JEDDAH, 25 September 2006 — The Saudi dairy industry has grown rapidly over the past two decades, from small farms to world class operations, equipped with modern dairy processing plants and large stocks of cattle. The private sector has injected massive investments in the industry over the years; importing top class cattle, complying with top industry operating standards, in addition to introducing the latest technology in processing, packaging and distribution.
The development of the dairy industry plays an important role in the Saudi economy due to its links with a wide range of support industries supplying both raw and packaging materials.
The Kingdom’s wide geographic zone for dairy products comprises of more than 60,000 sales outlets across the country.
The Saudi dairy industry consists of 61 firms ranging from fully integrated dairy companies which own farms and produce fresh milk locally as in the case of Al-Marai, Al-Safi, National Agricultural Development Company (Nadec), to recombining plants which mainly use imported powder milks like Saudia Dairy & Foodstuff Co. (Sadafco) and Jamjoom Foremost.
Market Demand by Value
Market demand for all types of dairy products in Saudi Arabia reached SR8.04 billion in 2004 and is estimated to have grown by 4.6 percent in 2005 to reach SR8.41 billion. In addition, the Saudi dairy industry exported SR1.20 billion worth of dairy products in 2005, bringing the combined market value of dairy products sold for the year to SR9.61 billion. The market value of domestic demand is expected to reach SR8.79 billion in 2006, with exports estimated at SR1.35 billion, brining the combined market value of dairy product sales to SR10.14 billion in 2006. Over the medium-term, the total market value of dairy products is forecast to reach SR11.32 billion in 2008, with an estimated value of exports of SR1.70 billion.
On a per capita basis, the value of dairy products consumed in 2005 by local residents was roughly SR362, an equivalent of nearly one riyal per day per resident. The combined average price of all types of dairy products is estimated at SR6.76 per kg in 2005, and is forecast to reach SR6.70 per kg and SR6.65 per kg in 2006 and 2008 respectively.
Market Demand by Volume
The combined domestic market for all types of dairy products in the Kingdom is estimated to have increased by 4.2 percent to 1,189 thousand tons in 2004, compared with 957 thousand tons in 2000. Furthermore, the domestic demand is estimated to have grown by another 4.6 percent to 1,243 thousand tons in 2005. According to industry sources, the breakdown of 2005 dairy product demand was as follows; 38 percent (453,000 tons) for liquid milk, 30 percent (360,000 tons) for laban, 7.7 percent (98,000 tons) for cheese, and 8.9 percent (105,000 tons) for yoghurt.
In addition, demand for other milk products amounted to 7.5 percent (89,000 tons), which included evaporated, condensed, butter and ghee for retail sales, and 3.7 percent (44,000 tons) for powder milk.
Other dairy products account for the 4.2 percent balance.
Over the past five years, market demand for all types of dairy products had grown by an annual average growth rate of 4.5 percent, surpassing the Kingdom’s population growth rate.
Given the current consumption and population growth, quantity demanded for dairy products in the Kingdom is expected to grow at about 5 percent annually in the coming four years through 2010. As a result, the quantity of dairy products demanded is forecast to reach 1,447 thousand tons in 2008, and 1,600 thousand tons in 2010.
Per Capita Consumption
The consumption of all types of dairy products is estimated to have reached 53.5 kg per head in 2005, and is forecast to reach 55.1 kg in 2006. The 25 million residents in Saudi Arabia in 2008 are expected to consume 1,447 thousands tons of dairy products with an average per capita consumption of 57.9 kg for the year. The increase in total population and the corresponding per capita consumption of dairy products is forecast to reach 60.6 by 2010.
The per capita consumption of dairy products in Saudi Arabia is considered significantly higher than the level prevailing in many developing countries, but is still 41 percent below the average per capita consumption of 90 kg in Europe and America in recent years.
If the Saudi society was to achieve the European and American level of 90 kg per head by 2010, dairy production capacity should increase by 1,133 thousand tons to reach 2,376 thousand tons, suggesting a 12.6 percent annual growth rate. Given the current consumption trend and population growth, a 12.6 annual growth rate is not likely achievable in the 2006-2010 period.
Saudi Exports of Dairy Products
Saudi exports of dairy products have rapidly expanded in the eight-year to 2000 both in value and volume terms, from 46.9 thousand tons worth SR205 million in 1992 to 88.3 thousand tons worth SR485 million in 2000. In addition, dairy exports rose during the 2000-2004 period, increasing by 26.4 percent to reach 112 thousand tons worth SR1.08 billion in 2004.
However, dairy exports have not changed a lot from 1998 to 2004 in terms of volume; as they were about 112 thousand tons in 1998 and reached 112 thousand tons in 2004. Conversely, dairy exports rose 150 percent from SR431 million in 1998 to SR1.08 billion in 2004.
The corresponding average unit price of exports increased from SR3.9 kg to in 1998 to SR9.6 kg in 2004. For 2005, exports are estimated to have reached around 119 thousand tons worth SR1.20 billion, and are expected to register about 140 thousand tons worth SR 1.70 billion by 2008.
Saudi Imports of Dairy Products
Saudi Arabia is traditionally a net importer of dairy products. In terms of weight, dairy imports increased 98 percent from 179 thousand tons in 1999 to reach 354 thousand tons in 2005, with an average annual growth rate of 10.3 percent in the 1999-2005 periods. Dairy imports are expected to continue growing and register 407 thousand tons in 2006.
In terms of value, Saudi imports of dairy products rose 110 percent from SR1.69 billion in 1999 to SR3.55 billion in 2005.
For 2006, dairy imports are estimated to reach SR4.08 billion.
Major Challenges and Risk Factors
Government subsidies for the dairy industry includes 30 percent of total dairy farms equipment costs, full coverage of all shipping costs, including airfreight for at least 50 imported cows, 50 percent on the official price of irrigation engines and pumps purchased for integrated dairy projects.
The recent cut in custom duties to 5 percent on imports of dairy products would induce more competition from foreign suppliers.
Furthermore, Saudi accession to the World Trade Organization (WTO) and the creation of much awaited Arab Free Trade Zone (AFTZ) are among the main challenges the Saudi dairy industry is expected to face in the future. The elimination of all kinds of subsidies under the WTO rules will increase the cost of production for the local dairy industry.
(Dr. Said Al-Shaikh is chief economist at the National Commercial Bank. He is based in Jeddah.)
