Grain industry transformed in quarter of a century

by Morton Sosland
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The founding of World Grain magazine 25 years ago in 1982 coincided with the end of a decade that up to then had been often characterized as the most tumultuous in the history of the global grain industry. Coming off the decade that began with unprecedented purchases of grain by the Former Soviet Union and the People’s Republic of China and closed with the imposition of export embargoes to limit such buying, the founders of this magazine saw an urgent need to provide the global grain industry with a thoughtful source of information and a clear voice for reason. At the same time, concern did rule among members of the editorial and publishing staffs as to whether the high level of excitement that had marked the preceding decade could possibly continue at anywhere near the same pace or volume. Would the launch of World Grain somehow signal a return to normalcy and a period when little that was exciting or even newsworthy would be happening in an industry that ranks as the world’s longest-lived business?

In light of what has occurred in the past 25 years, those concerns have proved unjustified. If the decade ended in 1982 was marked by a greater array of startling developments than any that preceded, the subsequent quarter of a century may appropriately be described as one in which the dimensions of what occurred and continues extend far beyond anything in the past. Hardly ever before in modern history have developments in the grain industry been more front and center than now. Of course, worries about the adequacy of global grain supplies, as well as surpluses, have been a part of the industry for thousands of years and hardly merit widespread attention, even when millions of people are threatened.

What is totally new currently is the rapidly expanding use of grains, primarily maize (corn), as feedstock for making alcohol for use in motor fuel. Widely described as a revolution driven by concerns over depleting petroleum reserves and the need to protect the environment, governments around the world, from Brussels to Brasilia to Washington, have embraced plant-based ethanol as a supplement to and as a substitute for oil-based gasoline. The result has been the introduction into the global supply-demand equation for grains of a third powerful demand element, in addition to food and feed that historically accounted for use. Prices at unprecedented levels witnessed in recent times typically would have prompted jousting between food and feed demand in a confrontation that food usually won. Just how this will evolve in view of governmental support for ethanol production, through both direct and indirect incentives, is a huge uncertainty affecting the business of grain and grainbased foods.

Countering to a degree the powerful demand created by the amazing expansion in ethanol production is the one aspect of the global grain business that, in comparison to the exciting progress in other fields, may be deemed disappointing. The lag is where it could not have been forecast — in the pace of exports. Using the market share measure that often determines performance in a wide array of financial analyses, grain exports have declined from eing 1 7% to 1 8% o f g lobal g rain isappearance a q uarter of a century go to h ardly 13% currently. Using he raw tonnage, global disappearnce of wheat and coarse grains in the urrent crop year is projected to total .670 billion tonnes, up 488 million, or 1%, f rom 2 5 y ears ago. In contrast, lobal exports in 2007-08 are projectd at 219 million tonnes, up 28 million, r just 15%, from 1982-83. The averge a nnual g ain i n g lobal e xporting a pa le 0. 6%, co ntrasted wi th 1. 6% rowth in annual disappearance.

The details behind the less than exiting export numbers mask forces imortant to the evolution of the global rain industry. Primarily, they reveal ow domestic production, even in ountries with environments once considered unsuited for grain, has kept pace with demand gains attributed to expanding populations and rising incomes. It is one of the hallmarks of the current era that the sudden outbreak of ethanol-related demand coincides with a slowing in world population growth to less than 2%. Indeed, the food and feed demand trends attributed to population gains are increasingly being supplanted by assessments of how income and standard of living increases are spreading, albeit slowly, into the poorest developing countries. Yet, even the once close tie of demand to income trends has been severed by consumer concerns focused more on food quality and safety than on quantity.

A survey of grain industry leaders 25 years ago, when wheat shipments exceeded coarse grains, probably would have revealed confidence about a reversal of that relationship so that coarse grains would be far in the export lead. That has not happened, with the export volume of wheat, even as the total has modestly risen, continuing to account for a larger share than coarse grains.

This helps to explain in part another surprising export feature, and that is the way shipments of wheat flour have not just kept pace with grains, but have displayed considerably greater ebullience. World flour exports in the latest crop year approached 11 million tonnes in wheat equivalent, which was up an impressive 62% from a quarter of a century ago. Not only was this increase half again as much greater than the showing of grain exports, but the performance of individual flour exporting countries revealed astounding changes. The largest flour exporters in recent years have been Kazakhstan and Turkey, whereas 25 years ago these countries did not even show up among the minor shippers, with leadership provided by the European Union (E.U.) and the United States (U.S.).

In these export numbers is striking evidence of the way flour milling capacity has grown, not only globally, but of equal importance, in the updating and modernization of flour mills. The long-running trend that has seen major flour importing nations expand their domestic milling capacity to write finis to flour purchases on world markets has continued unabated. Most notable in the past quarter of a century is the rapid decline of flour imports by the countries of North Africa, most notably Egypt, which a quarter of a century ago ranked at the top as a flour importer and now buys little or no flour on the world market. In instances, countries that barely had sufficient capacity to satisfy their own needs have added new milling to the point that they have become export competitors. The United Arab Emirates, which grows no wheat, has been a leading flour exporter for a number of years.

While flour mill building and modernization have mainly been in developing countries, significant investment also has occurred in the Commonwealth of Independent States, the countries that once made up the Soviet Union, and also in China. Here the emphasis has been on boosting plant efficiency to upgrade milling industries that under the tight yoke of Communist governments had missed out on many of the milling advances of the post-World War II period.

In the developed areas of the world, like Western Europe and the U.S., as well as in Australia and Japan, the emphasis in milling modernization has largely centered on taking advantages of computerization and what it has to offer in terms of greatly increased quality control and plant efficiency. Soaring energy prices have added significantly to the cost of milling plant operations in the past 25 years, and equipment and processing innovations that offer an energy savings approach have become as important as the milling industry’s long search for ways to reduce manpower requirements.

Similar advances have been scored in grain storage and handling systems, again largely to take advantage of the ability of computers to manage complex systems efficiently. For shippers of both grain and grain products, the past quarter of a century has produced minimal progress in transportation, even though bottlenecks in barge, highway and rail services continue to plague. Not surprisingly, new grain storage building has been mainly focused on domestic services, except in regions like the Black Sea ports that have gained an expanding share of world trade.

Use of shipping containers, developed initially for moving manufactured products unsuited to bulk handling, have suddenly emerged as offering grain shippers the advantage of maintaining the identity of specific lots of grains. This is seen as an important advantage when it comes to satisfying buyers seeking traceability or specific quality traits in grain that are difficult, if not impossible, to offer in bulk shipments. Carrying these possibilities to their ultimate leads to a time when grain bred with specific qualities will be marketed under a brand name and delivered in containers. For an industry that was mainly built by maximizing commoditization in order to assure the lowest unit costs, this is a prospect hinting of great transformation, extending far beyond the rapid growth of organic food production and its rising popularity.

When it comes to production of grain, the relatively modest annual increases in demand have been easily supplied by the rather stable land area devoted to crops around the world as well as the upward trend in yields. The past 25 years have seen massive changes in plant science, highlighted by the embrace of biotechnology and genetic modification in some producing countries and their rejection in other areas. It is generally agreed that absent biotechnology, the prospect for achieving a supply-demand balance would be gravely in doubt, particularly with the expansion of ethanol demand and its effect on maize and of biodiesels and the added demand this has created for soybeans.

Maize and soybean yields, particularly in North and South America, have been greatly expanded by GMOs. Due to the nature of the plants, how they are grown and their specific economics, maize and soybeans have attracted most of the investment in biotechnology-related research. Even though the possibilities of developing wheat with specific milling, baking and nutritional qualities have long been studied to the point of offering great promise, genetic modification thus far has not been applied to the bread grain. Indeed, doubts about consumer acceptance of GMOs in Europe and parts of Asia and Africa have provided additional barriers to pursuing this work.

World food use of wheat, the best estimate available of global flour production, has increased by nearly 100 million tonnes in the past 25 years, reaching a current total near 445 million tonnes. At one time, it would have been fairly accurate to apply a flour extraction average of 72% to that wheat food use to come up with an estimate of global flour production. That approach has recently come into question due to developments that raise doubts about the use of a "standard" extraction rate. Improved milling efficiency, including advances in roller milling technology and bran separation, have added two or three percentage points to extraction rates at many mills. That is significant change, casting doubt on the application of standard extraction rates. If that is not confounding enough, changes in the kinds of flour being produced, particularly the recent focus on whole wheat flour in America and Europe, have introduced another new factor into these calculations.

As should be expected in an industry undergoing a transformation like that experienced by the world of grain in the past 25 years, the companies and the overall makeup of the industry, both internationally and within individual areas and countries, have experienced mind-boggling shifts. When World Grain began, two entities — Exportkhleb in the Soviet Union and Cereoilfoods in China — were the center of attention in grain markets. Their massive purchases of millions of tonnes of grain, often carried out in great secrecy in negotiations primarily with the major grain trading companies, provided market-driving fodder. It almost seemed like the rest of the grain buyers around the world had to wait for these two governmental bodies to complete their business before even thinking about entering the market.

On the selling side in those days were the long-established, family-owned trading companies, each with a legendary history, as well as that other governmental anomaly, the wheat boards operating as monopoly sellers from Australia and Canada. Although operating with different powers, the European Commission of the E.U. and the Commodity Credit Corp. of the U.S. Department of Agriculture exerted huge influence, if for no other reason than in their daily establishment of export subsidies and similar arrangements that facilitated most of the trade being done during the 1980s.

All of these diverse buying and selling entities established by their governments, including those monopoly sellers and buyers, have either disappeared or currently play a greatly diminished role in the global grain industry. Export subsidies, either direct or indirect, are no longer used as tools to promote export business. Even in Japan, where the Food Agency has determined that country’s purchasing programs and domestic pricing, the government’s role is declining. That is also the case in many of the leading grain importing countries that have either cut back or abandoned centralized buying and pricing in order to put responsibility for the domestic food supply on local grain merchants and processors. This is one of the most important of the many changes that have revolutionized the global grain industry, transforming the market from one where very few sellers dealt with an equally small number of buyers, to one where the number of buyers, at least, has exponentially increased.

In this look at the first quarter of a century of World Grain and the developments that have had a massive impact on the global grain industry, much of what has been noted could be described as emanating from within the industry itself. Of course, any such conclusion would neglect the huge, even dominating, role played by politics and economics. Within the first decade of the magazine’s existence, the Berlin Wall came down, and Communism imploded as a governing force over the vast area of what is now the Commonwealth of Independent States led by Russia. This Soviet collapse wrote finis to brutal state control of essential grain industries across this vast territory. Now, after nearly two decades of freedom, the Black Sea has become a major participant in export trade in grains.

This change also exerted an impact on China, where Communism has become modified in ways that create domestic competition in the marketing and processing of grain, as well as in importing and exporting. Millions of farmers in China and India, as well as in Africa, make these huge areas very different in their grain production and marketing from the agricultural systems operating in developed nations.

Completion of the Uruguay Round of trade negotiations, begun in 1986 and signed in 1994, stands as a monumental accomplishment. This round made agriculture subject to international trade governance for the very first time. Its goal of ending export subsidies and slashing domestic support programs tied to specific crops helped to spur significant changes in domestic support programs. In the end, both the U.S. and the E.U. modified their farm programs in ways that have mostly freed up dealings in grain and grain products from governmental interference that early in this 25-year period had more to say about the direction of the global grain industry than anything else.

So far as the individual companies participating in the global grain in

dustry are concerned, this quarter of a century has had two distinctly opposite effects. In sectors like international grain exporting and flour milling in developed countries, consolidation has been the dominant, continuing theme. Two of the companies that ranked at the top of the global grain industry in 1982 are no longer in the industry, one having divested its grain operations to focus on other parts of agribusiness and the other quite literally vanishing as the result of financial difficulties. The number of industry leaders that are publicly owned with listed shares doubled in this period, from one to two, and the others continue mainly as family-owned. Farmer-owned cooperatives that 25 years ago often expressed a desire to become major participants in the global grain trade have either abandoned that ambition or have merged into other entities with a totally different focus. Adding value, which often means investing in processing, has been an important mantra of farmerowned cooperatives.

Even as the number of companies in the traditional grain business has shrunk, an explosion has occurred in numbers engaged in processing grain into ethanol. Indeed, this industry has grown so quickly that warnings of an "ethanol bubble" are frequently heard. Yet, hardly anything lends credibility to doomsday predictions just as numerous new plants are starting operations.

In other parts of the world, the opposite of consolidation has ruled in the more conventional aspects of the business, with a proliferation in the number of companies engaged in varied aspects of the business. Entrepreneurs, experienced managers, former government officials and many others have avidly pursued the wide range of careers in the grain industry. Wherever this growth has surfaced, and regardless of how primitive its early start may be, the enthusiasms that have characterized the business of grain for hundreds, yes, thousands of years, shine brightly. Yet, it is likely that few, if any, companies operating in the business today would call themselves a "grain company." That description was commonplace a quarter of a century ago. Its disappearance from the current grain industry dialogue is evidence of how the business has dramatically changed, by reaching out, by engaging in new things and by seeking to capture an even more important role in behalf of the global grain economy than it ever had before.

It is the happy role of World Grain to record the excitement and the happenings in this dynamic industry.