A need for change
September 01, 2002
by Emily Wilson
Milling industries around the world are suffering from low profitability brought about by chronic overcapacity, out-dated mills, lack of expertise and finance, declining markets and political interference. Speakers at the International Grain Council’s annual conference in London in June were almost unanimous in their analyses of the problems facing the industry. The only disagreements at the conference, which centered on the theme "New Milling Markets – Opportunities for Trade," were the inevitable clashes over single desk trading and the ethics of farm support systems.
The present situation in the world’s milling markets was a reflection of the level of overcapacity in most countries and the extent to which governments were prepared to subsidize flour production and exports. The short-term prospects were not good, but looking forward, there was a general agreement among speakers that opportunities existed for those prepared to adopt new attitudes and respond to the changing market.
World trade for flour has shrunk in the last 10 years, and it is difficult to see if this declining trend would change, said Bernard Valluis, director of Silos Soufflet of France. The United States and the European Union, two of the world’s largest suppliers of wheat flour, lost their majority share of world trade in this period. They have been replaced by China, Japan, Turkey and emerging exporters, such as Tunisia and Morocco.
The main reasons for the changing patterns were the manufacturing overcapacity of traditional exporters, trade liberalization, privatization of state-owned mills, investment in new plants and surpluses in traditional wheat flour importing countries. A number of markets also lacked the feed outlet for milling by-products, which made a significant difference to profitability and was often not taken into account by new investors, Valluis said.
There have been major changes in the main exporting countries, which now account for a little over 50% of purchases, compared with 10 years ago. In 1991-92, the largest importers were the USSR, Libya, Yemen and Syria. Ten years later, the biggest importers include the Commonwealth of Independent States, Indonesia and Hong Kong. This change had led to a major restructuring in the U.S. and E.U. markets that a decade ago accounted for more than 60% of world trade.
Most speakers agreed that markets would continue to be dominated by commodity products largely supported by government finance. There were, nevertheless, opportunities in the growing demand for products for specific markets. With consumer tastes changing in some of the largest markets in the world, the opportunities are considerable. In Southeast Asia, for example, the market for wheat is forecast to increase slowly, but demand will grow for new types of wheat. In Brazil, the market for bread and bakery items is growing rapidly, although access is likely to continue to be difficult to non-Mercosur countries.
To recover financially, the milling industry needs to modernize, rationalize and work more closely with customers to identify market requirements. This is likely to lead to more vertical integration working from plant breeders, seed producers and farmers through grain traders and shippers to millers and bakers. Food safety and traceability will also be important.
MAJOR REFORMS REQUIRED
The world’s largest wheat consumer, China, is struggling with massive milling overcapacity and lack of the right quality wheat. Xubo Yu, vice president of the China National Cereals, Oils & Foodstuffs Import & Export Corporation (COFCO), said that China had more than 40,000 milling units with a flour processing capacity of an estimated 300 million tonnes, against annual consumption of 84 million tonnes. As a result, flour prices and profitability are too low, while most flour mills are running at a loss.
Wheat was China’s second most important grain crop, producing 94 million tonnes last year compared with a rice crop of 178 million. Although it was used in a wide range of steamed products and noodles, much of the crop produced had inappropriate gluten and protein values. Breeding programs concentrated on producing new varieties with the right quality, and farmers were encouraged to grow the new higher gluten varieties. However, current production is too fragmented and harvesting and storage systems are not sufficiently organized to cope with the segregation of different qualities.
Following accession to the World Trade Organization, Yu said that China’s flour milling industry would have to make major reforms in its product mix. This would either be by increased production of high quality flours for specific uses or improving the quality of traditional all-purpose flours. As China’s food processing industry develops, the demand for special-use raw materials will increase. Demand for quality flours could increase from 11% to 50% of total flour requirements.
He predicted that with growing urbanization, improved standards of living and new production technology, China’s demand for food would rise. At the same time, production capabilities and the allocation of water and land resources would see China taking a bigger part in the international grain trade in the long term.
Despite a slowdown in Malaysia’s wheat flour consumption, three new mills were still to come into operation in 2002, said Dr. Soon-BinNeoh, managing director of the Soon Soon Group’s Sebaranag Flour Mill in Penang, Malaysia.
Milling capacity of the country’s 14 flour mills was currently 50% higher than the annual requirement of around 800,000 tonnes. Although economic growth is reviving slowly, Neoh said it was unlikely to return to the levels of the mid-80s to mid-90s. This means mills would need to export more flour in the short term, but would lose out to more competitive producers in the long term.
As for wheat supply, Neoh said he expected India to replace Australia as Malaysia’s largest supplier. The country annually imports around 1.2 million tonnes, of which 700,000 to 750,000 comes from Australia. This is likely to change with India taking up to 25% of the market and Canada increasing its share to 20%, at the expense of the U.S.
Canada has developed a hard white wheat that produces bright yellow flour, has strong extensible gluten and high water absorption, factors that are ideal for noodle production and baking, he said. India is also producing more hard white wheats. In addition, India had a large export surplus of around 4 to 5 million tonnes and, with the help of government subsidies, was able to offer wheat at US$40 per tonne less than U.S. grain.
LISTENING TO THE CUSTOMER
Brendan Stewart, making his first official international appearance as the new chairman of AWB Ltd., the commercial successor to the Australian Wheat Board, acknowledged that there were cheaper, subsidized supplies coming on to the market. However, he said AWB would choose not to compete on price in commodity markets but would concentrate instead on premium markets.
He said the organization was increasingly focusing on producing specific products for specific markets. Its main customers are developing countries, accounting for 82% of sales last year. As consumers in these countries became wealthier, tastes changed and their requirements became more specific. Consumers in developed countries also expected more, particularly in terms of food safety.
Stewart said AWB believes the world’s grain industry is moving towards increasing levels of vertical integration that would lead to value-added integrated marketing. This would redefine competition in the marketplace, replacing the old volume-and-margin approach of commodity trading with a whole-chain approach, providing differentiated branded products.
Instead of starting with the producer and working forward, future success lay in starting with the consumer and working back down the chain to produce what the market wants, Stewart said.
AWB’s single desk approach, in which it acted as the sole exporter of Australia’s annual 15 to 18 million tonnes of wheat sales abroad, meant that it was able to drive through necessary changes in the industry. Already, 3 million tonnes of exports were sold as niche products in Asia alone. Its biggest success story so far was West Australia’s segregation of spring wheat for Udon noodle production in Japan.
AWB has also worked towards dealing directly with its customers, Stewart said. Now, more than 70% of exports are sold directly to customers.
At the other end of the chain, AWB is stepping up its involvement in plant breeding through a joint venture with the Swiss crop science company, Syngenta, which will result in setting up a multi-million dollar breeding program in Australia. To provide a complete service, AWB offers a range of services to customers, such as freight chartering, trade financing and joint investments.
North Africa and Middle East
Overcapacity, government intervention and lack of finance are the main problems facing the milling industries in North African and Middle Eastern countries, said Wayne Bacon, president of the Grain & Feed Trade Association. Bacon, who pointed out that he was speaking in a personal, not official, capacity, said that wheat production in the region at around 48 million tonnes and consumption at 75 million tonnes were virtually static. Recent falls in consumption were mainly caused by economic problems in Egypt.
At the same time, many people with no special expertise had invested in flour mills because they had money available. As a result, mills in nearly all countries from the Red Sea to the Mediterranean were operating at less than ideal production levels. This meant lower prices, lower quality, lower profits and worried bank managers. There will inevitably be some disasters with many poorly managed mills unable to survive, he added.
The situation has been made worse by government intervention, he said. In Turkey, people had invested in new mills in response to a government-subsidized flour export program, but this failed when world markets contracted. In Egypt, private sector millers had to compete with government-backed, quasi-private mills that had access to cheaper financing and advantageous wheat costs. Private sector millers were also suffering from much tighter credit lines and adverse exchange rates in some countries. This meant that trade has been dominated by international shippers acting as bankers, with local importers buying bills of lading.
But, said Bacon, this situation would not last forever and the outlook is improving. In Egypt, the government-backed mills would increasingly concentrate on the commodity side of the business, leaving opportunities for private millers to target specific needs and produce value-added products.
The opportunities for exporters are already improving with countries in the region beginning to buy from a much wider range of suppliers as millers develop the skills to blend wheat from different origins to meet specific customer requirements. The bulk shiploads of wheat from the U.S., Australia and Canada are being supplemented by small ships of 2,500 to 5,000 tonnes coming from countries such as the Ukraine, Hungary, Turkey and Bulgaria, he said.
One country in the region that is showing some signs of improvement is Morocco, where the tightly controlled industry is slowly moving towards a more liberal operation. The country’s per capita flour consumption is very high at 175 kilograms, compared with 71kg in Italy, 64kg in France and 54kg in Spain.
Adil Ghazzali of Morocco’s National Milling Federation (FNM) said the milling industry was split almost equally between industrial producers operating in urban areas and small mills in rural areas. The industrial sector employs 10,000 people, and is made up of 173 mills — 100 process soft wheat and the rest process hard wheat. Their combined processing capacity of 6 million tonnes was 40% above actual requirements.
The 10,000 artisan mills have a production capacity around 2 million tonnes, providing about one-third of local requirements. This sector is gradually changing through the promotion of exports for flour, couscous and pastas, resulting in an increased range of flours produced, improvements in quality and vertical integration.
Overall, changes to the industry are being driven by FNM, which itself has changed from a publicly funded, bureaucratic organization to a professional body working for the milling trade. It had set up grading laboratories at the main ports, created a technical institute to improve management skills and has begun moves to liberalize and rationalize the industry.
WOES BLAMED ON U.S.
Perhaps the least optimistic picture was of the European milling industry, which has not only seen profitability slump through overcapacity but has also lost a large slice of its traditional export markets. This is because traditional importers have themselves become exporters to balance out their own excess production capacity. New suppliers, such as China, Russia, Ukraine, Kazakstan and India, are moving into world markets.
But the main cause of the E.U.’s problems was placed on the U.S. by Lars Hoelgaard, a director in the European Commission’s agricultural directorate.
He said the E.U.’s wheat flour exports had dropped from 3.5 million tonnes in 1991-92 to 2.3 million in 2001. Although some was due to construction of new production capacity in traditional markets, most of the fall was caused by big increases in the use of food aid programs by the U.S. These, he said, increased the proportion of flour exported as food aid from 31% in 1995-99 to 53% in 2000-01.
The latest U.S. Farm Bill, he said, gave the wrong signals to the WTO’s Doha Round discussions, developing countries and the E.U., which is planning reforms of the Common Agricultural Policy.
However, Hoelgaard was more optimistic about prices and trade. He said consumption is expected to outpace production by 2009, while trade could increase rapidly from 40 to 47 million tonnes.
Alex Waugh, director general of the National Association of British and Irish Millers, said that the developments in world markets, plus changes in the E.U. market, would lead to a greater concentration in the flour milling industry, causing more mill closures and the beginnings of transnational purchasing.
There would need to be considerably more rationalization along the lines that had already happened in the U.K. Average wheat usage per mill ranged from nearly 66,000 tonnes in the U.K., 33,700 tonnes in the Netherlands to 7,600 in France. The eastward expansion of the E.U. would provide more choice in local markets but would also increase surplus wheat supplies. Meanwhile, the proposal to change the present import system to one based on quotas could have a negative impact on the quality of the wheat trade.Flour customers will increasingly respond to consumer concerns by demanding assurances on traceability and food safety. Already, all domestic wheat purchases by U.K. millers are based on farm/trade assurance schemes. Products will also have to change in response to consumer concerns about obesity, food allergies and intolerances, as well as changing lifestyles.
Genetically modified wheat likely will be totally excluded for the foreseeable future, Waugh said. At the moment no, customer wants to buy it.
"We are not even talking about thresholds," he said. "There will be no GM wheat purchased in Europe for the foreseeable future."