total combined storage capacity of 3.1 MMT at the end of 2014, an increase of about 70 percent over 2011.

SAGO has signed contracts to build five additional silos in Makkah, Qassim, Jazan, Aseer, and Al-Hasa, which will increase the total storage capacity to 3.7 MMT by the end of 2016.

Currently, SAGO maintains more than 1.8 MMT in strategic wheat stocks but it has plans to increase it to close to the annual wheat consumption level in MY2016/17.


Policy:

In MY2015/16, the Saudi government officially ended its more than three decades domestic wheat production program by fully implementing its 2007 decree # 335 to phase-out domestic cultivation.

The main reason for the policy change was a strong concern over the depletion of the country's scarce water reserves, as the Saudi wheat crop is 100 percent irrigated.

This policy was a drastic departure from the country's longstanding strategy of achieving wheat self-sufficiency that has been pursued since the mid-1980s.

Another agricultural crop that was targeted by the government decree for gradual termination is the domestic green fodder production, with production estimated at about 4 MMT per year.
 
In December 2015, the Saudi government instructed the Saudi Ministry of Agriculture (MOA) to issue a three year green fodder phase-out plan to end local production by 2019, making Saudi Arabia one of the largest import market of green fodder, starting 2020.

According to the Saudi Ministry of Water and Electricity, elimination of the domestic green forage production alone will save the country about 7 billion cubic meters of water annually.

The Saudi government is also encouraging agricultural companies to invest in foreign countries that have comparative advantage in producing certain crops and re-export their products back to Saudi Arabia.

The crops targeted by this initiative include wheat, rice, barley, yellow corn, soybeans, and green forage. The Saudi government is providing financial incentives to encourage

Saudi investors (companies and individuals) to take part in this food security initiative and invest overseas.


Saudi Arabia Privatizes Flour Mills

On November 9, the Saudi government approved the establishment of four milling companies and restructuring the Grain Silos and Flour Mills Organization (GSFMO) under a new name, the Saudi Grains Organization (SAGO).

The Saudi government authorized the Public Investment Fund (PIF) of the Ministry of Finance to set up four flour mill companies, which will be eventually sold to the private sector, to produce wheat flour for domestic market. The PIF will re-group nine existing flour mills into four companies that will be sold to interested buyers through a competitive bidding process. F

oreign investors will be allowed to compete with the Saudi investors to own and operate these flour mills. The flour mills sector has been for several years targeted for privatization by the Saudi government.

The new milling companies will serve as clients of the SAGO to process and distribute wheat flour for fees to government approved customers at agreed subsidized prices.

The new mills would be allowed, if so chose, to import their own wheat shipments for the processing of non-subsidized flour and the production of upscale quality bakeries and pasta.

Most of the revenue of the private mills is expected to come from the milling fees charged to the SAGO.

These flour mills have a combined daily milling capacity of 13,980 MT and can process more than 3.3 MMT of wheat annually. SAGO has about 3.1 MMT of wheat storage capacity and is currently building several wheat silos to increase its total storage capacity to 3.7 MMT of wheat by the end of 2016.


The role of the SAGO after privatization

The SAGO will remain the exclusive government agency to import subsidized milling wheat, and will maintain ownership and operation of most of the wheat silos across the country. The SAGO will manage the strategic wheat reserves and ensure the Kingdom's food security objectives.

The SAGO is expected to privatize only a part of its grain storage silos to provide a smooth transition for the new flour mills. The rest of the storage capacity will be retained by the SAGO for strategic reserve purposes.

SAGO will also assume regulatory functions in the wheat milling sector that will include:

  • Setting the regulations concerning wheat flour quality
  • Inspecting flour mills to ensure compliance with quality regulations
  • Regulating the competition among the private flour milling operators


 

Marketing:

The SAGO is the sole wheat buyer and distributor of wheat flour in Saudi Arabia. All licensed bakeries, industrial users and supermarkets get their flour requirements directly from designated SAGO's flour mills located in their cities or from assigned agents in their respective areas.

There are more than 525 appointed distributors, with about 100 that have multi-outlets, and sever a total of 11,606 establishments, of which 6,500 are licensed bakeries.

The distributors provide the packaged flour to licensed bakeries in a 45 kg sack and to retailers in 1, 2, 5, or 10 kg sacks. Industrial users purchase in bulk/metric tons.


Market Development Activities:

Since the resumption of wheat imports in 2008, the U.S. Wheat Associates (USWA) regional office has been coordinating various market development and trade servicing activities in Saudi Arabia.

The capacity building activities, which included seminars, training and exchange programs, were designed to assist SAGO's purchasing staff in understanding the quality attributes of various U.S. wheat varieties.

The USWA offered workshops to address diverse wheat purchasing issues, including risk management, contract terms, quality specifications, wheat inspection and other global market considerations related to wheat supply and demand, as well as freight and shipping costs.


Prices:

Large bakeries and industrial users purchase wheat flour directly from SAGO flour mills, while smaller bakeries and retailers receive their assigned quotas from SAGO appointed distributors.

SAGO packs wheat flours in five sizes: 45 kg bags for bakeries and 1, 2, 5 and 10 kg bags for retail. Industrial customers purchase in bulk of 1,000 kg. The SAGO's wholesale prices vary on the flour type and extraction rate.

The wholesale price of a kg of consumer packed wheat flour range between $0.27 and $0.33, bakers purchase from $5.3 to $8 per 45 kg, while industrial users purchase in bulk for prices that range between $117.3 and $160 per MT. The prices have not changed for over three decades.


Exports:

Saudi Arabia does not export wheat grains. However, an estimated about 10,000 MT of wheat grain equivalent of wheat products such as macaroni, pasta, biscuits and some breads are exported annually to the GCC and other nearby countries.


This content is provided by Global Grain Events for informational purposes only, and it reflects the market and industry conditions and presenter’s opinions and affiliations available at the time of the presentation.

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