February 19, 2015

By Garrett Baldwin

The Gulf region’s power in energy production, financial services, and international trade makes it one of the most influential and fascinating economic regions of the world.

But the area remains gripped by geopolitical tensions, a challenging climate, and lackluster investment in its agricultural sector. The Gulf Cooperation Council (GCC) nations rely on imports for 80% to 90% of all foods that its citizenry consumes. Still, one of the most complex challenges for agriculture in the region centers on the lack of best-in-class logistics, despite these remarkable import levels.

As China continues its ascension as a global economic powerhouse, investment has been significantly allocated to the petroleum sector, creating a vast energy network capable of filling an energy-starved world’s needs. In comparison, little attention has centered on the Gulf investment in the non-petroleum sectors.
Ahead of the GAI Middle East Investment Conference in Dubai this February 23-25, the following is a brief overview of logistical and investment challenges facing Middle Eastern agriculture in the years ahead.

Infrastructure and Storage Challenges Abound

The logistical challenges of the Middle East  are one of the chief concerns when discussing the broader theme of food security in the region.
“If you look at the region, we cover Africa, Central Asia, the Middle East,” says Farid Masood, Director, Advisory Services & Asset Management, ICD-Islamic Development Bank Group. “What we see [in the Middle East] is a lack of quality logistics, strategic warehousing, and other important infrastructure.”
Investment has improved in recent years, but current infrastructure spend remains inadequate for the region’s modern needs. Dubai, for example, has boosted deep-freeze storage in recent years, as Integrated National Logistics (INL) stores food for the entire Middle East in 40,000 pallet spaces. While Dubai has the space and the funding to store this much food, increased investment will need to be placed in refrigerated transportation to maintain quality.
But the challenges of fresh foods, particularly produce and grains, remain firmly in place.
“Because of the lack of quality logistics, we see problems in the food supply chain,” Masood said. “For example, a country like Saudi Arabia does not have mechanized grain terminals today. As a result, you will have a seven to eight percent loss of grains.”

Political Instability

The Middle East has been rocked by political instability, social unrest, and war in recent years.
Those events have placed increased strain on the existing logistical network and have forced individual nations to prioritize certain commodities over others, while heightening border and port security, which can reduce transit times.
“We have seen flare ups in the region,” Masood said. “Because of that, it affects the supply chain, and you are faced with the challenges of whether you can get the food supply to where it needs to be.”

This has been notable in Syria, where recent problems fueled by the rise of ISIL, have forced producers to reroute produce and grains through Haifa, Israel in order to ship products into Jordan. In addition, geopolitical tensions in Israel, Iraq, Saudi Arabia, Egypt, and several other nations have fueled logistical concerns for fresh produce.
Spoilage due to delays in transport is a challenge that must be addressed by investors and logistics professionals. And while many are able to react whenever regional problems erupt, more proactive efforts to create and regularly refresh logistical backup plans remains a critical best-practice for the future.

Are Import Levels Sustainable?
With the GCC importing 80% to 90% of its consumed food, an important question must be considered about the future of the region: Are these levels of imports sustainable over the long run.
With growing demand around the world, nations are expected to look-inward for production. However, climate and water challenges loom, and significant investment to afford best-in-class technologies will be required to overhaul domestic production.
Masood states that imports are sustainable so long as the nations are capable of remaining viable in the global trade arena. However, some nations may be better suited than others given their economic diversity.
“When you look at the region as a whole, I don’t think there will be a serious strain, but we need to have indigenous supply. When you look at the situation country by country, there will be challenges. If countries are unable to produce food, they’ll be able to get it so long as they have other tradable commodities.”

Of course the most tradeable commodities in the world are crude oil and gas, the lifeblood of economic expansion around the world. However, that could be a significant challenge to the booming economic center that is Dubai, an emirate with very little oil. The emirate will certainly need to grow its economy through tourism and other goods and services to feed it booming population and growth.
How Are Investors Reacting?
In the Middle East, food security has remained a primary driver of investment for nations. But the widespread acquisition of land in Africa for the purpose of importing is a trend that will ultimately abate as suitable lands grow more scarce.
Aside from environmental and logistical challenges, the other pressing challenges center on the nature of the investment opportunities, from their scale, uncertain returns, and the ability to prove the sustainability and viability of agricultural funds.
“Finding good deals is hard today,” Masood says. “One challenge that is making it harder to attract investors is the lack of scale in the region. The scale is not there. It’s smaller companies hoping that they can grow significantly.”
Meanwhile, investors are looking for reliable revenue streams. Funds will require time to prove that investments are promoting value, meeting security challenges, and returning a profit. However, that takes time and patients from investors and fund managers alike.
“The goal of starting a fund is to show that it can be done with a profitable track record,” Masood said. “It’s going to take time for people to start making.”

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Farid Masood, Director, of Advisory Services & Asset Management at ICD-Islamic Development Bank Group will be participating in Global AgInvesting Middle East in Dubai on February 23-25. To learn more about the event click here.