Saudi Arabia buying up farmland in US Southwest

Saudi Arabia and other Persian Gulf countries are scooping up farmland in drought-afflicted regions of the U.S. Southwest, and that has some people in California and Arizona seeing red.

Harvesting alfalfa crop
Andy Sacks | Getty Images
Harvesting alfalfa crop

Saudi Arabia grows alfalfa hay in both states for shipment back to its domestic dairy herds. In another real-life example of the world's interconnected economy, the Saudis increasingly look to produce animal feed overseas in order to save water in their own territory, most of which is desert.

Privately held Fondomonte California on Sunday announced that it bought 1,790 acres of farmland in Blythe, California — an agricultural town along the Colorado River — for nearly $32 million. Two years ago, Fondomont's parent company, Saudi food giant Almarai, purchased another 10,000 acres of farmland about 50 miles away in Vicksburg, Arizona, for around $48 million.

"They will continue to come over here and buy properties where they can grow good-quality alfalfa hay and ship it back to the Middle East. It makes logical sense for them to do that because they're not going to be able to grow it in Saudi Arabia, especially for milk production." -Joseph Dutra, President, Westec

But not everyone likes the trend. The alfalfa exports are tantamount to "exporting water," because in Saudi Arabia, "they have decided that it's better to bring feed in rather than to empty their water reserves," said Keith Murfield, CEO of United Dairymen of Arizona, a Tempe-based dairy cooperative whose members also buy alfalfa. "This will continue unless there's regulations put on it."

In a statement announcing the California farmland purchase, the Saudi company said the deal "forms part of Almarai's continuous efforts to improve and secure its supply of the highest quality alfalfa hay from outside the (Kingdom of Saudi Arabia) to support its dairy business. It is also in line with the Saudi government direction toward conserving local resources."

Alamarai did not respond to CNBC requests for an interview.

"We're not getting oil for free, so why are we giving our water away for free?" asked La Paz County Board of Supervisors Chairman Holly Irwin, who represents a rural area in western Arizona where food companies affiliated with the Saudis and the United Arab Emirates have come to farm alfalfa for export.

Added Irwin, "We're letting them come over here and use up our resources. It's very frustrating for me, especially when I have residents telling me that their wells are going dry and they have to dig a lot deeper for water. It's costly for them to drill new wells."

'Beneficial use'

However, the issue of land rights comes into play. As the owners of the land, the Saudis appear to be playing by the rules. The area of the Arizona desert where the Saudis bought land is a region with little or no regulation on groundwater use. That's in contrast to most of the state, 85 percent of which has strict groundwater rules.

Local development and groundwater pumping have contributed to the groundwater table falling since 2010 by more than 50 feet in parts of La Paz County, 130 miles west of Phoenix. State documents show there are at least 23 water wells on the lands controlled by Alamarai's subsidiary, Fondomonte Arizona. Each of the wells is capable of pumping more than 100,000 gallons daily.

"You can use as much water as you'd like, as long as it's put to a beneficial use, and you're not required to report your water use," said Michelle Moreno, a spokesperson for the Arizona Department of Water Resources, which has scheduled a public meeting for Jan. 30 in La Paz County to hear concerns from residents.

Back in Blythe, the purchase of farmland comes as urban residents of California face state-mandated water cutbacks due to a fourth year of severe drought.

Blythe Mayor Joseph DeConinck said between 10 percent to 15 percent of the hay grown in his region is exported overseas, but insists the practice is not contributing to the state's drought. The mayor, who also grows alfalfa, said he isn't concerned about the Saudis buying up land in his community.

"They are buying the ground to farm. There's abundant supplies of water in Blythe for farmers from the Colorado River," he said. "Our valley has the first water rights on the river."

More competition for land and fodder is likely to make things more expensive for dairy farmers in California and elsewhere.

"It will ultimately drive the price up for the West Coast dairy operations," said Robert Chesler, vice president of the dairy group at FCStone, a Chicago-based commodity-risk management company. "This is where they are buying that hay. This is where they are buying the farmland for dairy farms as well as and where they are buying the dairy goods, because we are obviously exporting more out of the West Coast."

Westec President Joseph Dutra, who has served as a consultant to international companies looking to farm in the U.S., said he wouldn't be surprised to see more U.S. farmland purchased by the Saudis. "They will continue to come over here and buy properties where they can grow good-quality alfalfa hay and ship it back to the Middle East. It makes logical sense for them to do that because they're not going to be able to grow it in Saudi Arabia, especially for milk production."

Asian buyers dive into American hay

Besides the Gulf countries, China, South Korea and Japan are big buyers of American hay.

In recent years, buyers in China have acquired as much as 20 percent of total U.S. hay exports. Export demand to Asia cooled last year as hay inventories abroad rose and the strong U.S. dollar made American ag crops more expensive overseas. It also didn't help that some international dairy customers in 2014 found other sources for hay due to the U.S. West Coast port labor dispute.

"We do live in a globalized marketplace, and the fact that we ship food to China and Japan and ship automobiles back to the United States is part of the globalization of our marketplace," said Daniel Putnam, an alfalfa and forage specialist with the University of California-Davis. "Whether we ship almonds or wheat or corn or soybeans or alfalfa or milk, it's world demand for food products that comes from American farms."