May 12, 2016

Garrett Baldwin

While Saudi Arabia is undergoing a dramatic liberalization of its economy, its purchase of American farmland may be one of the biggest stories to slide under the radar in 2016.

Saudi Prince Mohammad bin Salman has secured $10 billion in loans from global banks, set expectations for a dramatic international bond issue, discussed the potential for a sovereign wealth fund, and floated the idea of its state-owned oil company Saudi Aramco issuing an IPO by 2018.

But while oil prices crater and the nation continues to liberalize its economy to promote investment and create jobs, its large purchases of Southwest farmland will be critical to meeting one of its largest challenges yet: feeding its growing population.

Saudi Arabia’s population hit 31.31 million at the start of Q2 2016, according to Trading Economics. That figure will increase to more than 34 million by 2020, and more than 39 million by 2030, according to Euromonitor. Currently, the Kingdom’s population has a median age of just 26 years old in a nation where the average person is expected – in 2016 terms – to live an average expectancy of 75 years. This will place significant pressure on the nation to ensure food supply – at a time that it already imports more than 70% of its required goods.

Dwindling supplies of arable land and natural water resources have already placed a strain on its domestic production capacity. Therefore, the country is looking for alternatives to meet both its food demand and water security goals. It just so happens that part of that strategy requires expansion into the already water-scarce region of Southwestern United States and fueled a debate not only about its own commodity challenges, but those occurring in the United States as well.

 Buying the Farm

Saudi Arabia hasn’t always relied on foreign countries to secure its water intensive crops.

The nation once grew crops like alfalfa within its own borders. However, that has changed over the last decade as it reversed policies and banned the cultivation of certain crops in order to conserve fresh water.

Recently, the nation banned the cultivation of wheat. That policy forms the foundation for looming bans of livestock feed like “green fodder” and alfalfa, expected to be phased in over the next three years. That creates a challenge for a nation that owns 170,000 cows, all of which require water-intensive feed crops. Though the nation has made a strong commitment to using its oil supply to fund the increased output of the energy intensive process of desalination, the industry dedicated to removing salt from water is still at least a decade away from putting a dent into its supply requirements, according to Mordor Intelligence.

The country’s near-term solution has been to effectively outsource the development of one of agriculture’s most water-intensive crops by purchasing land in places like the Southwest region of the United States.

 Established in 1977 by the Saudi Kingdom, Almarai Company announced it recently purchased 14,000 acres of farmland in Arizona– effectively doubling its already existing holdings of land in the Palo Verde Valley of California. The purchase gives the dairy company first rights on water from the nearby Colorado River.

The strategy for Saudi Arabia has been described by some analysts as challenging to understand. But at its core, it remains two-fold. First, secure short-term food security, and second, own the land and resources that are needed to ensure supply for decades to come, through investment in politically stable nations with liberal land-rights laws.

Given the favorable water rights toward farmers in both California and Arizona, and the liberalized attitude toward foreign ownership, Saudi Arabia is certainly accomplishing both by ensuring a supply of alfalfa and securing access to the key input: water.

Still, that ownership raises significant questions about policy and ownership of the world’s most important natural resource.

 Water Worries

 Last summer GAI News spoke with Sprott Management executive Rick Rule, who advocates the privatization of the water market in California. At its core, the privatization would reverse a century of policies that economically and politically favor farming interests.

While Saudi Arabia doesn’t have as much fresh water as the United States, its key resource is its significant oil reserves – a resource that the nation doesn’t give away in international trade. In contrast, however, the growth and export of alfalfa does effectively export water as a significant by-product given its

University of California at Riverside economist, Christopher Thornberg has expressed his concerns about alfalfa farms wasting water and sending it abroad, even calling for the state to consider using eminent domain laws to seize land owned by companies.

 Rule’s argument, however, called for a free market to place a price on an acre of water, much like in Australia.

Built upon reforms initiated in the 1980s, Australia’s water market has become a widely successful model of resource management despite reservations once held against treating water as a commodity.

In its 2011 report entitled, “Water Markets in Australia”, The Australian National Water Commission commented, “Creating a working market in Australia required policy makers to put faith in the collective wisdom of water users, rather than governments, in deciding how to make the best use of the resource. The flexibility and autonomy offered by water trading has increased agricultural production, helped farmers and communities to survive severe drought, and provided the mechanism for recovering water for the environment.”

The formation of Australia’s water market has not only proven to be ecologically and agriculturally beneficial, but economically beneficial as well.

“Today, our water markets are internationally recognized [sic] as Australia’s water reform success story,” states the Commission. “A market now boasting an average turnover of $2.4 billion is allowing water to be put to its most productive uses, for a price determined by water users. Trading generates economic benefits valued in hundreds of millions of dollars annually.”

Given decades of proof of success in one of the driest countries in the world, a U.S. water market could not only be a responsible answer to water management in the country as many regions deal with long term drought conditions, but could also be a new, profitable investment space for agricultural investors.