JEDDAH, 24 April 2006 — Establishing a union for dairy producers and manufacturers in GCC member states would be an important step toward setting a unified manufacturing policy for the dairy sector, according to a new report.

The Gulf Organization for Industrial Consulting (GOIC) said that this union will assist and coordinate in the buying process, marketing strategy and expand production capacity thus reducing costs, increase quality and attract more investment to the sector.

Even though the trend during the past few years has been toward mergers and acquisitions of smaller companies by larger ones, the GOIC report said that it seems that in the long run that is not enough. Certainly indulging in a price war is detrimental, in the short and long term, and should not be considered an option even by the big companies.

The dairy product market in the Saudi Arabia has expanded over the years, and one national company has the distinction of being the largest dairy product company in the world. The three biggest dairy producing companies — Almarai, Al-Safi and Nadec — dominate the largest share of the market, but there are a number of smaller companies that struggle to survive.

In a bid to counter the competition, some of the smaller companies have been in merger talks. On the other hand, the larger companies have continued expanding by acquiring smaller companies and increasing their production capacity.

After acquiring Al-Safwa Dairies recently, Almarai expects to increase its production capacity by 60,000 liters of milk per day. Almarai currently produces 1.6 million liters of milk per day, by far the largest dairy producer and exporter in the Kingdom.

According to Almarai’s managing director, Abdul Rahman Al-Mohanna, big Saudi dairy companies are embarking on a buying spree to bail out small and non-performing companies. The main problem with these companies, he added, is that they lack financial resources that allow them to market their products. Therefore, making the acquisition would result in a win-win situation for all involved parties.

Until a year ago, the Saudi dairy industry witnessed a price war that had gone on for two years and threatened to wipe out the smaller companies. The big companies, who have a major share of the domestic market and export their products to GCC countries, slashed their prices to such a level that smaller companies in order to match their price cuts lost millions of riyals. The products of some companies never reached market and perished in warehouses.

Eventually, the Agriculture Ministry intervened and the price of many products including milk and buttermilk has since stabilized. However, during the last two months, reports surfaced again of a renewed price war following the boycott of Danish dairy products as a result of the blasphemous cartoons that appeared in a Danish newspaper depicting Prophet Muhammad (pbuh). Some local companies saw that as an opportunity to take advantage of the increased demand for their products.

The report by GOIC points to a better strategy for competition and strategy especially in the face of international competition. The recommended union will be responsible for buying all production necessities in a unified procedure; marketing the products in a collective manner; and supervising the grant for setting up new factories for dairies products or expanding the capacities of existing ones.

The union would also direct investments toward certain dairies products whose production is less than others in GCC member states, such as cheese, butter and grease, and finally to establish a research institute for dairies and milk production to satisfy the requirements of this industry.

The report also pointed out the main obstacles facing the dairy industry in the region. These obstacles are mainly related to the lack of natural grazing where dairy farms depend on utilizing groundwater to plant some areas with green feeds; this requires more investments to set up an advanced irrigation system which suites planting arid regions.

Other obstacles are the hot climate in GCC member states that cause low milk production on the part of certain varieties of cows, and the absence of agricultural industries that result in secondary products to be used as feeds. In addition, milk and some other dairies products are easily spoiled in case of any delay in refrigeration.

In order to solve these problems, according to the report, a number of points should be observed such as finding new markets, observing quality issues and the ways of filling and packing products. Other factors that should also be considered are increasing the production capacities during certain periods, doing research and studies to develop production, and paying attention to training factory workers.

Specialized companies should handle issues of transferring and distributing products as well as encouraging exports.