Sukuks, Savola and Milk

Saudi food conglomerate Savola is issuing an Islamic bond (sukuk) with a maturity of  seven years.

Savola is the largest sugar refiner in the Middle East but also has a 36.5 percent stake in Saudi dairy producer Almarai.

Bloomberg Business Week recently ran a good profile on Almarai  and its founder and major shareholder Prince Sultan bin Mohammed bin Saud al-Kabeer. The story pointed to the importance of feedstock imports from Argentina.

It seems that the expansion plans of the Saudi dairy industry are backed up by financial prowess.

Saudi milk production rising amid water concerns

Saudi Arabia’s dairy industry is bucking the trend of agricultural downsizing: Wheat production is declining and will be phased-out by 2016 (if everything is going according to plans and rearguard fights of ago-lobbies notwithstanding).

Milk production however is rising and will grow 27.2 percent to 2.4mn tons by 2016/17.

A motion by the Saudi Majlis al-Shoura some time ago was opposed by the Ministry of Agriculture which tends to represent the water guzzling agro-industry, which is often in royal hands like the leading dairy producer Almarai.

The argument was that dairy production is not water intensive because it uses imported feedstock like barley. This of course conveniently overlooked the water consumption for green fodder (mainly alfalfa) and for raising the cattle itself (drinking water, cleaning the stables etc.).

Interests are vested and the phasing-out of wheat production will not mean a reduction of water consumption if dairy production and associated green fodder production keeps rising.

Saudi Milk Production: Expansion and Feedstock Worries

Saudi dairy giant Almarai, which has farms with 135,000 cows is concerned about rising feed prices, especially corn and soybeans.

It plans further expansion, even though the Saudi dairy industry has been attacked by a motion of the Majlis al-Shoura for its high water needs in the past.

This could lead to an increased interest in outsourcing water intensive production of green fodder like alfalfa. Almarai already acquired an Argentinian farm earlier this year.

Saudi Dairy Company Almarai Buys Argentine Firm

Saudi Arabia’s Almarai Co., the Gulf’s biggest dairy firm by market value, has acquired Argentine Fondomonte S.A. for $83 million.

Fondomonte has three farms totaling 12,306 hectares which focus on the production of corn and soy beans. Almarai is interested in securing feedstock for its dairy and poultry operations.

The deal is in line with recent trends: For real Gulf agro-investments rather take off in established food exporting countries like Brazil or Australia that have the infrastructure, the track record and the institutional set ups to actually deliver food supplies. Investments in developing countries like Sudan or Pakistan are more speculative in comparison and have been often rather announced than implemented.