Saudi Arabia Wheat Exports (SAUDI Case)


        CASE NUMBER:        190
        CASE MNEMONIC:      SAUDI
        CASE NAME:          Saudi Arabia Wheat Exports

A.   IDENTIFICATION
1.   The issue.

     The Saudi government decided to embark on an ambitious
agricultural promotion two decades ago, as part of its overall
strategy to diversify the structure of its economy away from oil.
In spite of difficult climatic conditions, Saudi Arabia has
succeeded over these years to modernize its agricultural sector
by introducing new and modern technologies, fertilizers and other
methods of cultivation. As a result, Saudi Arabia's wheat output
touched a peak of 4.5 million tons in 1993. Overall, Saudi
agricultural production amounted to a surplus and growing exports
to neighboring countries. However, environmental constraints and
budget cuts tend to undermine Saudi Arabia's strategy of self-
sufficiency. Sources of water face the threat of depletion, while
subsidies to wheat producers decrease steadily in the face of
increasing budgetary constraints.
2.   Description
     Saudi Arabia's under-secretary at the ministry of
Agriculture and water, stated that subsidies for wheat production
have been cut as part of a general policy aimed at diversifying
agricultural produce in addition to saving water and money. 
Therefore, there will not be a surplus for export starting from
the 1996 harvest season.  Saudi wheat production is expected to
remain at the level of self-sufficiency in wheat.
     The plan provided for subsidies to farmers to encourage them
to increase their production. Wheat productions increased from
3000 tones a year two decades ago to million tones in 1992 which
is equivalent to twice the domestic consumption.  A
representative at the ministry of agriculture and water, said it
is important to note that our wheat strategy was aimed always at
self - sufficiency," as we have no intention to compete in the
world wheat markets".  The government subsidy to what producers
this year fell to $850 million, down from $1.87 billion in 1993.
     The plan was so generous to farmers it backfired as they
took advantage of subsidies, and the flood of exports raised much
criticism against Saudi Arabia by competing wheat exporters.  A
crop year which runs from October to around June,  the amount of
wheat bought  by the government at subsidized prices are 3.3
million tones for 1991-1992, three for 1992-1993, 2.8 for 1993-
1994, 2.5 for 94-95, 2.3 for 1995-1996 reaching self-sufficiency
of two million by 1996-1997.
     Therefore, farm with more than one owner will be able to
sell more than one quota allocation to the GSFMO.  Non-commercial
farmers are allowed to sell their  entire output to the GSFMO at
$534 a tone.
     Another reason for cutting subsidies is the environmental,
as the country's booming agricultural sector consumed ever
greater amount of ground water consumed in the kingdom for any
purpose.  Saudi Arabia's water scarcity is the cause of urban
degradation and pollution from the neighboring countries, but
Saudi Arabia has the economic capacity to process its drinking
water.  Urban degradation has been a very serious problem in the
Middle East.  The World Bank indicates that urban population and
industrialization have created massive air pollution problems. 
In Cairo, for example sulfur dioxide emissions into the air from
oil burning power plants are up to five times safety level
standards, causing rates of living disease in children three time
those  found in rural communities.  
     High levels of desert dust pollution, along with dangerous
dust emissions from industries, such as cement plants.  Dust
pollution causes respiratory tract diseases, gastro-duodenal
ulcers and cancer; dust levels are up to ten times World Health
Organizations (WHO) safe standards.
     The water crisis is more threatening to health and human
welfare than urban degradation.  Nevertheless 30 years ago,
renewable freshwater resources were estimated at approximately
3,000 cubic meters per person a year, or about three times the
conventional definition of water scarcity of 1,000 cubic meters. 
The problem of rapid population has created increasingly heavy
and often inefficient use for irrigation, very rapid increases in
domestic demand and new industrial requirements.  As a result it
is estimated that in 1990 only five countries in the Meddle East
have per capita supply exceeding the boon cubic meter level.  It
is estimated that by the year 2020, water availability of the
region as a whole is expected to drop to 700 cubic meters per
person per year.  The problems decreasing availability is also in
a state of double jeopardy because of pollution induced decreases
in the quality of water and that means a reduction in water
availability of water needed would be unsafe or unusable.
     It is argued that the low priority by many Middle Eastern
counties given to environmental issues in national policy agendas
must be re-evaluated and emphasized to the seriousness of the
environmental problems that many counties face.  This problem is
stemmed from persistent notions that concern for the environment
is a "luxury" issue  one that contradict economic growth, but in
reality action on environmental issues is fundamental to
successful economic and social development.
     Before the discovery of oil, Saudi Arabia was endowed with
an agricultural sector aiming at satisfying local needs. In the
mid-1970s, Saudi arable land did not exceed 150,000 hectares and
its wheat yield hardly amounted to 3,000 tons, thsu meeting the
needs of only 20,000 people per year. After a period of
decline, the use of modern technology, government incentives to
farmers and pragmatic economic planning have enabled Saudi Arabia
to achieve major breaktroughs in agricultural production during
the two last decades. Now the arable land amounts to 2 million
hectares and the wheat yield totals about 4 million tons.
     With relatively a small population, there has never been a
population pressure on available land, although only about 0.6%
of it is arable(Apo)APO APO APO. The government could easily
distribute vast areas of land free of cost to volunteers. A few
specialized regional agricultural development companies have also
been set up on a joint stock basis with the initial support of
the government. These companies, backed by massive resources,
have contributed significantly to the development of the
Kingdom's agriculture. In addition, the government has pumped in
large volume of finance into agricultural development projects.
Massive investment, backed by interest-free official loans and
heavily subsidized inputs, have aided the emergence of an
agricultural set-up based mostly on large scale farming in all
the sectors concerned.
     Saudi Arabia's strategy relied heavily on capital-intensive
techniques, import of state-of-the-art farming technology and
large scale operation. To overcome water shortage, Saudi Arabia
has chosen to adopt the best technology available anywhere in the
world. For  wheat  production, modern equipment (like the
center pivot irrigation system) to draw underground water has
been used extensively. To augment water supply, several plants
for treatment of water have been set up. There are now about 200
dams at various locations contributing to underground water
storage, domestic water supply and protection from occasional
floods. Wadi Bisha, with a capacity of 325m cubic meters, is one
of the largest dams in the region. Besides, the Al-Absa
irrigation and drainage project, serving 14,000 hectares of
agricultural land, has 3000 km of irrigation canals and over 1000
km of drain pipes. There are similar irrigation and drainage
network in other agricultural areas like Al-Jouf, Al-Aflag and
Al-Kharj. Additionally, liberal imports of drought-resistant
seeds have been allowed.
     The strategy was the same for vegetables and fruits. The
introduction of greenhouses has given a big boost to the
cultivation of a wide range of vegetables, fruits and even exotic
flowers which have found export markets in Europe. These
greenhouses, some of them computer-controlled to regulate the 
temperature and supply of water and fertilizers, have modernized
the basic production techniques in Saudi horticulture. The
protected agriculture has also eliminated the seasonality in the
supply of certain vegetables and fruits which are now available
year round.
     As a consequence, Saudi Arabia has made a breakthrough at
least in certain sectors of agriculture: wheat, fruit, milk,
eggs and meat... The Kingdom has attained near self-sufficiency
in a number of staple foodstuffs. Indeed, the growth of food
production and the food processing industry has had an import
substitution effect. Saudi Arabia's domestic production accounts
for 74 percent of the total domestic demand for foodstuffs,
according to an official estimate. The comparative figure for
1984 was only 34 percent. Saudi Arabia  still imports large
quantities of food (SR13bn-$ 3.5bn-in 1992), but without the
recent progress in domestic agriculture, the import bill would
have been substantially larger. The domestic demand, meanwhile,
has been steadily going up because of the growth in
population-estimated at an annual rate of 4 percent, one of the
highest in the world-and the high levels of per capita income and
purchasing power in the Kingdom.
     Beyond meeting its domestic needs,  Saudi Arabia has been
able to export some of its products, like wheat, vegetables,
dates, eggs, dairy products and seafood, to its neighboring
countries. According to the Agricultural Statistical
Yearbook-1992 released by the Department of Economic Studies and
Statistics of the Ministry of Agriculture and Water, Saudi
Arabia's wheat output touched a peak of 4.07m tons in 1992. The
actual domestic consumption of wheat is estimated at no more than
1.3m tons a year, leaving a large surplus. Exports amounted to
2.5m tons in 1993.
     As a result, agriculture has contributed to the progress of
economic diversification taking place in the economy. The share
of agriculture in Saudi Arabia's GDP used to be traditionally
negligible. Following large flow of investment in this sector
from mid-70s, its share improved 3.4 percent by 1984-1985. By the
end of the Fourth Development Plan (1985-1990), the share of
agriculture in the total GDP rose further to 8 percent. A more
reliable index of growth is the agriculture's contribution to the
"value added" which grew at an annual rate of 13.8 percent during
the Fourth Plan, as against 8.7 percent during the Third Plan
(1980-85). During the Fifth Plan (1990-1995), the annual average
growth of agriculture is envisaged at around 7 percent. This rate
of growth represents a relative decline, but this is
understandable in the context of the need for maintaining the
supply and demand balance for agricultural commodities and
conservation of underground water.
     Another major impact of the upsurge in food production has
been felt in the industrial field. The food processing
industry (flour mills, wheat and dairy products) has become
dynamic in recent years. Revitalization of agriculture has also
its impact on supporting industries like fertilizers,
insecticides, plastics, etc.
     However, sources of water are rare in the region. Scarcity
of rains and surface waters, coupled with an arid desert land and
hot climatic conditions have made agrarian reforms a costly
challenge (see Environment Clusters).  In addition, agriculture
is now the most logical area to examine for potential budgetary
savings. The result has been the creation of a farming sector
that appears to be technologically sophisticated but economically
very inefficient. Wheat is grown at eight times world prices
and then subsidized for exports. To that extent, U.S. Secretary
of Agriculture Block once called the Saudi wheat program
"crazy".
     As a result of budgetary constraints, by early 1993 the
government announced plans to reduce wheat output from more than
4.2 million tons by nearly half to 2.8 million tonnes by 1994.
In November, 1994, Abdullah Bin Abdul Aziz Al-Muammar,
Undersecretary at the Ministry of Agriculture and Water, stated
that subsidies for wheat production had been cut as part of a
general policy aimed at diversifying agricultural produce in
addition to saving water and money. The government subsidy to
wheat producers in 1994 fell to $ 850 million, down from $ 1.87
billion in 1993.

3. Related cases
     ISRAELH2 Case
     ARAL Case

     Keyword Clusters
     (1): Bio-geography               = DRY
     (2): Environmental Problem       = HABITat loss
     (3): Trade Product               = FOOD

4. Draft authors: Yannick Poivey and Eyad H. Zayed

B. LEGAL CLUSTER

5.   Agreement and Discourse: DISagreement and INPROGress
6.   Forum and Scope:  SAUDI Arabia and UNILATeral
7.   Number of Parties affected: 1
8.   Legal standing: LAW

C.   GEOGRAPHIC FILTERS

10.  Geography

a) Continental domain:        Middle East
b) Geographic site:           Eastern Middle East [EMID]
c) Geographic impact:         Saudi Arabia

10.  Sub-state: NO
11.  Type of habitat:  DRY
     Saudi Arabia is one of the Arabian peninsula states whose
desert lands are mainly unfit for agriculture. There are few
renewable water resources and the climate is hostile to intensive
exploitation of the land.

D.   TRADE FILTERS

12.  Type of measure:  SUBSIDY

     The Saudi government provided subsidies and various
agriculture-promotion measures to farmers. Dr. Mohammed Al-
Qunaibet, head of the Agricultural Economic Department, King Saud
University, estimates that the Government procurement policy
price for wheat crop was $933 per ton, which was later reduced to
$533. According to the same expert, the Government has so far
paid more than $13 billion to wheat farmers. This price does not
include subsidies on agricultural machinery and interest-free
loans of over $7 billion. These arrangements may be regarded
as export incentives for agricultural produces (see Degree of
Competitive impact). It has to be noted that cash shortages due
to Gulf War expenditure and lower oil revenue played an essential
role in the current decrease of subsidies.
13.  Impact:  DIRect
14.  Relation of measure to impact
     Directly related         NO
     Indirectly related       YES  WHEAT
     Not related              NO
     Process                  YES  WATER
15.  Product type:  Wheat
16.  Economic data
     Agriculture plays a considerable role in Saudi economy by
employing 569,000 persons, or 9.9% of the work force(Apo)APO APO
APO. Along with forestry and fishing, agriculture accounts for
7.3% of the kingdom's GDP.
17.  Degree of Competitive Impact: HIGH
     Subsidies and agriculture support mechanisms have created
the Saudi agricultural production system. Indeed, in the late
1980s, Saudi Arabia was paying farmers more than 500$ a ton for
wheat it was selling on the world market for about 170$.
     However, it is important to note that Saudi wheat strategy
was never aimed at exporting, but at self-sufficiency. Saudi
Arabia did not intend to compete in the world wheat markets. To
that extent, subsidies did not affect competitors substantially.
In addition, following the trimming of subsidies, Saudi wheat
production is expected to be limited at the level of self-
sufficiency from 1996. Consequently, there will not be any
surplus for exports.
18.  Industry sector: FOOD
19.  Exporter and Importer:  Saudi Arabia and MANY
     Saudi Arabia has become one of the major wheat-exporting
countries worldwide. It has been awarded many decorations for
the quality of its wheat from various organizations, including
the FAO.

E. ENVIRONMENT CLUSTERS

20.  Environmental problem type:  WATER
     A number of problems have been associated with subsidy
programs. Meaningful statisticsinclude: a loaf of bread weighing
only 200 grams uses 400 liters of water and Saudi Arabia uses
80 percent of its fresh water for agriculture. Dr. Mohammed
Al-Qunaibet, head of the Agricultural Department, King Saud
University, says the agriculture-promotion policy was
environmentally not feasible. The undertaking initiated in 1978
by the Ministry of Agriculture and Water in 1978 was based on the
slogan "food security and self-sufficiency at any cost". Saudi
Arabia uses irreplaceable fossil ground water to grow wheat. Many
Arab environmentalists consider this to be the most outstanding,
negative example for water planners. However, about 10,000
water pivots were withdrawn in 1993, along with supporting
machinery such as water pumps.
21.  Species information
22.  Impact and Effect:  LOW and Structure [STRCT]
23.  Urgency and lifetime: HIGH and 100 of years
24.  Substitutes:  LIKE
     The Saudi case is pretty straightforward: a reduction of
wheat subsidies woud encourage neighboring countries to switch to
alternative, more relevant suppliers. As a second step, a further
reduction of subsidies would lead Saudi Arabia to import part of
its wheat needs at a cheaper cost than local production. As a
consequence, constraints on the level of water reserves would be
alleviated.

F. OTHER FACTORS.

25.  Culture: NO
     Saudi wheat exports are the result of a long-term strategy
aiming at securing self-sufficiency to the Kingdom. The issue
thus pertains to a notion of "food security", rather similar to
the Japanese relationship to rice self-sufficiency, or the
concept of "oil security" coined by the United States. The
willingness of the Kingdom to attain self-sufficiency comes as a
national-pride oriented answer to a perceived threat of potential
wheat embargo by traditional exporters, on which Saudi Arabia was
highly dependent. In addition, wheat is considered to reflect the
strength of Saudi agriculture, deriving from the fact that
nowhere else in the world a field crop like wheat has been
cultivated on a large scale in a desert land. To that extent, the
case relates to a specific cultural perception of the wheat issue
by Saudi officials.
26.  Human rights: YES
     The Saudi program of land distribution has convinced many
people to settle in the countryside rather than rushing to the
cities. We might also assume that some nomadic tribes were given
incentives to settle down, in order for the Saudi regime to gain
tighter control over their activities and location.
     Flush with wealth in the early 1980's, the Saudi government
was eager to promote rural development to win support from
nomadic tribal groups of dubious allegiance to the ruling Saud
family, consolidate government authority near undefined borders,
and prevent a potentially destabilizing migration of rural Saudis
to the cities.  The problems began after the subsidies for wheat
farmers was drastically reduced and many lost the incomes they
were so dependent on for daily living necessities.  The Bedouins
have always been discriminated against by the Saudi government
and are very critical of the Saud family.  Since the Saud family
attained control over Saudi Arabia, the bedouins have always
believed that their members are not the true leaders of the land. 
The bedouins are bitter rivals and enemies of the regime and live
in isolation from the rest of the nation.

27.  Trans-boundary issues:  NO
28.  Relevant literature.

Abelson, Philip H. "Desalination of  Bradsish and Marine Waters".
Science   March 15, 1991, v 251 n 4999 pp. 1289-90.

Ahmed, Furqan, Riyadh Daily Staff, "Saudi Arabia: despite arid
desert lands and hot climatic conditions, Saudi Arabia has made
deserts bloom".  Reuter Textline-Moneyclips, October 6, 1994

Alan, George "Water Scandals." Middle East,  October 1994, n 238,
pp.30.

Al-Saleh, Mohammed Abbullah "Declining Ground Water Level of the
Minjus Aquifer, Tebrak Area, Saudi Arabia."  Geographical Journal
July 1992,. V158 (pt.2) pp. 215-222.

Awkasho, Rashad. "Saudi Arabia: special report - drain on
valuable water resources plugged; overcoming a problem of
plenty".  Reuter Textline-Moneyclips, February 9, 1995

Bashir, Abdul Wahab.  "Economist Warns of Negative GATT Impact;
Prices of Imported Food May Go up by 10%." Money clips April 26,
1994.

Bou-Saah, Jamil F. "Runaff as a Resource."  Civil Engineering
October 1993, V 63 n 10, pp. 70-71.

Cordahi, Cherif, "Saudi Arabia-Economy: Kingdom Takes Stock as
Boom Years End". International Press Service  February 23, 1995.

Hudson, Michael. "Arab agriculture - Just Add Water" Economist
July 15, 1989. v 312 n 7611, pp 51-53. 

Lancaster, John . "Saudi Wheat Exports Hit by Low Oil Prices."
Washington Post  January 1, 1995.

Looney, Robert E.  "Saudi Arabian Budgetary Dilemmas". Arab
Affairs, 1990, p.76-87.

Millership, Peter. "Saudi Arabia wheat exports to stop, Minister
Says."  Reuter, World Service, November 22, 1994.

O'Sullivan, Edmaund.  "Saudi Arabia: Wheat Harrest Drop
Forecast". Middle East Economic Digest, May 2, 1994.

Reuters World Service, November 22, 1994.

Reuter Library Report, January 31, 1991.

"Roundup: Saudi agricultural achievements a world miracle".
Xinhua News Agency, September 23, 1994.

"Saudi Arabia: subsidies cut as part of diversification policy;
no surplus wheat for export from '96".  Reuter Textline-
Moneyclips, November 29, 1994.

Spear, John.  "Saudi fodder on the Heels of Wheat".  Ceres: FAO
Review March, 1991, v 23  n 2, pp. 9-11.

"Subsidies cut as part of diversification policy, No surplus
wheat for Export 96", Moneyclips, Saudi Gazette, November 24,
1994.

Williams, Ian.  "Science: Politics of water: making deserts
bloom, not boom".  The Daily Telegraph, January 13, 1992.



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