A work in progress

by Morton Sosland
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As a relative newcomer to flour milling — entering the business only in 1972 — Cargill, Inc. has come to regard milling as essential to its strategy to develop a global presence in food ingredients. And even though Cargill's global scale in flour milling is small in comparison to some of its other grain processing operations like sweeteners and vegetable oil refining, the group already views itself as among the world's largest flour millers, even while acknowledging that its position in milling is very much "a work in progress."

These views emerged during an interview at Cargill's headquarters in Minneapolis, Minnesota, U.S., with John Geisler, formerly president of worldwide dry milling and now a leader of North American and European food ingredients and food applications platforms, and Guy Shoemaker, president of North American Flour Milling.

Cargill's worldwide daily wheat grinding capacity aggregates 24,120 tonnes, equal to about 386,000 cwts a day on a flour basis. U.S. Flour Milling accounts for 16,000 tonnes, or 250,000 cwts, of the total. Indeed, all but 250 tonnes of Cargill's milling investment is in the Western Hemisphere. The exception is a single mill in India.

Next to the United States, Cargill's major flour milling operation is in Argentina, where it has a 65% stake in a joint wheat milling venture operating under the name of Trigalia, a name selected to mean "wheat alliance." Daily capacity is 4,730 tonnes in nine flour mills that account for about 25% of Argentina's flour market. Its partner in the Argentine venture, which came into being last spring, is Molinos Rio de la Plata S.A., which continues to be a major manufacturer of consumer foods and thus is the largest flour customer of Trigalia.

Cargill is the managing partner of the Argentine venture, undertaken to create an efficiently sized milling business in Argentina, Mr. Geisler explained. With the joining of the two companies by combining their mills, and after an analysis of available capacity, the decision was made to shut down three mills with combined daily capacity of 1,100 tonnes.

As part of the Argentine venture, Cargill also assumed management of a flour mill at Asuncion in Paraguay with 360 tonnes of daily capacity.

In Brazil, at Sao Paulo, South America's largest country and largest city, respectively, the company operates a single mill of 780 tonnes. Since it is in Brazil that Cargill, Inc. has its largest capital commitment outside the United States, with extensive operations in a broad range of businesses such as oilseed crushing and refining, orange juice and other food-related businesses, Mr. Geisler acknowledged that the country offers a fascinating opportunity.

Yet, as for the many parts of the world covered during the interview, a cautious attitude ruled on whether it makes sense to enter into milling. Mr. Geisler stressed that each country requires careful examination, not just of the milling industry, but to gain an understanding of the best business system applicable to that nation.

Along that line, Mr. Geisler observed that flour milling is unique in how it has evolved. In countries that grow sufficient wheat to cover all or most of their domestic needs, the milling industry tends to be an independent business. But in countries that rely on imports for most or a large share of their wheat needs, milling tends to be integrated into the total food chain.

As Cargill seeks to evaluate how it can best deliver customer solutions, Mr. Geisler said the company increasingly wants to draw on its expertise in trading wheat and in supply chain management.

He expressed considerable satisfaction with how the company's business has developed in Venezuela, which was its first international milling venture, in 1987. He said the company initially thought it was buying a flour milling business, but Cargill quickly discovered that it was really in the pasta business, which, in turn, led to an expanding presence in other food businesses. Cargill is now the largest food manufacturer in Venezuela.

The experience in Venezuela has proven to Cargill management that the potential in Latin America is not just in flour milling, but also in manufacturing consumer foods and in food distribution.

"We do want to grow in branded foods in parts of Latin America," Mr. Geisler said, describing Venezuela as a developing economy that has plenty of room for income growth.

He also noted that Italian immigrants started the milling industry in Venezuela and that per capita consumption of pasta in Venezuela is second only to Italy.

A similar consumer foods strategy led to Cargill's entry into flour milling in India, on the other side of the world from its Latin American operations. The basic appeal of India was its rank as a major wheat producer — the third largest in the world — and a population made up of heavy wheat consumers that is projected to exceed China in size at the middle of the 21st century. At the same time, nearly 75% of India's wheat consumption is in the form of atta, a type of whole wheat flour that is mostly ground on small stone mills operating in villages and major cities, often grinding wheat brought in by the customer. Consumers use the atta at home for preparing chapatis, the food that accounts for a large share of wheat consumption.

Cargill ventured into India hoping to produce a packaged and branded form of atta that would win favor with consumers as the Indian food market became sophisticated. Mr. Geisler acknowledged that this hope has not materialized, mainly because consumers have a preference for freshly ground atta, and because India's highly complex food distribution system lacks adequate internal infrastructure for moving wheat.

"We would call this very much of a scout project," Mr. Geisler said, adding that "while a clear distribution strategy has not emerged, we are still very enthusiastic about the opportunities and are encouraged by the strong welcome of our investment in the country's food business."

The mill in Delhi acquired by Cargill in 1996 has 200 tonnes of conventional roller mill capacity and a 50-tonne atta unit.

While Mr. Geisler noted that Cargill has made "significant strides" in developing an international flour milling business, he pointed out that its growth in other food ingredients, especially sweeteners and refined oils, has outstripped flour. This divergence is especially apparent in Europe, where Cargill has substantial food ingredient businesses in a range of countries — Russia, Turkey, Poland, the Netherlands, France, Spain, Germany and Britain — but no milling investments.

Asked why Cargill has not entered into European milling, he pointed to concerns about the heavy reliance of European mills on export business, which he viewed as being dangerous in the near-term.

"We are very internationally patient," Mr. Geisler said while declaring that "more interesting opportunities exist in other areas." These decisions, he commented, have to reflect the reality that "most of the world is awash in milling capacity."

He also said that there's not great economic advantage in becoming larger and larger in global flour milling. Instead, Cargill sees its opportunities as stemming from knowing what business systems work best, its skills in providing customer solutions and wheat trading and origination.

Although the present offers unusual opportunities for acquiring several large flour milling assets, especially in Britain and Indonesia, Mr. Geisler refrained from declaring any interest. He said Cargill has no list of countries where it hopes next to enter into flour milling.