Changing Saudi Arabia MoA Dairy Exporting Rules

Official details are a little difficult to come by, as always in Saudi government circles. However, there is now some evidence that the Saudi Ministry of Agriculture is close to firming up plans on how to restrict usage of scarce water resources by the domestic dairy industry. You may recall a press scare in 2010 – soon quashed by other branches of the Saudi government – that all dairy exports from the Kingdom were to be suspended. But the discussion has clearly continued…

Our information is that the MoA will soon be imposing a balancing system between dairy exports and feed imports. Basically, dairy exports and feed imports are to be logged with the MoA. A formula will be devised on how much feed is on average used to produce 1kg of finished good export – and the exporter will then need to prove that the equivalent amount of feed has been imported if fresh bulk milk (and, therefore, dairy feed) has been used as input. The aim is to reduce, and perhaps ultimately even to get rid of, usage of scarce water resources for the domestic growing of fresh dairy feed – alfalfa, barley etc. – in Saudi Arabia.

At the moment the talk is only about dairy exports, not production (ie volumes consumed in the Kingdom itself will not be affected). And by the time a policy is implemented and the effect will trickle down the supply chain, 2011 will probably be over and we may be well into 2012 or even 2013. However, we at IMES can see that this will have an impact on Saudi exports going forward. Cheese and butter (mostly imported in bulk and processed or simply repacked domestically) will probably not be affected as they are typically not manufactured from fresh milk in the Kingdom. But liquid milk, laban, yoghurt and labneh exports may well see a change. Saudi fresh dairies are heavily active in all GCC countries with all manner of product (Almarai even has some of its product range filled in the UAE by NFPC Milco, from imported bulk fresh milk sourced from Almarai cows) and export volumes for many of the fresh dairies are significant.

Why is this such an issue? Well, large fresh dairies in the Kingdom have always benefited from relatively cheap, often internalized production of fresh feed on large pivots predominantly in Saudi Arabia’s Central Region. A huge amount of water is being used to grow feed in areas that are perhaps not the most natural choices for arable farming. Nutritionally there are advantages in providing at least a portion of fresh feed to dairy cows, and from a supply-chain perspective there are both logistical and monetary advantages in having a source of fresh food in the processing plant’s vicinity. If this is to be replaced with imports of compressed feed, even from neighbouring countries such as Sudan and Ethiopia which no doubt will be developed as new sustainable sources, input cost will nevertheless rise. Saudi dairy cows are among the most scientifically pampered beasts in the world.

Now, prices achieved in Gulf countries are higher than in the domestic market, and recently dairy prices have gone up throughout the region, providing relatively happy margins for the Saudi fresh dairy industry. There is, therefore, some wriggle room. Nevertheless, the industry will be looking at alternatives no doubt. Fresh dairies may well be introducing recombining, at least for export markets, for those product ranges for which this might be suitable – ambient flavoured milk, yoghurt or labneh come to mind. In fact, some recombining by Saudi fresh dairies is already underway. It is unlikely that recombining for short-life milk or laban will start – but no doubt the Saudi fresh dairies are already sharpening their pencils to take a long hard look at likely bottom lines going forward.

Exciting times ahead for the dairy industry in the region I would say…..

With best wishes-Thorsten

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