RIYADH, 10 June 2008 -- Rice is an essential foodstuff for about half of the world and remains highly protected and regulated. For Saudi Arabia, it is one the most important food items, consumed by 85 percent of all Saudis on a daily basis and by nearly 80% of the Kingdom's expatriate population. Rice consumption in Saudi Arabia, at 45 kilos per capita per annum, is among the highest in the world -- and all of the Kingdom's rice is imported.

Rice imports to Saudi Arabia over the past decade have been growing by more than three times the annual population growth rate. If we assume even a conservative scenario, then imports will rise by 58 percent between 2008 and 2014.

Over the decades, rice tastes have shifted. Up until the 1960s, American rice was widely consumed in the country, especially in the Western province. But since the early 1970s, Basmati rice has become the preferred choice of Saudi households throughout the country, with some specific regional variations.

There are about 17 large rice importers in Saudi Arabia, from a total of 180 companies importing rice. Six importers account for 63 percent of the total rice import market. Two-thirds of all rice imports in 2007 came from India and were primarily Basmati (73 percent). American rice (12.3 percent) is the second most imported rice type, followed by Thai rice (10.2 percent).

Rice subsidies, like other food subsidies, can have a distorting effect on markets. Subsidies can lead to consumer hoarding, in anticipation of future price hikes and anticipated shortages. Price is one way to ration goods -- and rationing is necessary to deal with scarcity. The second option available, at this moment, is to institute a price freeze among rice importers. Effectively this would be cutting the profit margins of the importers and the retailers -- but they would only be able to tolerate such anti-market policies for a short period of time.

However, subsidies and price freezes on selective food products do not address the rising cost of other inputs, such as labor, transport and raw materials.

Going forward, we do not expect global rice prices to subside in 2008 and, according to the Food and Agriculture Organization (FAO), international rice trading is expected to decrease, mainly due to restrictions imposed by major exporting countries. Local rice prices have witnessed an average decline of 18-20 percent over the past several weeks as government subsidies are now beginning to make a difference at retail outlets. The government agreed in December 2007 to subsidize rice to the tune of SR1,000 per ton.

Meat: The Rise of Poultry

Meat (including poultry, beef, sheep, goat and camel) is another key food category, with nearly 75 percent of all Saudis and almost 70 percent of expatriates in the Kingdom consuming meat on a daily basis. Dietary preferences have shifted since the 1990s, as Saudis now tend to eat less red meat (beef, sheep, goat and camel) and opt for poultry.

Indeed, poultry is now consumed three times more than beef, sheep and goat meat. Annual per capita consumption of poultry meat was estimated at 40 kilos in 2007, compared to 16.5 kilos in 1979. All meat products in Saudi Arabia (poultry, beef, sheep and goat) account for 8 percent of total daily per capita calorie intake. The preference for chicken over other meats is also due to affordability of poultry over red-meat products.

In 2007, around 54 percent of all poultry consumed came from local farms. The food self-sufficiency strategy of the 1970s, which focused on wheat production, also entailed the establishment of an indigenous poultry industry and, today, Saudi Arabia has around 500 poultry farms.

Worldwide demand for corn to feed livestock and to make biofuel has been putting enormous pressure on its global supply. The United States is the world's largest yellow corn producer -- and the US ethanol industry uses only yellow corn for biofuels. Globally, the cost of poultry production is estimated to have increased by 27 percent in 2007, partly resulting from the economic impact of ethanol on livestock.

The food business, like many other trade businesses, relies on transportation to move its goods around the country. The cost of land transportation has increased in Saudi Arabia over the past year by average of 50 percent, and transport costs between the port of Jeddah and Dammam by an average of 65 percent over the same period. Although the cost of fuel is not significant, the lack of qualified expatriate drivers is a shortage which all the major food importers have noted.

Red meat is consumed less in Saudi Arabia today than two decades ago. On average, meat prices over the past year have increased by around 23 percent. Imported lamb from Australia and New Zealand increased by an average of 14 percent during the same period. The more affordable Berberi type (imported from Somalia and Ethiopia) saw its price rise by 10 percent, on the back of a 20 percent increase the year before.

The volume of locally produced lamb will increase in the coming years, as additional investors enter the Saudi market. Steps have also been taken to produce animal feed in neighboring Sudan, which could bring costs down and secure the export of certain crops.

Dairy, Fruit and Vegetables

The dairy industry in Saudi Arabia grew out of the 1970s government policy aimed at achieving self-sufficiency in dairy. The use of underground water became a viable alternative, given the lack of permanent rivers and the low level of rainfall. The Saudi dairy sector is now the most developed and technologically sophisticated in the Middle East.

The Kingdom's dairies produce higher yields per cow per day (30-35 liters) than any other producer in Europe (23-27 liters) or the Middle East. The quality of fresh milk in Saudi Arabia is one of the highest, if not the highest, in the world. There are currently 33 dairy producers in the Kingdom and only two -- Al Safi (30 percent) and Almarai (35 percent) -- have a significant market share, with Nadec (17 percent), Nada (7 percent) and Najdiya (5 percent) following behind.

The dairy sector has so far gone through two price wars -- the first lasting for six month until a ceasefire was brokered in May 2000, and a second running up until August 2002. By the end of the second "milk war", the price of milk had been brought down by 66 percent, as price was used as an instrument to gain market share. The price per liter of fresh milk and laban did increase again by 33 percent, from SR3 to SR4. But despite this increase, milk prices in Saudi Arabia remain the cheapest in the GCC and highly price-competitive in comparison to Europe.

The 1970s drive to make Saudi Arabia more self-sufficient also turned the Kingdom into a net fruit and vegetables producer. Today Saudi Arabia is 82.5 percent self-sufficient in vegetables and 65.5 percent in fruit. However, it seems that vegetable production in the Kingdom is in gradual decline, while fruit production is on the increase. This production ensures that Saudi Arabia is insulated, somewhat, from global food price hikes and shortages.

The Kingdom is a significant producer of fruit -- with citrus fruits, watermelon, grapes, pineapples, bananas and mangoes among its most productive crops; and Saudi Arabia has approximately one-tenth of the world's productive date palms. Competition seems to go through peaks and troughs during the year; fruit prices behave in a cyclical manner, notably during Ramadan and the winter months when prices rise significantly.

Domestic agricultural inputs rose over the past year, which can only partly explain the rise in the cost of fruit by an average 45 percent and vegetables by an average 67 percent. The cost of agricultural inputs (which are predominantly domestic, not imported) has risen in Saudi Arabia: fertilizer prices rose by 24 percent over the past year, labor by 20 percent and transportation by 23 percent. Machinery and equipment for the fruit and vegetable producers are mainly US-made.

In all, we find little justification for the "imported inflation" argument as a cause for the fruit and vegetable price rises in Saudi Arabia. We believe there are a host of other reasons which account for the higher cost of fruit and vegetable in the country -- including harsh winters, rising labor costs, increased costs, industry shrinkage and commodity speculation by local producers and wholesale intermediaries.

By Dr. John Sfakianakis

© Arab News 2008