Careful attention paid to wheat sourcing
May 01, 1999
by Teresa Acklin
MANCHESTER, ENGLAND Unusually careful attention is devoted to wheat sourcing at Allied Mills, the milling group of Associated British Foods P.L.C. and one of the world's largest flour milling companies. Currently, about a fifth of the 1.2 million tonnes of wheat ground annually by Allied Mills is grown under contract with British farmers, probably ranking the group as the largest contract wheat grower, not just in the U.K., but among flour millers around the world.
As part of this same intensity focused on obtaining the wheat it needs to meet its milling requirements and the desired functionality of its flour, Allied Mills engages in extensive research and development work with plant breeders. Contract growing is designed to produce an assured supply of specific varieties of wheat grown in U.K. agricultural areas where field conditions are known. The research work, though, takes a totally different thrust in that its aim is to develop a wheat or wheats that would give Allied Mills a competitive advantage in serving its bakery flour customers.
In the course of an interview with Ralph Richard and Martin F. Connolly, chairman and managing director, respectively, of Allied Mills, it was pointed out that the quantity grown under contract with farmers has varied considerably from year to year, and depended in part on the group's experience in originating wheat in the prior season. The actual varieties grown under contract also were often changed from year to year. Currently, growers producing under contract are guaranteed a return of £15 to £20 per tonne (U.S.66c to 88c per bu) over the market price for standard wheat, delivered at mill, which recently was near £100 per tonne ($4.40 per bu).
The contract premium and the wheat research aimed at developing varieties that would be exclusively available to Allied Mills are focused on assuring the functionality of the group's flour, rather than looking for premium prices from bakers, the two executives noted. “We are seeking every possible way of gaining an edge over our competition and quality wheat is very important here,” they noted.
They estimated that 95% of the grist of the group's mills originated within the European Union, with a varying share coming from Continental sources like France and Germany. Allied Grain Group, a sister company of Allied Mills within A.B.F., is one of Britain's largest grain merchants and is the country's leading grain exporter, mainly through its Mardorf Peach division.
Mr. Richard, who also is chairman of the grain company, noted that Allied Grain has a role in originating E.U. supplies of wheat for Allied Mills, but emphasized that the wheat buyers located at each mill were authorized to buy wheat from whatever domestic merchant was best positioned to supply the individual plant requirements. He estimated that hardly a fifth of the British wheat grist of the mills was supplied through Allied Grain.
The regional wheat buyers coordinate their operations through a central supply director, who also manages a benchmark against which the prices of wheat purchases are measured. The wheat buyer also has responsibility for selling millfeed, called “co-products,” primarily to local feeders and feed manufacturers, and effort went into assuring a coordinated wheat buying strategy among the group's plants.
In discussing how wheat and flour prices in the U.K. are affected by the adoption of the euro and by fluctuations in world prices, Mr. Richard said Allied Mills would continue to insist on buying wheat in pounds sterling, not the new euro, regardless of the currency in which it traded on the Continent. “European grain merchants will have to sell it to us in sterling if they wish our business,” he declared. At the same time, he acknowledged that the few products that Allied Mills sells into the Continent will probably have to be priced in euros.
Noting that the main exposure Allied Mills has to the wheat market derives from currency fluctuations as well as quality variations, rather than wide price swings in the market itself, Mr. Richard said a major share of Allied Mills' flour was sold through annual contracts setting volumes to be delivered. Formulas were often used to arrive at flour prices.
So far as pricing was concerned, “we do not assume any risk in either the cost of wheat or the value of the co-products,” he said. He pointed out that the relative strength of the British pound in the past year or so had meant a lowering in the cost of wheat, but also relatively heavy imports of feedstuffs competing with millfeed and lowering the latter's value.
Swings in recent years have been generally less than in North America. At its peak, standard wheat in the U.K. reached £150 per tonne; it currently was selling at about £100.
Not too surprisingly, a discussion of wheat with the Allied Mills executives led to a review of the possibility of gene-modified organisms being introduced into wheat and milling through biotechnology. “There needs to be a reason consumers will accept G.M.O.,” Mr. Richard said, adding that this has not yet occurred. He also stressed the importance of having absolute clarity about the possibility of G.M.O. in wheat.
Mr. Connolly pointed out that Allied Mills' wheat purchase contracts do not allow for G.M.O. material, and he cited a company statement, as follows: “Allied Mills is committed to using the highest quality raw materials and will only consider use of genetically modified ingredients when convinced of their safety, public acceptability, quality and practical potential.
“We believe that modern biotechnology represents a reasonable extension to traditional plant breeding techniques which has the potential to provide many benefits to consumers and the environment.
“Our aim is to be open about the origins of our ingredients and to make available to customers information about the use of genetic modification.
“At the present time, no genetically modified materials are used in our products and we will maintain close relationships with customers, suppliers and other parties to ensure that the interests of all those concerned are protected as new ingredients are developed.”