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. 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. 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 search of greener pastures
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.
Almarai announced that by 2019, it would source 100% of its animal feed from imports, 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. 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.
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% sales growth and 7% 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. 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.
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. 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.
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
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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