Feeding a business abroad – Can Saudi dairy giant Almarai bet its business on a fully global feed supply?
Farming the desert
The desert is an unlikely place for a dairy farm, but for Saudi-based Almarai, when you source everything but the cows abroad, suddenly you can create the most productive dairy farm in the Middle East[1]. Food giant Almarai controls 45% of the food and dairy market in the GCC and is one of the largest vertically integrated farms in the world[2]. The business model is simple: grow your feed abroad, ship it back home, create a deeply controlled climate in the desert for your cattle and own a sprawling distribution network.
In a water-scarce local environment, Almarai is betting that foreign investments and long-term open borders can provide it with all the feed it needs to sustain its business. Saudi Arabia has been on a path to food security since the 1970s, but years of farmland development and agricultural investment have milked the desert of its last water resources, so new government regulation is forcing companies like Almarai to look elsewhere[3].
Almarai announced that by 2019, it would source 100% of its animal feed from imports[4], making it wholly dependent on foreign trade and ultimately, globalization. They’re doing it by buying up farmland abroad. The first purchase came in 2011 when Almarai invested $83M to acquire corn and soybean farmland in Argentina[5]. It followed it up in 2015 with an acquisition in Arizona and again in 2016 with a $32M investment in California farmland to grow alfalfa as feed for cattle[6].
They have turned the purchase of farmland into the purchase of water. No water in the Saudi desert? No problem. The economics make enough sense to buy up farmland abroad to grow water-intensive crops such as alfalfa and then ship it across the Atlantic. And so far, it’s been working. Almarai posted 9.4%[7] sales growth and 7%[8] sales growth in 2015 and 2016, respectively.
A gamble on free trade
Sourcing feed abroad requires a deep reliance on international trade and a bet on globalization because their investments are also coming in water-deprived areas. California and Arizona are both drought-prone, but Almarai is using those water sources to support the cultivation of hay that will serve Saudi food security. For the time being, they have not been met with much resistance from local farmers who are happy that the water supply is going to agriculture in the first place.
Almarai is aware of these risks though and for that reason, has chosen to purchase the land itself rather than worry about potentially volatile commodity prices[9]. It is also why they maintain diversified farmland holdings across three continents. Their 5-year strategy also includes moving their product mix away from their core dairy products into other food products that require more manufacturing and less farming – more of the work that can be done at home in Saudi Arabia[10].
Beyond this though, Almarai should focus on maintaining strong relationships with local farms and governments. In a people business, though Almarai technically owns foreign farmland and can do what they want, they must behave in a way that does not make them look like a foreigner in this space. This means cooperation, collaboration, information-sharing and making it clear that if droughts strike, they are willing to curb back their own production for the greater good. More than anything as the foreign player, they need to act like a local.
Is the risk homegrown?
Almarai’s global diversification rests on the assumption that any trade risk is external to Saudi policy, but if there is anything the past year has taught us, it’s that geopolitical relationships can turn in an instant. Relations with Qatar remain tense where Almarai products are now taboo in one of their original and largest markets[11]. More recently, the Lebanese Prime Minister resigned under Saudi pressure and the Saudi government led a sweeping purge of royals and businessmen under corruption allegations, fueling tensions and the prospect of war[12].
Saudi Arabia is using its influence and capital to make heavy foreign investments that support their largest and most important companies, such as Almarai. For now, Saudi Arabia is a US ally and makes the rules, but the US government has already reprimanded them for meddling in Lebanon and for their costly war in Yemen[13]
So what happens if the sentiment shifts? What happens if local US governments and farmers don’t want their water supply to fund Saudi businesses? It’s not so farfetched – the current US administration is more protectionist than ever.
Can a company bet all it has on a global supply chain or will you always need to maintain some level of supply back home?
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[1] Shadbolt, Peter. “Milking the Desert: How Mega-Dairies Thrive in Saudi Sands.” CNN, Cable News Network, 18 Dec. 2013, www.cnn.com/2013/12/18/world/meast/milking-the-desert-saudi-dairy-farms/index.html
[2] “Forbes Honors Almarai among Top Companies in Arab World.” Almarai, www.almarai.com/en/recent-events/forbes-honors-almarai-among-top-companies-in-arab-world.
[3]“Country Briefs – Saudi Arabia.” FAO GIEWS Country Brief on Saudi Arabia –, Food and Agriculture Organization of the United Nations, 2 Nov. 2017, www.fao.org/giews/countrybrief/country.jsp?code=SAU.
[4]“Almarai Strategic Report.” Almarai, annualreport2016-en.almarai.com/wp-content/uploads/Strategic-Report.pdf .Khrais, Rami. “What Saudi Arabia Is Doing to Save Water.” Al-Monitor, 4 Apr. 2016, www.al-monitor.com/pulse/originals/2016/04/saudi-arabia-self-sufficiency-water-policy.html.
[5]“Saudi’s Almarai Buys Argentina Firm to Secure Livestock Feed.” Reuters, Thomson Reuters, 21 Dec. 2011, www.reuters.com/article/saudi-almarai-fondomonte/update-1-saudis-almarai-buys-argentina-firm-to-secure-livestock-feed-idUSL6E7NL0CI20111221.
[6]“Saudi Land Purchases in California and Arizona Fuel Debate over Water Rights.” LA Times, 29 Mar. 2016, www.latimes.com/business/la-fi-saudi-arabia-alfalfa-20160329-story.html.
[7]“Almarai Income Statement.” Almarai, 2016, annualreport-en.almarai.com/financial-review-page/income-statement/.
[8]“Almarai Annual Report.” Almarai, 2016, annualreport2016-en.almarai.com/.
[9]“Almarai Company.” Almarai Company, Albilad Capital, 14 Mar. 2016, www.albilad-capital.com/Research_EnglishReport/Almarai-Detailed%20Report-EN.pdf.
[10]“Almarai Approves 2017-2021 Business Plan.” Almarai, www.almarai.com/en/recent-events/almarai-approves-2017-2021-business-plan.
[11]Belhumeur, Jenna. “Doha’s Grocery Rejects.” Qatar | Al Jazeera, Al Jazeera, 29 June 2017, www.aljazeera.com/blogs/middleeast/2017/06/doha-grocery-rejects-170629150019541.html.
[12]Barnard , Anne, and David Halbfinger. “Case of Missing Lebanese Prime Minister Stirs Middle East Tensions.” The New York Times, The New York Times, 10 Nov. 2017, www.nytimes.com/2017/11/10/world/middleeast/saudi-arabia-lebanon-france-macron.html?rref=collection%2Fsectioncollection%2Fmiddleeast&action=click&contentCollection=middleeast®ion=stream&module=stream_unit&version=latest&contentPlacement=6&pgtype=sectionfront&_r=0.
[13]DeYoung, Karen, and Anne Gearan. “U.S. Warns Saudis, Iran of Threats to Stability in Lebanon.” The Washington Post, WP Company, 10 Nov. 2017, www.washingtonpost.com/world/national-security/us-warns-saudis-iran-of-threats-to-stability-in-lebanon/2017/11/10/67897ac6-c637-11e7-84bc-5e285c7f4512_story.html?utm_term=.98e35c99bc9a
[14]“Almarai Dairy Farm and Factory Visit.” Pixels for Four, 14 Feb. 2015, pixelsforfour.blogspot.com/2015/02/almarai-dairy-farm-and-factory-visit.html.
In the case of Almarai, a business that both requires steady water supply and targets a water-scare environment, a global supply chain is necessary. However, you pose a realistic potential shift in sentiment. US protectionism may indeed end up affecting Almarai’s ability to own farmland in the American Southwest. The company would be wise to continue supplementing its farmland investments in the US with additional investments in countries like Argentina, which as you mention, contributed farming land starting in 2011. In diversifying its supply sources, the company would not only be hedging against political risks, but also weather risks, transportation mishaps and other conditional risks that may end up interrupting Almarai’s supply chain.
In response to your second question, “can a company bet all it has on a global supply chain or will you always need to maintain some level of supply back home?,” it seems that as long as costs are kept under control, Almarai has opted to maintain as much supply back home as they can, as evident by its ownership of cattle. I wonder not whether it is necessary, but instead, in Almarai’s case, at what point does “at home ownership” become inefficient? How do they decide when to outsource, and when to invest in supply chain efforts in their home turf?
It is interesting to see the Almarai reliance on international trade of food from five perspectives. The first is that agricultural products often face obstacles to free trade either as subsidies or tariffs as many countries see food as a strategic resource that they want to produce domestically. The second and third are the current protectionist trend seen across the world at the moment and the potential impact of climate change on agricultural output. The fourth perspective is that Saudi Arabia’s power on the international scene may be declining with lower dependence on oil, reduced oil prices and the US becoming an oil exporter. The fifth perspective is that Saudi Arabian values seem at odds with western values and politicians in the west may face bad press for supporting Saudi Arabian interests. Combining these four perspectives, it seems that Almarai’s business has significant risk that is largely out of their control. The question that I am left with is what is their alternative? Are there ways Saudi Arabia and Almarai could reduce their dependence on imports by leveraging their own relative advantages, for instance by using solar power to desalinate sea water for agriculture?
The question Hans raised in his comment was the exact response I had while reading this essay: What is their alternative? Given the arid conditions in Saudi, one would assume that by outsourcing their supply of agricultural products they are making do with the hand they have been dealt, and are actually making do in a very smart and well diversified way. Jessica pointed out the fact that should the US impose sanctions or some financial penalty on exports, Almarai has other continents on which it has farmland. In addition to wanting to own the farmland so that they have complete control over its output, I think the Saudi’s also want to own the farmland as a secondary alternative to not having as much arable land locally. Said differently, I think Almarai, and Saudi Arabia in general, is buying and storing in another country what it does not have in its own.
The fact that Qatar was one of Almarai’s biggest markets and that Almarai’s products are now considered taboo there serves to highlight the role geopolitics can play on the profits and business dealings of a company. I do agree with Hans that Saudi may be losing some of its power on the world stage, and it will be interesting to see how tensions with surrounding GCC countries and with countries that serve as global supply for Almarai (and Saudi in general) play out. In the meantime, I think while Saudi continues to hold some leverage, they should continue to invest and diversify their global supply so that even if they are reliant on globalization, at least they aren’t reliant on only a few bets.
This is an interesting question, and quite relevant to a lot of countries that are dependent on foreign production and globalization or favorable trade policies to continue business as normal. I would like to draw a parallel – Romania depends heavily on natural gas for energy from Russia. That natural gas is particularly important during the winter months to heat houses and buildings. In the past, whenever Romania has tried to take a stand against Russia on a political position, the natural gas pipelines often “just mysteriously stop working.” The Russian government never officially says it had anything to do with the political agenda but the Romanian government can read between the lines because it directly impacts the Romanian government’s ability to provide an energy source for their residents. As a result, the Romanian government feels strong armed to give in and agree with Russia. This shows how sensitive and vulnerable countries can be if they depend heavily on a global trade for true essentials that may not have a clear alternative. Though this is an extreme example relative to the dairy production discussion, I think the underlying principal is the same – globalization is great because it gives you access to resources you may not be able to produce yourself, however, there can be many negative consequences of over reliance.
Really interesting profile, Christine! Having spent a few months in Saudi Arabia, the supply chain of fresh foods and produce is a very real issue. Many expats and Saudi nationals join self-organized co-ops that fly in food from Europe, Africa, or Asia to gain access to high quality produce. Certain fine-dining restaurants in urban areas like Riyadh and Jeddah fly in high quality groceries daily.
A few thoughts on Almarai’s supply chain strategy. First, it makes sense that Almarai has looked to diversify its international supply chain, but how much control do they have over the distribution/delivery of their raw materials? Regulators in Argentina and the U.S. might be willing to keep trade relations open with Saudi businesses and Almarai, but what would happen in the case of regional conflict blocking the best ports for Almarai? Finding alternate ways of delivering the raw materials through less-than-ideal ports may prove costly.
I also wonder what sort of contingency plans Almarai has to mitigate supply chain concerns. With long lead times to ship supply from the Americas, I would imagine they need to hold high levels of raw materials inventory at each farm or a centralized warehouse, increasing inventory and holding costs. It may also be important to have emergency suppliers closer to Saudi Arabia in the case that the supply chain breaks down in the short term. With climate change and regional tensions, global supply chain management may become increasingly more important and complex for Almarai.