RIYADH, 9 January 2008 — Saudi Arabia is abandoning a 30-year program to grow wheat that achieved self-sufficiency but depleted the Kingdom’s scarce water supplies. The government will start reducing purchases of wheat from local farmers by 12.5 percent per year from this year, officials from the agriculture and finance ministries said yesterday.

The Kingdom aims to rely entirely on imports by 2016. “The reason is water resources,” said one official, who did not want to be identified.

Saudi Arabia produces 2.5 million tons a year of durum and soft wheat, enough to meet domestic demand. In the 1970s, the government started a program to encourage farmers to produce wheat, guaranteeing them at the time a massive SR3,500 ($933.5) for every ton.

The Kingdom even ended up with a large enough surplus in the early 1990s to export some to the ex-Soviet Union and donated a portion of it to Syria, said Abdulrahman Al-Qahtani, a Saudi agriculture expert. The government gradually cut the price to SR1,000 per ton.

Global prices, in contrast, have soared in the last few months and wheat of milling quality for March delivery was trading at 252 euros ($370.5) per ton in Paris yesterday.

The government is considering offering wheat farmers compensation, either through helping them switch to other crops, such as feed for livestock, or cash handouts, officials said.

“With oil prices at record levels, there is no better time to do this than right now,” Al-Qahtani said.

A surge in input costs, such as pesticides, fertilizers and transport, has drastically eroded farmers’ margins.

Samir Qabbani, deputy chairman of the National Committee of Agriculture, said farming in the Kingdom relies totally on underground water resources.

“It is possible to save 1,300-1,500 cubic meters of water for every ton of wheat produced,” Qabbani said. The phasing out of Saudi wheat production will have little impact on global prices, said Abdoulreza Abbassian, a Food and Agricultural Organization grain analyst.

“We are dealing with a world situation where the strain on supplies is predominant and when we have an unexpected increase in imports, it will provide some support to prices, but it will not be anything exceptional,” Abbassian, secretary of the intergovernmental group on grains, said.

Money Supply Grows

Money supply growth in Saudi Arabia edged up in November even after the central bank tightened lending rules to prevent lower borrowing costs from fueling inflation. M3, the broadest measure of money circulating in the world’s largest oil exporter, grew 21.6 percent in the year to Nov. 30 compared with 21.1 percent in 12 months to Oct. 31, according to data on the central bank website.

Demand deposits were up 27.3 percent in November versus 26.8 percent in October, and time and savings deposits had increased 27.9 percent compared with 27.6 percent on Oct. 31, the data showed.

Money supply growth, driven by oil prices at record highs near $100 a barrel, is fueling inflation across the Gulf Arab region.

while central banks shadow US interest rates to deter bets on the appreciation of their dollar-pegged currencies.

The Saudi central bank has lowered borrowing costs by 75 basis points since Sept. 18, tracking the Federal Reserve, which is trying to contain the fallout from a mortgage market crisis.

On Nov. 1, Saudi Arabia raised to 9 from 7 percent the share of depositor funds banks must keep in their vaults after it cut interest rates. It was the first time the central bank raised the reserve requirement since 1980.

The Saudi central bank is torn between checking price pressures at home, where inflation hit a 12-year high of 5.35 percent in October, and maintaining the riyal’s peg to the weak dollar.

The central bank’s net foreign assets on Nov. 30 were worth SR1.07 trillion riyals ($285.3 billion), an increase of almost 32.1 percent from a year earlier, according to the central bank website.