Dairy products are among most favoured food in the GCC countries. Fresh milk, laban, yogurt and cheese find their way to the consumer’s tables on a daily basis, but the production, in spite of the effort that GCC countries are putting into dairy industry development, is still low. Some estimates say the GCC countries have huge deficit in dairy products – three million tonnes per year, and that the industry needs at least USD 12 billion of investments a year in order to satisfy rising consumer needs. The GCC dairy industry in total is looking for an investment of USD 35 to 45 billion till 2020, according to Mordor Intelligence, a market research and consulting firm.
The GCC market for dairy products has grown at an estimated rate of 50 percent during the period 2007-2012, when the dairy sector in the GCC reached USD 5.8 billion. Four years since, the dairy sector is still rapidly growing, in fact, it is one of the fast growing markets in the world – on a revenue basis. Market research company TechNavio forecasts the dairy food market in the GCC is to grow at a CAGR (compound annual growth rate) of 8.39 percent during the five year period from 2014 to 2019.
But, it is hard to estimate the present value of the GCC dairy industry. “Due to the lack of availability of reliable data on small and medium-sized players (unlisted companies), it is difficult to gather an accurate estimate to gauge the market size and value for the dairy segment. However based on the data that is available we can conclude that the industry is witnessing significant growth. The combined revenue of the selected dairy companies (top 22 listed companies) stood at USD 4.4 billion in 2014, growing at an annual average of 12.1 percent between 2011 and 2014.
The dairy segment’s return on equity (ROE) and return on assets (ROA) averaged at 14.6 percent and 8.3 percent, respectively, from 2012 to 2014,” says Mahboob Murshed, managing director of Dubai-based investment bank Alpen Capital.
Global sales of dairy products were around USD 494 billion in 2015, but in Europe and in the US, the biggest global producer of dairy, consumption of dairy products, especially milk, often called “white gold”, is on the decline because of changing lifestyles and dietary requirements which caused a major shift in consumption habits. Thanks to emerging markets like Asia, Latin America and Africa, global consumption of dairy products is expected to rise by 36 percent, reaching in excess of 710 million tonnes of liquid milk equivalent by 2024, while the total world milk production is estimated to grow from 692 million tons in 2010 to 827 million tons in 2020, a 19 percent increase.
The volume of dairy products consumed in the GCC countries is around 2,225 million litres a year with the consumption of milk rising from 2,090,000 metric tonnes in 2009 to 3,622,000 metric tonnes in 2014. Among dairy products, says Mordor Intelligence report, fresh milk and yogurt have registered the highest growth rates in terms of production and consumption. Fresh unflavoured white milk recorded 41 percent of volume share, followed by laban with 21 percent. When it comes to market value, cheese leads with 22 percent of value share, followed by fresh unflavoured white milk.
“Rising population, changing consumption patterns, continued modernization of the food value chain and the vibrant tourism industry are some of the main drivers that are accelerating the growth of the dairy industry. High health awareness and a developing taste for a westernized diet, preferred by the increasing expatriate population, are bringing about a change in the region’s dietary habits, creating demand for organic and international foods which also has a positive impact on the growth of the dairy industry,” opines Murshed.
He states that this trend is expected to continue in the foreseeable future with further expected increase of these contributory factors. “In recent years, the dynamics of the dairy market in the region is also evolving with the introduction of several varieties of milk and milk-based products such as flavoured, low-fat, vitamin-enriched, organic, and lactose-free, in line with growing health awareness. The total production of dairy products in the GCC region increased at a CAGR of 9.4 percent between 2006 and 2012, driven by an 11 percent annual rise in the output of the largest dairy producer, Saudi Arabia,” says Murshed. It is estimated that food consumption in the GCC region will expand at a CAGR of 3.1 percent, reaching 49.1 million metric tonnes by the end of 2017, and it is expected that milk consumption will increase at a CAGR of 3.1 percent.
As mentioned above, Saudi Arabia is the biggest dairy producer in the region, with around 74 percent of the market volume, supported by highest per capita consumption of dairy products among all GCC countries. The kingdom is also the major exporter of dairy products to other GCC countries – KSA exports between 20 percent and 30 percent of dairy production to their neighbours, at revenues exceeding USD 533 million, stated the 2013 report by food and drink consultancy Zenith International.
According to Business Monitor International (BMI), milk production in Saudi Arabia is expected to increase by 27 percent by 2016. Saudi Arabia is home to the world’s largest integrated dairy business, owned by Almarai, whose dairy division in 2015 produced around 1 billion litres of fresh milk from 75,000 milking cows on seven farms. At one of the farms, Al Badiah, 22,500 milking cows produce 930,000 litres of milk each day. Because of high temperatures, lack of adequate grazing land and water scarcity, dairy cattle is mostly kept in buildings equipped with fans and misters which keep the precious Holsteins at a cosy 23 C. Almarai farms are state-of-the-art in the world of dairy, but this comes with the a, since almost all the food for the cattle has to be imported, not to mention the cost of water, air conditioning, labour force, among others.
“The GCC region is facing extreme water scarcity due to persistent decline in its renewable water resources. An inadequate water supply is adversely impacting the region’s limited agricultural productivity. This could have an indirect impact on the local production of dairy products and hinder its growth. In addition, cost of processing is higher in the region due to high utility and labour costs. The GCC region’s dependence on imports from cheaper sources to meet demand is another big challenge facing the dairy industry. Though the GCC governments are taking several measures to improve food security in the region, in the short term this poses a very big restraint on the growth of the dairy industry,” says Murshed.
While Saudi Arabia is the major exporter of dairy, it is also the biggest importer – total food imports account for 70 percent of all food requirements, with dairy imports growing at a CAGR of 3 percent, because of the high demand – it is estimated that more than 400,000 tonnes of dairy produce per year is imported to the kingdom. Milk consumption in the kingdom is growing at an annual rate of 6 percent – per capita consumption is 28.9 litres, and it is expected to increase 4.9 percent annually until 2016. It is estimated the Saudi dairy industry is in need of around USD 4 billion additional investments by 2020.
Other GCC countries are also investing in the dairy industry – Qatar authorities recently announced a major dairy project, for which the government has allotted 62,000 sq. m of land plus 500 hectares for production of fodder to support the livestock. The Ministry of Economy and Commerce is working on this ambitious project to produce milk and associated products locally in collaboration with the Ministry of Environment.
The full-fledged dairy project will be awarded to the private sector and bids have already been invited. The aim of the project is to reach full production capacity in three years, producing 20,000 tonnes of milk annually. Ministry of Development Planning and Statistics (MDPS) data show that in 2013 Qatar produced 741,566 tons of cereals, fruits, vegetables, meat, eggs, fish and dairy products. Dairy production was increased by 65 percent from 35,609 tons in 2010 to 58,743 in 2013.
Oman is also planning heavy investments in the dairy industry in order to meet growing local demand. Oman Food Investment Company subsidiary Mazoon Dairy Company will develop the USD 260 million dairy project in the Al Buraimi governorate with construction scheduled to start in 2015 and commercial operations to begin in 2017. The dairy will include a farm with 4,000 animals at opening and 25,000 by 2026. “The company will produce approximately 202 million litres in 2026 and 985 million litres in 2040. This along with increase in existing production and the new milk collection scheme being promoted will reduce the import dependency from 69 percent in 2014 to 13 percent in 2026,” said a statement from OFIC, adding that Oman could become a net exporter of dairy by 2040.
At present, the Sultanate’s requirement of milk and milk products is in the range of 1.5 million litres per day and the country, according to official data, hardly produces 15 percent of that amount. Like all other GCC countries – and none of them have achieved complete self-sufficiency in terms of milk production – remaining demand is met through imports.
The Middle East and North Africa (MENA) is the world’s second largest dairy import region, importing a combined 3 million tonnes of dairy produce a year. Switzerland’s International Trade Centre data show that Middle Eastern imports of dairy have trebled in the past decade. In October 2014, imports in the year were 4 percent higher than the same period in 2013 with fluid and fresh milk up 24 percent and butter up 17 percent. For example, around 11 percent of Australia’s dairy produce heads over to the Middle East region, and was worth about USD 337 million in 2013/14. With the removal of EU milk production quotas in April 2015, dairy exports to the Middle East are expected to further increase. Irish industry experts predict dairy exports from Ireland to the Arabian Gulf could jump by 50 percent over the next five years.
“With higher purchasing power as well as health conscious dietary choices both by the local population and the growing expatriate community, the demand for specialized dairy products such as cheese as well as low-fat or lactose-free milk is going to increase further. The dairy segment will continue to be one of the fastest growing food segments in the GCC. Though meat and fruit consumption have overtaken the consumption of dairy products, it remains a significant contributor to the size of the food industry and we don’t see this trend changing in the near future,” says Murshed.
He adds the traditional dairy industry in the region is shifting its production to a large variety of products including flavoured, low-fat, vitamin-enriched, organic, and lactose-free. “We also see an increased demand for specialized dairy products like cheese and butter.”
Investments in the dairy industry are in high demand – Gulf Organisation for Industrial Consulting (GOIC) data from July last says that total investment in the food industries in 2014 in the GCC was USD 23.7 billion, of which investment in dairy was about USD 4.49 billion or 18.9 percent. But the downside is that dairy plants showed a decline of 3.8 percent. There were 152 such plants in 2010 with the figure declining every year to reach 130 in 2014, GOIC said.