Focus on Germany

by Meyer Sosland
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Growing demand for biodiesel sparks the need for increased rapeseed production

by David McKee

The diesel engine was invented in Germany about 120 years ago, with the first ones running on rapeseed (canola) oil. But the diesel engine’s success was assured only with the exploitation of petroleum diesel at the end of the 19th century.

Now Germany has become a world pioneer and leader in production and use of biodiesel. Production in 2005 was about 1 million tonnes, consuming about half of the country’s total rapeseed oil production.

Capacity is being added rapidly. High world oil prices and a zero tax on biodiesel (versus €.50 per liter for mineral diesel) are fueling the expansion.

The oilseed crushing industry, which is dominated by six large plants owned by Archer Daniels Midland (ADM), Cargill and Bunge, has invested significantly to convert capacity from soybean (imported) to rapeseed (mostly domestic) crushing. Once all current projects are completed in 2006, Germany will be able to produce about 3 million tonnes of biodiesel per year compared to total diesel usage of 25 million tonnes.

In addition to the major multinationals, there is a second tier of players in the German biodiesel industry, about 30 companies all told. These are smaller private firms which have sprung up mostly to refine biodiesel fuel using crude vegetable oil purchased from the major multinational companies mentioned above. Several have their own extraction or extrusion capacity as well.

A critical part of the equation for this new industry is the rapeseed supply. The rapeseed crop rotation in Germany, which is every three or four years, is already approaching the maximum level. In 2006, there should be a large increase over the 1.3 million hectares planted last year.

There is always the option of importing rapeseed from neighboring countries or refining soy oil produced from imported beans. But that calls into question one of the reasons for the tax breaks given to biodiesel production, which is to stimulate a new market for German farmers.

Due to high world energy prices, and the limits on domestic rapeseed production, the German government has already decided to start taxing biodiesel, but initially at just .10 per liter. That will not do much to reduce the attractiveness of biofuels for blending.

Germany’s love affair with biofuels will likely require consumers to adjust to higher prices at the supermarket as well as at the pump, and greater demand for oilseeds and increased biodiesel production will also require some adjustments by both wheat flour millers and feed producers.

In Germany, milling has traditionally been the domain of family-run enterprises whose ownership often spans generations. There are about 130 mills processing more than 5,000 tonnes of wheat per year. Just six of those mills processed more than 200,000 tonnes per year. In the north, there are only 1.7 mills per million people, while in Bavaria, Germany’s largest state, the figure is 7.2 mills per million people.

Despite the large number of operating mills, well over half of German flour production is now controlled by just three companies.

Hamburg-based VK Muehlen AG, one of the largest milling groups in Europe, has the largest share of the German market through its subsidiary Kampffmeyer Muehlen AG. It also has milling operations in Poland and Hungary.

Werhahn Muehlen KG, based in Neuss in the Ruhr Valley, has the second-largest share, while Grain Millers, which owns the single largest mill in terms of output (Rolandmuehle in Bremen), rounds out the top three, grinding about 350,000 tonnes of wheat and rye per year.

Wheat flour consumption has been gradually increasing, permitting millers to continue to prosper. Most of them are members of Germany’s renowned "Mittelstand," the medium-sized enterprises that are the backbone of German milling industry, which employs about 5,000 people.

Mill closures take place, but they are mostly limited to small mills, which were often sideline operations for their owners in the first place, processing less than 500 tonnes per year.

German millers have benefited from two consumer phenomena that would appear to conflict: family meals and fast food. On one hand, there is the traditional consumption at mealtimes of bread. Indeed, dinner in Germany is referred to often as "Abendbrot" or "evening bread," when bread and rolls are eaten with cheese and cold cuts in most homes.

On the other hand, the trend toward non-traditional eating habits — i.e. fast food — has helped to gradually raise percapita consumption of wheat to a level of 53.5 kilograms (kg). In addition to more flour-based snacks, this means visits to hamburger restaurants, the even more ubiquitous Turkish doner kebab stands, and kiosks selling sausages. Wheat-based products, such as buns, pita pockets and rolls, are a key part of every fast-food meal.

Rye bread has been a traditional staple in Germany, but it has been in slow decline on a per-capita basis for decades, as German consumers have come to prefer whiter, lighter and sweeter breads. Rye consumption now stands at just 9.4 kg per capita versus 13.2 kg two decades ago.

Germany is self-sufficient in, and frequently an exporter of wheat, barley and rye. These three grains totaled 38 million tonnes of the country’s grain production (46 million tonnes) in 2005. The price supports of the E.U.’s intervention system help sustain a level of production well above national and European demand.

Only about 25% of Germany’s 2005 wheat production total of 24 million tonnes was needed to cover domestic milling needs. Almost half of the crop is high-quality wheat, and much of it is traded throughout the E.U. The remainder is used by the feed industry and for industrial uses.

Of the 12 million tonnes of barley produced in 2005, much of it still goes into intervention stocks and then is rerouted for exports, mainly to Iran, Saudi Arabia and other Persian Gulf countries. Germany’s malting plants take all the barley that does not exceed the maximum protein level for brewing, and usually need to import malting barley from France as well. The prolonged decline in demand for rye had resulted in up to one-third of the crop going into E.U. intervention stocks. Since the intervention price was the same for all grains, this was the best outlet for growers. In 2005, the E.U. removed rye from its price support system.

Rye is the most suitable grain crop for the sandy soils of northeastern Germany. Without the intervention price support, rye has become economical as a component in cattle and hog feed. Formerly producers of compound feed resisted rye, but prices as low as €70 in recent years have convinced them to partly substitute it for maize and wheat in hog and cattle rations.

More than anything, rye growers are counting on political support for ethanol production to sustain them.

Despite the prolonged hype over biofuels and the stimulus provided by the Kyoto Protocol, Germany’s ethanol industry has been slow to take off.

Today, there are three ethanol plants, all started up in 2004 and 2005. They are located in eastern Germany, where wheat and rye greatly exceed the demand of the declining population for food and feed, and where plant construction costs receive a state subsidy of up to one-third.

Two of the plants near the Polish border in northeastern Germany, owned by the Sauter Group, operate on rye, with annual capacity of a 500,000 tonnes. The third plant, near Leipzig, has a capacity of 700,000 tonnes of wheat per year.

These amounts do not constitute a supply threat to German flour mills. However, some millers are worried that wheat demand for ethanol, along with reductions in wheat planting in favor of rapeseed, will drive up prices. WG

David McKee is a grain industry consultant providing market research and other services to companies seeking to initiate business in new markets. He can be reached by e-mail at