SAUDI ARABIA

General market update: With Prince Mohammed bin Salman on an unprecedented mission to fundamentally transform the economy and modernize Saudi society, Saudi Arabia is set to change now and in the coming years. Some of his most pronounced endeavors are fighting corruption and diversifying the economy, while maintaining national and regional political stability.

Previous efforts to reduce dependency on oil, which forms roughly 80 percent of the Kingdom's revenues, and linking the economy to global production and trade, have proven to be largely ineffective. Progress notwithstanding, Saudi Arabia still has a long way to go in terms of market competitiveness, developing the skill sets of its indigenous population, and softening the influence of traditional cultural practices, both in general society and in the educational system; some say it will take a generation to realize goals.

The introduction of the new VAT will take a few months of adjustment. Importers and traders in Saudi Arabia mentioned that other expenses are also burdening companies. These include very high gas prices, a three-fold increase in utility bills, and the requirement to pay an additional 400 SAR ($107) for each non-Saudi employee. Also, Saudization is being enforced at 30 percent of company workforce, with Saudis in some cases being paid a third more than their expatriate counterparts. Further, businesses are redesigning their accounting systems to comply with the new taxes. It is expected that general businesses, including food service, will take an initial dip of around 30-35 percent before making the adjustment and rebounding.

However, in spite of the challenges ahead, Saudi Arabia will witness significant positive changes this year:

• Tourist visas: for the first time, Saudi Arabia has announced that it will start issuing tourist visas in 2018.
• Cinemas and entertainment: After a 35-year ban, cinemas are back in Saudi Arabia. In addition, concerts and shows will be introduced.
• Women drivers: the Saudi ban on women driving will be lifted in June 2018.
• Women watching sports events: Women are now allowed in stadiums to watch sporting events.
• ARAMCO privatization: Saudi officials have on several occasions announced they would sell a small stake in Aramco in 2018. If this goes through, the sale is expected to be the biggest stock market listing in history.

In terms of dairy, butter prices have dropped close to 30 percent in the last two months, prompting more purchasing from local processing plants. Irish and Argentinian butter in 25kg blocks (brand Saputo) are now being offered at $5,800/ton. These blocks are further distributed to foodservice and catering companies, but to a larger extent to confectionery processing plants for the production of pastries, chocolates, biscuits, wafers and cakes

As for the retail market, butter is available in various brands and packing sizes. Almarai, Forsan and other major dairy companies still depend on purchasing blocks of butter from the New Zealand, Europe and the United States to further process (cut-and-wrap for private labeling) in their local facilities and distribute to retailers throughout the Kingdom in portion sizes of 125 grams, 250 grams and other. Saudis are not accustomed to consuming butter during breakfast; instead, it is mainly incorporated in the production of homemade and industrial bakery and confectionery. U.S. butter is available in the Saudi market on a small scale, purchased at a price of about $4,900/ton. U.S. butter is mainly sold re-packed and private-labeled to the retail segment.

Almarai led the cheese category with a 28 percent retail value share in 2017. The company has a significant presence in all types of processed cheese, as well as in soft cheese. Almarai recently invested aggressively in promotional activities such as in-store promotions, digital media and broadcast, as well as outdoor media, which further enhanced its image and improved the sales of its processed cheese. Processed spread cheese is a large cheese category, but there are indications that its growth slowed in 2017.

Saudi Arabia is currently witnessing major campaigns advocating healthy consumption habits. More attention is paid to produce labels, especially by the young population. Cheese witnessed an impact from this trend as consumers began to shift towards more natural, healthier cheese, at the expense of processed cheese.

European skim milk powders currently dominate the Saudi market. German SMP, considered of very high quality, is being offered at $1,750/ton. French SMP, said to be of lower quality, is being offered at $1,600/ton.

Whey permeate sourced from Switzerland and Holland ($800/ton) and de-mineralized whey from Ukraine are mainly used in the processing of confectionery, especially biscuits. U.S. lactose is finding its way inside the Saudi market in applications of chocolate and caramel fillings.

Retail and food service: The Kingdom's food retail sector continues to expand as UAE's LuLu Group opens new hypermarkets in Jeddah. By 2020, Saudi Arabia will get another 20 LuLu Hypermarkets, six of which will be opened by end 2018. This includes two hypermarkets in Riyadh and one each in Tabuk and Dammam.

The fast-food market in Saudi Arabia is witnessing growth due to a surge in the young population and the changing lifestyle of workforce. A recent study shows that Saudi Arabia's fast-food market is projected to reach US$9 billion by 2023. Fast-food demand is anticipated to continue to grow due to adoption of western culture, growing influx of women in the workforce and the availability of a variety of fast-food options.

UNITED ARAB EMIRATES (UAE)

General market update: Driven by trade and tourism, the UAE is expected to continue to forge ahead as the most progressive and best managed economy in the Gulf and the region. With respect to consumer behavior and economic growth, the introduction of the VAT starting January 2018 is not expected to have much impact in the long term, although businesses (and consumers) are now going through a painful transition period. The way businesses operate will need to be adjusted. Small and medium-sized enterprises (SMEs) are expected to benefit as they will be starting from a clean slate.

Retail and food service: The UAE's retail segment continues to boom. Spinneys invested $48 million in new headquarters in Dubai that will feature a flagship store and on-site cooking school. Spinneys will open 18 new outlets as part of an expansion plan in UAE by 2020. The 18 stores will be either Spinneys or Waitrose, with outlets located in Dubai and Abu Dhabi emirates.

Also, UAE's retail giant Lulu plans to double its own-label products by 2020, from 2,500 products to 5,000. Lulu products, which were introduced 10 years ago, are now top sellers across 140 stores in the Middle East and North Africa, India and the Far East. UAE supermarkets and hypermarkets are driving demand by widening the offering and introducing new products, especially those with nutritional, organic or natural propositions.

In addition, the UAE has more than 16,000 food and beverage (F&B) outlets, the highest per-capita in the world. This figure is expected to top 19,000 by 2020.

Growth in F&B has a clear link to growth in tourism, business, and consumer spending. Expo 2020 is expected to further push the UAE in a positive direction. Upcoming trends in foodservice include more focus on cost efficiencies, innovation, continued health focus and increased digital footprint. Fast food will continue to flourish. Entertainment will increase in importance to retain consumer loyalty and to generate repeat business.

New partnerships: Greenhouse Foodstuff Trading, a major foodstuff trading company in Dubai, is reported to have partnered with the International Centre for Culinary Arts (ICCA) Dubai. Greenhouse Foodstuff Trading will be supporting ICCA by providing quality products for all their trainings, and also by sponsoring events and exhibitions. In return, ICCA will promote Greenhouse's brands and products in their day-to-day operations and in events

Furthermore, leading UAE regional supplier Chef Middle East has signed a major deal with dairy food producer, Lactalis. Lactalis has an extensive dairy range of globally recognized brands like Président and Galbani. Chef Middle East's expertise and broad client portfolio within the hotel and dining industries will give Lactalis much wider exposure. Meanwhile, the Lactalis range will strengthen Chef Middle East's existing dairy portfolio and will increase the credibility of their dairy portfolio with both existing and prospective customers. This new partnership also will position Chef Middle East's pastry and bakery range as "the one stop solution" for pastry professionals.

With respect to dairy, UAE is a major importer of UHT milk, which is supplied into chains such as Starbucks, Costa, institutional contracts and airlines. The market is expected to grow strongly in coming years with the growth of the tourist industry in the UAE. Yogurt and sour milk products registered value growth of 9 percent in 2017. Almarai Co. continued to lead sales in 2017, posting a value share of 23 percent. The UAE is a major buyer of dairy products from Ireland, with 2016 imports of about $30 million. Ireland markets itself as a sustainable (green and clean) food producer.

Sweet whey powders, whey permeate and SMP are used mainly in the production of confectionery items such as biscuits and chocolate. SMP is also used in the production of white cheeses.

These dairy ingredients are imported from the United States (Hoogwegt), France (Lactalis), Belgium (brand Corman), Ireland (brand Kerrygold), Canada (brand Gay Lea), Holland, Switzerland, Germany, Oceania and India. De-mineralized whey powders are imported frequently from Turkey (brand Enka) for ice-cream factories in the UAE. New Zealand's main brands Fonterra and Synlait dominate the whole milk powder market for use in the confectionery and bakery sectors, as well as for recombined dairy products. Other sources of WMP include Holland, France, Poland and Ireland. Prices of instant WMP from these sources fall in the range of $3,120 to $3,375/ton.

MPC 70% is usually sourced from local market/distributors; product originates from several sources including Canada (Chisholm brand) and New Zealand. Unsalted butter is usually sourced by processing companies through Arla's Dubai office.

Major foodservice franchise outlets are seeking U.S. cheeses. Varieties in demand include monterey jack, cheddar, mozzarella, Swiss cheese, provolone, parmesan, pepper jack and four cheese. U.S. cheeses are estimated to be selling for around $4,300/ton.

QATAR

General market update: In mid-2017, Saudi Arabia, the UAE and Bahrain, as well as Egypt, Yemen, Maldives and Libya, cut diplomatic ties with Qatar, citing support for Islamic extremist groups and its close relations with Iran.

Qatar is dependent on imports by land and sea for the basic needs of its population of 2.7 million, and about 40 percent of its food came in through the land border with Saudi Arabia.

Initially, supermarket shelves in Doha were emptied of basic supplies as residents rushed to stock up but the hoarding quickly ended after Turkey and Iran began sending food by air and sea. Since then, Oman and India have become key transit hubs to Qatar.

Qatar was heavily dependent (about 90 percent) on dairy products from Saudi Arabia, so the blockade posed a significant problem, which others saw as a good opportunity. With the help of an Irishman, 3,400 Holstein cows were flown into the Baladna Farm outside of Doha last year. The goal is to have 10,000 cows milking by April 2018.

Expansion in the food industry is not limited to the dairy sector. The number of factories in Qatar has doubled since the blockade. Baladna plans an IPO of its shares in the next few months and aims to move into other farming sectors. Despite political and economic challenges, Qatar's economy is still projected to expand by 3.1 percent in 2018, up from 2.5 percent in 2017.

Cheese: Mozzarella is in high demand by pizza outlets. It is mainly sourced from Germany and Belgium, as well as the United States (Saputo). EU cheese is trading for $4,850 to $5,100/ton, depending on origin.

Butter is mainly sourced from Australia and Europe. Traders and importers mentioned that suppliers change depending on price, shipping time/costs and other logistics. There is a big demand for Tex-Mex cuisine in Qatar, and users are constantly seeking items that fit this category. Qatar has a limited processing activity, but SMP and whey powders are imported in relatively small amounts.

EGYPT

General market update: Although the economic situation is said to be improving, inflation remains high. Restaurant menu prices have increased by around 14 percent compared to seven months ago, affecting purchasing activities of raw materials and ingredients. At the same time, the current economic situation is more stable compared to a year ago, when inflation was running at nearly 20 percent. The spike was largely the result of higher prices for regulated items, particularly fuels and oil-related products, as well as for foods, beverages and apparel.

Cheese: Cheddar blocks (20kg for further processing) are still in high demand. Most come from Ireland and New Zealand, currently priced at about $4,180/ton. The United States was a major player up until 2014 when it was pushed out of the market due to large price differences compared to the EU.

Retail shelves now carry a broader range of locally produced cheeses, and fewer imported cheeses. Today, the average price of imported cheese in retail is estimated to be around $6.23-$6.80 for 200g (about 7 oz.), up from $3.40-$3.96 previously. Egyptian producers of consumer items, who import most of their raw materials, have taken a sales hit since the country floated its currency last November, forcing them to raise their prices. Local dairy giants are teaming up with competitors to meet consumer demand, expand exports, and for cost efficiency.

SMP: Europe, the United States and Canada are the major sources of SMP. U.S. SMP is being offered at very good prices around $1,725-$1,750/ton. However, importers and big manufacturing companies are concerned about purchasing huge quantities at one time because they are unable to predict what the economic situation will be. Therefore, importers and manufacturers are placing half the order volume they would usually place.

Butter: Very expensive prices dominate the market. Importers/distributors and manufacturing companies still prefer to purchase New Zealand butter (Fonterra brand) from the local Egyptian importer, Sakr. Some butter from Uruguay and the Irish Dairy Board is being offered to the Egyptian market in prices of $28/carton, however Egyptians still prefer New Zealand butter. U.S. butter is now not highly available or in demand.

Whey powders: Sweet whey powder is the most widely used whey powder in Egypt, mostly imported from Turkey and Ukraine, and goes to different food manufacturing segments, mainly dairy and confectionery. It is used in bakery to a lesser extent. Whey is trading for around $800/ton.

Whey Permeate: U.S. whey permeate is being purchased by major manufacturing companies, particularly producers of flavors. The price is estimated to be around $1,000/ton. Much effort has been made to convince bakery and confectionery segments to use U.S. whey, but loyalty to country-of-origin is very price sensitive.

MOROCCO

General market update: Over the years, Morocco has implemented aggressive market reforms that have helped to position it as a gateway to other African markets and even to Europe. At the same time, the U.S.-Morocco FTA offers opportunities for U.S. dairy exporters, especially since the growing and diversifying food processing industries cannot rely on domestic availability and quality of raw materials. The need for regular and consistent supply has become a priority. Imports to Morocco are mostly through the port of Casablanca, although other ports of entry are being developed.

In terms of dairy applications, Morocco's imports of dairy ingredients for the food processing industry include butter, SMP, whey and cheese. Butter is also resized and repackaged locally for retail sale; New Zealand and Ukraine compete for market share.

The preference of the Moroccan market is yellow butter, 82 percent fat, with a maximum moisture content of 16%. Local bakeries and confectioneries prefer yellow butter, as it is considered to yield a more eye-appealing color in finished bakery products, such as croissants, cookies and traditional Moroccan pastries.

Processed cheese accounts for roughly three-fourths of cheese consumption in Morocco. It is purchased all year round and consumed by most population segments. Bulk cheese is imported for the cheese processing segment. Varieties used for cheese processing include cheddar, edam, emmental, and gouda. Most processed cheese is produced in triangular portions, but other formats including blocks, shredded and slices also are sold.

Most Moroccan cheese processing companies import dairy ingredients from Europe, mainly France (brands Le Group Bel, EPI Ingredients and Lactalis), Spain, Germany (brand BMI), Italy, Ireland (Lakeland Dairies, Kerrygold, and Dairygold) and the Netherlands (brand Hoogwegt). New Zealand (brand Fonterra) is a key supplier as well. European sources offer competitive prices and proximity to market; product arrives to Morocco within 10-15 days.

EU SMP is currently trading in the range of $1,750 to $1,850/ton, while EU butter ranges between $5,550 to $6,550/ton, depending on country-of-origin. Local cheese processing companies are increasing capacities, upgrading the quality of finished products, and working to enhance their export strategies. Processed cheese is distributed to the retail and foodservice outlets throughout Morocco.

IRAN

General market update: Burdened by economic woes, Iran, a top market for dairy products, is currently witnessing major political unrest and anti-government protests. Youth unemployment is said to be around 24 percent. The government's proposal to cut subsidies on basic goods, including food, and services for the poor and increasing fuel prices by as much as 50 percent, continues to fuel public anger.

Despite the unrest, Iran inaugurated a newly built extension to the country's main Arabian Sea outlet, the strategic Chabahar Port on the Gulf of Oman. The $340 million project brings the capacity of the port to 8.5 million tons of cargo annually. It is also expected to make Chabahar a rival to Pakistan's Gwadar Port, across the border some 75 kilometers away. The port is expected to be linked to the country's railroad network to facilitate transit of goods to neighboring landlocked Central Asian countries, as well as open a route to eastern and northern Europe through Russia.

The market for dairy products in Iran witnessed significant growth during 2011-2017, on the back of increasing demand from various regions of the country and shift in consumer preferences from unpackaged dairy products to packaged dairy products. In addition, rapid urbanization, changing lifestyles and growing popularity of western dairy products in Iran is projected to drive production and consumption of processed and packaged dairy products throughout the country. The newly inaugurated port will play a significant role in channeling the imports of raw materials, including dairy, to the country.

Nina Bakht Halal is USDEC's Middle East/North Africa representative.

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The U.S. Dairy Export Council fosters collaborative industry partnerships with processors, trading companies and others to enhance global demand for U.S. dairy products and ingredients. USDEC is primarily supported by Dairy Management Inc. through the dairy farmer checkoff. The password-protected article above is intended for USDEC member organizations only and should not be shared with anyone outside your organization.