Saudi offers new mix for milling
July 19, 2016
Flour milling executives in developed nations who often face many difficult issues may derive some relief from contemplating what millers in Saudi Arabia are facing this year. It is this year that the kingdom is halting the purchase of locally-grown wheat, which in effect means that no more wheat is being produced in a country that not long ago was striving to be self-sufficient. To protect domestic wheat availability, the kingdom has committed to building sufficient new grain storage capacity to bring the total equal to slightly more than a full year’s needs, or around 3.7 million tonnes. If this is not sufficient to create complexities, think of the kingdom’s firm decision to finalize before year’s end the privatization of the entire government-owned milling industry, comprising 10 mills with daily capacity of 13,000 tonnes of wheat grind. This action means sale to a Saudi or non-Saudi operator or by undertaking an initial public offering or finding some other way of ending government ownership of all of the kingdom’s mills.
While each aspect of this undertaking affecting such a major food industry has its own reasons, there’s a single driving force — the collapse of oil. Saudi Arabia long operated with a heady financial surplus from its position as the world’s largest oil exporter. That has dramatically ended since 2014 in the collapse of oil prices that once ruled above $100 per barrel and recently fell to $30 and below. At the same time as the mills are being shifted from government ownership, suggestions are sought on how best to monetize ownership of the Saudi Arabian Oil Co. (Aramco), the world’s major oil exporter. It is likely that a public sale would make Aramco the most valuable company in the world, at a total in the trillions of dollars. These actions, it is hoped, will ease the pain of growing deficits that are forcing cuts in consumer subsidies, delays in infrastructure investing and tapping of once sacrosanct foreign reserves.
Putting oil aside, the end to wheat crop subsidies, where farmers enjoyed more than double global prices, came about because of huge quantities of water used to grow wheat. Draining water reserves was wisely decided as a poor trade in a world of wheat abundance. Privatizing flour milling has been a possibility almost from the time the kingdom began building mills to replace imports after World War II. The mills’ owner-manager is the widely known government agency, Grain Silos and Flour Mills Organization (GSFMO). In preparing for this change, the new name is General Organization for Grains (GOC).
As prelude to many of these steps, the Saudi Council of Ministers, which is chaired by King Salman, moved to restructure milling into four separate companies. The new milling companies will buy wheat from the government and will be allowed to sell flour at pre-determined prices to approved customers processing the flour into a range of consumer products. In an opening to free markets, mills may also import wheat at world prices for sale as non-subsidized flour to high-end specialty bakers and pasta manufacturers. The new milling companies will control a limited amount of wheat storage, all with the hope of improving milling efficiency and encouraging innovation. It is the GOC that will continue to look over milling operations with responsibility for overseeing product quality, compliance with government regulations and competition.
In an interview with our sister publication World Grain, Abdulrahman Abdulmohsen Al-Fadhli, minister of agriculture and chairman of GOC, expressed enthusiasm for the opportunities he sees in private ownership and operation of Saudi flour mills. Predicting the drawing of international investors, he cited new investments and heightened progress for food security. Of course, such issues as profits dependent on operating fees agreed to by GOC are challenging for new owners. The Saudi combining both government and private price setting on wheat and flour promises a much different milling industry from any other country.