How globalization impacts your flour mill
February 1, 2008
During a recent visit to India, one of the speakers, Mr. G. Chandrashekhar, associate editor of the Hindu Business Line, gave a keynote address entitled, “Wheat and Wheat Products Scenario in India.” During his presentation, it occurred to me that awareness of the global wheat situation was often addressed at the business or grain-trade level, with little or no discussion about quality issues related to milling and baking properties.
Often risks are managed locally, as well as globally, based on some standard amount and grade for the commodity being traded. On paper, this sounds good. However, when the actual wheat arrives, it often isn’t as good as advertised from a quality standpoint.
As Thomas L. Freidman wrote in, “The World Is Flat: A Brief History of the 21st Century,” globalization has occurred and will continue to have a far-reaching impact on our lives. Local wheat issues can become global wheat issues and vice versa, not only from a business/risk management perspective, but an operative miller’s perspective as well.
The AWB, the Australian company that oversees wheat exports, recently reported that global wheat production levels have been growing, on average, at 1% per annum over the past 20 years.
The world’s five major wheat exporters — the United States (U.S.), the European Union (E.U.), Canada, Australia and Argentina — are expected to account for approximately 75% of the supply of wheat traded internationally until 2012. This figure has declined from the average of 83% during 1996 to 2001; the decline is linked to the increase of international competition from minor exporters.
The AWB noted that historically wheat has been a staple product with the level of consumption largely unaffected by changes in its price and the price of substitutes (such as rice, maize and oats).
Over the past 20 years, worldwide wheat consumption has been growing on average at a stable 1% per annum, which is equal to the average growth in wheat production during that time. Total world consumption is around 595 million tonnes per year, and this is expected to continue to increase over the coming years.
The global wheat trade represents a combination of both food and feed demand. Food demand for wheat is generally stable and only minimally responsive to price fluctuations, but feed demand is variable to grain trade patterns (see chart at left for world wheat flour and products trade statistics).
Use of wheat, despite its global mass trading and movement, at some point gets down to the consumer level. The eating habits and products of the market play an important role in the type of wheat needed to meet the market needs. What are your capabilities as a miller to deal with cleaning, conditioning and milling of wheat delivered to your mill? What types of products can be made from the wheat provided, and do they fit the market needs? Do the local specifications provide adequate information to meet suppliers’ information requirements? Will or should the government established standards be adequate to protect your needs? Is there an expectation that non-governmental standards of quality need to achieve the intended goal? Can these be met by the wheat supplier?
Selling to local customers may change as the exchange of information increases and the knowledge base improves. Wheat flour specifications will change as local users apply an ever-increasing amount of information to their flour specifications.
The U.S. Wheat Associates provides a crop report that identifies grade, nongrade characterization of the wheat crop as well as flour test milling data, flour and dough analysis, and baking or processing characteristics for the major wheat classes grown in the U.S. Wheat grading in most countries does not adequately address wheat end use properties, so you, the miller, have to know and communicate your needs to the grain traders.
The cost of wheat production cannot be ignored, since it determines among the producers that crop with the greatest possible return. Other crop alternatives will be selected to increase producer income. How will the wheat users and wheat markets compete for those hectares of global wheat production?
When has weather not played an important role on agricultural production and markets? As wheat moves across the globe, it seems that now, more than ever, weather conditions globally have as much impact on wheat supply, price and quality as local weather conditions. Recently, the WeatherBug network of farm-based weather stations was named the top new technology in Canada for2007 by the Canadian Association of Agri-Retailers. The grassroots weather network was launched by the Canadian Wheat Board, WeatherBug and Pioneer
Grain in August 2007 and has already attracted orders for hundreds of new stations across Western Canada. Weather changes the potential for a crop and thus its future value in the marketplace.
Weather- and production-related issues clearly impact the supply side of the wheat market. Consumer demand is growing, which may be as a result of population growth and/or market penetration and growing consumer preference. In any of these cases, wheat supply/demand issues will be reflected in crop carryover and risk management practices.
Wheat market/price will be a function of production economics, weather condition and supply/demand, risk management and delivery cost to establish the delivered cost of wheat to the mill.
In order to facilitate global trade, there is no doubt that transportation of wheat is a critical element in the supply chain equation. As the demand to export and import wheat increases, so does the demand for transportation equipment and associated costs such as labor and fuel.
Time to load and unload wheat must be minimized. Timing of shipments becomes a critical factor as transportation vehicle utilization and storage costs, as well as risks, are scrutinized. The complete cost of wheat to the mill cannot be accurately determined without assessing the transportation costs and their impact on the cost of wheat to the mill. The number of transportation vessels is limited and may not be growing at the same pace as shipments. As with production choices, those owning transportation assets may select to carry those products with greatest return on the vessel and resources.
Price of wheat delivered to the mill is critically important, but it cannot be just any wheat; it has to be the right wheat. It has to be the right wheat for the mill unloading, cleaning, conditioning, milling process being utilized and customer base being served.
Removal of a particular type of dockage or foreign material not observed locally from an imported wheat shipment may or may not be possible with an existing cleaning system. With up-to-date equipment and flexible design, it may be possible to remove such material. However, identifying the problem and making the necessary changes can be a technical problem which bears some cost.
Quality of the finished product is determined most often by the local customer, but that too is changing. It is important for the miller to figure out what the bakers or food processors need and how to quantify those characteristics and translate those back to wheat selection and their milling process. Preferences may vary by country and region within a country. Despite the world “flattening,” we all have cultural differences and preferences are to be respected and preserved.
To remain competitive, the mill operative or mill manager must determine his or her customer’s needs, design the mill process to handle the type of wheat needed to meet those needs, and be able to identify the wheat source to minimize risk as well as material cost.
Your wheat supply may well extend beyond the confines of your local production. Success depends on your ability to learn and communicate about the global wheat situation and how it impacts your mill.
Dr. Jeff Gwirtz is a tenured associate professor in the Department of Grain Science and Industry at Kansas State University. Gwirtz is also chief executive officer of JAG Services Inc., a consulting company serving the grain and milling industries. He can be reached by e-mail at email@example.com .