Milling's little secret

by Emily Wilson
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After nearly two decades in the shadows, Seaboard Corp. is quietly emerging as a powerhouse in flour milling worldwide.

Seaboard, based in Merriam, Kansas, was one of the largest flour milling companies in the United States throughout most of the 20th century. When it sold its U.S. milling operations to Cargill, Inc. in 1982, Seaboard owned 10 mills with a combined daily milling capacity of 85,650 cwts (3,900 tonnes). It was the largest single flour milling acquisition in U.S. history.

Not included in the Cargill transaction were Seaboard mills located outside the United States, in Ecuador, Nigeria, Sierra Leone, Liberia and Guyana. Since the sale, Seaboard has focused in the United States on a number of non-milling areas, especially pork processing and marine transportation. But throughout the last 18 years, Seaboard has steadily expanded its milling presence in Africa and the Caribbean to the point that it now has daily wheat milling capacity totaling 88,000 cwts (nearly 4,000 tonnes) — more than it had in the United States before the Cargill transaction.

"Seaboard is committed to expanding in the industries it knows best," said Steven J. Bresky, vice-president. "Grain processing, including flour milling, is one of those businesses."

Bresky noted that in most of the countries in which it operates flour mills, Seaboard also operates corn (maize) mills and/or feed mills.

The expansion in recent years has reflected the company's willingness to step forward in response to major government policy changes in much of the developing world, Bresky said.

"The assets that have come into play over the last five or six years have been the consequence of a privatization binge," he said. "So it's really just been in the last few years that we have even had the chance to explore these opportunities."

Ronald G. Graver, director, milling operations, said the privatizations have come a full generation after many of the mills were placed under government control.

"In the 1960s, several nations in Africa gained their independence, and many governments either nationalized or built flour mills," he said. "It seems as though they have encountered operational or financial problems. As a prerequisite to obtaining I.M.F. funds, these governments were required to divest themselves of their state-run enterprises."

Joe E. Rodrigues, executive vice-president and treasurer, noted that privatization, in addition to giving Seaboard significant opportunities, has posed some challenges.

"Privatization and free trade give us more control but also generate tremendous competition," he said. "People are able to import flour directly, which makes our job more difficult on one hand, but it also makes it more competitive on the other hand."

WORKING CAPITAL. While Seaboard does not have 100% ownership of all the various mills it operates, the company is largely responsible for the mills' management.

Significant capital infusions are almost always part of a Seaboard acquisition of an existing foreign milling business. A flour mill acquired in Angola with daily milling capacity of 70 tonnes of wheat was increased to 200 tonnes in a project that was to have been completed in December.

"Basically, the formula we have experienced is that when we take over these mills they have operational difficulties or shortfalls in working capital," Bresky said. "We provide the working capital to give them a steady supply of raw materials, and we put in capital expenditures that need to be made in order to bring things up to a standard that allows them to be competitive."

In almost all of the countries in which Seaboard operates, the company holds a leading market position in flour milling — which is not to say that the company does not face competition. Despite the presence of mostly local competition, Rodrigues said, Seaboard is well received in all the markets in which it operates.

"They see an international company that is well capitalized and with advanced technology," he said. "But keep in mind that the local competition is usually pretty substantial people."

The fact that Seaboard operates roughly the same amount of milling capacity today as it did in the early 1980s does not mean that the company in any way structurally resembles the business that existed 20 years ago, according to Bresky.

"I think the only units that remain are the engineering department, equipment purchasing, raw material purchasing and quality control," he said. "These areas of expertise and knowledge were transferred to the international side.

"But the international business involves many aspects that the domestic business did not, such as public and political relations in Washington, D.C., more challenging personnel management and more complex financial issues."

Perhaps the greatest structural change, Graver said, is the decentralization necessary in an international business.

"Domestic mills were managed more as production units while, on the international side, these mills are businesses unto themselves," Graver noted. "These are individual operating companies, and the reliance on local management is huge."

Bresky noted that the company's Kansas City headquarters had more than 200 persons devoted to flour milling in the early 1980s. Today, with the same milling capacity, the number of staff members dedicated to milling totals 15.

Rodrigues concurred, adding, "We are very decentralized. We rely on the management to make day-to-day decisions. We give them a philosophy of guidelines and corporate culture, but they have to rely on themselves."

A FATHER'S FORESIGHT. Bresky credited his father, Seaboard Chairman H. Harry Bresky, for advocating the move into international milling in the 1960s and for creating the structural template for its international operations that is still used as a guideline today. "Remarkably, the business model developed almost 30 years ago by Harry remains intact to this day," he said. "From a capitalization standpoint to the supply chain, our structure has not changed at all. This is a real tribute to my father's foresight, guts and business acumen in the international milling business."

While the structure has been a constant, improvements in information technology have been tremendously helpful in managing Seaboard's far-flung collection of flour mills. Bresky, Graver, Rodrigues and others make periodic visits to all of the mills, but are in constant touch through e-mail and telephone. In addition, a regional office staffed with management, financial and technical specialists is maintained in Durban, South Africa. The location places them only a couple of hours from the continent's various mills.

"I think the advent of the computer age helps us just to coordinate getting everybody together from this office, from Durban, from Bermuda, from Washington to all of these countries," Bresky said. "It's incredible. There are times when you get to these countries and nothing works except the e-mail."

Staffing mills in overseas markets is considerably more complicated than is the case with mills in developed countries, Bresky said. "At the top, we normally staff our mills with a managing director, financial controller and director of operations," he said. "In the bigger mills, sometimes we have to supplement technically and managerially, but normally the smaller mills would start with three, that is the minimum."

Seaboard is committed to developing the local staff, Bresky noted, and frequently brings them to the United States for training. "That's very important," he said. "Many local technicians attend A.O.M. meetings and training courses."

Graver added, "There is a misunderstanding that labor in developing countries is low cost. It takes a large number of people to run these operations. If you look at just the mill, there aren't many people. But when you consider sales and accounting, packing and loading, security, maintenance, purchasing, it takes additional staff to support and maintain the operation. You need to consider the whole operation, which is basically self-reliant.

"For example, if you operate in the United States, you have a contractor to take care of your air conditioning or electrical maintenance. In Africa, you have to perform all of these activities yourself. This requires a lot of people."

Another significant expense for flour milling compounds in Africa is security, Rodrigues said. He noted that the relationship of the value of a bag of flour to a week's wages makes theft a serious threat.

A more rare but serious security situation relates to civil strife. Last year, Seaboard had to withdraw its staff from Sierra Leone because of fierce fighting there. Still, Bresky said there are many misconceptions about life in the various African countries in which Seaboard operates.

"What you hear on the news and what the actual situation is, it's quite a bit different," he said. "In Sierra Leone and Nigeria and other locations, there is a network of organizations which have systems in place to address security issues. Having reliable information and a well-defined structure mitigates some of the potential anxiety in times of instability."

MILLING CHALLENGES. Another operating challenge faced by Seaboard is that all but a couple of its mills are located in hot climates where wheat and flour can easily go out of condition.

"Grain is fumigated on board our vessels prior to sailing," Bresky said. "We have people who are very focused on quality control and sanitation."

He added, "Storage facilities hold about 60 to 75 days' wheat usage. We have regular routes to all of these locations with our own ships so we don't need to keep large stocks of grain on hand unless market conditions dictate we do so."

Even though humidity and heat create sanitation challenges, the same factors can be advantageous for milling, too, Graver said. "Once you get the mill flowed properly, you normally don't have any changes in the flow," he said. "It stays that way day in and day out. In the tropics, maybe temperatures fall to the 70s (Centigrade) for lows and 90s for highs, and humidity stays about the same, so you don't experience the temperature swings millers in the States face."

While different types of flour are milled in each of the countries in which Seaboard operates, in general, Graver said that wheat is milled in Africa for one of two types of end product. "It goes back to the Colonial days, when the French required a certain type of bread, and the English required another," he said. "In Nigeria, the baker produces a pan loaf like they do in the United States. In the Congo, they make the baguette, a small loaf that is not popular in Nigeria. The formulas are very lean in Nigeria. The baker doesn't want to put any more into the mix than he has to, so a lot of times there is a little bit of sugar, yeast and salt and that's it."

Graver said local tastes can be extremely specific. For instance, in the Congo, Seaboard found that it was unable to use U.S. soft red winter wheat to meet local demand. "We need French wheat in the blend to make it more flexible and pliable for the baguettes," he said. "Soft red winter is not the same thing. It is more of a cookie and cake wheat. Actually the No. 1 French milling wheat is a really low-protein bread wheat. We've tried to substitute before, and it hasn't worked in Guyana or in the Congo."

In most of the areas where Seaboard operates, bread is one of the main staples for local populations. But Rodrigues worries that flour is "getting expensive for the populations."

Bresky explained that demand cycles for flour may give a strong indication of whether local populations can afford wheat-based products as staples in their diet. "It used to be that we could chart our sales based on the local harvests," he said. "When harvests of rice or yams, competing carbohydrates, came in, we would see our sales dip for awhile and then come back again.

"But if the country is so poor, like Haiti is today, then we see an impact from products beyond carbohydrates, say, the mango harvest. It's a fruit, but when the country gets so poor that they need just something to eat, they will substitute fruit for bread."

Having witnessed only the skimpiest of economic advances in most of the countries where it has operated over the past generation, Seaboard Corp. remains hopeful about prospects for the years ahead. "The economy has actually deteriorated in Nigeria, the Congo and much of the region," Rodrigues said.

"We sincerely hope there will be change. People are getting tired of autocratic rule, and they are trying to find new ways of running the economy more efficiently. Obviously, the transition period is extremely difficult and things won't happen immediately, but at least the intention is there.

"The military leadership in Nigeria has given way to democracy and they are taking tentative steps now. We hope things will get better."

At the same time, Rodrigues acknowledged that when it decides to invest in an African flour mill, Seaboard never depends on an improving local economy to make the investment viable. "We know that people need to eat, and we believe that our industry is a basic industry," he said. "We will always be in business, sometimes better and sometimes not. But the people need to fill their stomachs."

Still, Rodrigues is guardedly optimistic about economic prospects and the outlook for an improving business climate in many of the countries Seaboard operates. "I would say that governments are trying to allow private enterprise to operate with more freedom, but still all of the countries have many rules and regulations that they inherited from the colonial administration," he said.

"Those rules and regulations are sometimes applied in an arbitrary way, which makes it very, very difficult for our people. Those rules and regulations cost money and are passed along so are not of benefit to the population."

Many of the countries in which Seaboard operates have remained mired in poverty, though one exception cited by Bresky was Guyana. The improvement followed the death in 1985 of long-time leader Forbes Burnham. President Burnham pursued an unsuccessful policy of agricultural self-sufficiency that resulted in a closing of the Seaboard mill until 1986, when the U.S. government offered P.L.480 Title I wheat.

"That was the start of the rejuvenation of our flour milling business there," Bresky said. "Now in that country we have per capita consumption of flour up to about 115 lbs annually. It's a very small country, but we have had very steady, consistent growth even though the population growth has been flat. The economy is doing well. Guyana is doing the right things."

Interestingly, Bresky said that as Seaboard has evaluated investment opportunities in recent years, a country's political stability has never factored into a decision to walk away from a deal. Too high a price has led Seaboard to pass up investment opportunities, he said. "There have been times when the seller wanted a price that was unreasonable, not even close to the marketplace," he said. "We do not participate."

Rodrigues said that while Seaboard has been aggressively seeking investment opportunities in recent years, the company has been anxious to avoid paying excessive prices.

Bresky added, "But there isn't a country of which we would say there is a political risk or a physical risk that keeps us out. No, I think we're already in those countries. It's all downhill from here."