Holding mirror to European flour milling

by Morton I. Sosland
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As tempting as it may be to draw parallels between flour milling industries in different nations, especially those with similar economic structures, a careful look reveals huge variations in the fundamentals defining national milling industries.
Hardly anything emphasizes these differences more than a recent study of European flour milling carried out by that highly regarded source, the research group of Rabobank. Based in the Netherlands, but with banking operations covering the world, Rabobank is unique among global banks for its base in agriculture. Serious attention is paid to its studies of industries, and that particularly applies to this analysis of European milling. The study, reviewed in this journal’s November issue, offers a superb look at European milling in comparison to the industry operating in other countries and regions around the world.
According to Rabobank, both the present and future prospects for European milling rest on three key issues. These are counterparty risk, price volatility and margin profitability. On the surface, it might appear that these same issues affect milling in other developed regions in the same ways. But a close look questions that conclusion. For Europe, counterparty risk applies primarily to wheat merchants, who are generally separate from mills and who Rabobank sees as susceptible to defaulting on contracts with dramatic market moves. It also points to similar counterparty risks with flour customers, a situation that has occurred in a few regions but which in many areas has been prevented by the use of credit insurance. In regard to defaults on wheat contracts, stories relating such happenings have appeared around the world, but with a few exceptions centered on China and the Black Sea, nothing serious has been recorded.
Price volatility is an issue that Rabobank says requires both operational and strategic responses. These are necessary to maintain margins as well as a competitive position. The extreme volatility experienced last year has been especially challenging, and the study says European millers have not always been able to pass along higher costs. Citing these erratic prices as a worry for European millers, the study thus differs from some other parts of the world. In America, for instance, sharp fluctuations in wheat prices have prompted exceptional caution in flour pricing by millers who have strived to maintain operating margins. While it may be correct to describe the past year’s extreme price volatility as a problem for all millers, it is apparent that the shape of these difficulties differs dramatically.
In discussing margins, the bank’s study says profitability has declined across European milling in the past six years. It also says that larger milling companies have not done better than their smaller competitors, unlike other sectors of grain-based foods where larger companies do better. The margin decline is mainly attributed to wheat volatility. These same patterns differ area by area.
In the face of these difficulties, Rabobank presents a positive picture of the outlook for European milling. It says the industry has displayed great resilience and has shown no slackening in the face of thinner margins. At the same time, it notes that these problems come at an inauspicious moment in the European economy, and thus may bring about a pickup in consolidation, both within countries where it has not run a course and especially across the totality of Europe where fragmentation still rules in both flour milling and among consumer foods companies like baking.
When it comes to demand, Rabobank shows European millers facing many of the same problems and opportunities as their peers in other regions. The dramatic drop in European flour exports, as Kazakhstan and Turkey have seized the flour export lead, duplicates the way other millers lost flour business to European competition some years before. So far as the domestic market is concerned, the bank envisions bread retaining its sway among European consumers. The same hope for market gains prevails in every other region.