Dynamic growth in U.S. durum milling
March 01, 1993
by Teresa Acklin
Semolina production tracks increased pasta consumption.
The United States durum milling industry is experiencing exciting growth, paced by increasing pasta consumption. Morton I. Sosland, editor/publisher of World Grain, offered his views on the developments in the industry before the 1992 annual meeting of the National Pasta Association. This article is based on a portion of Mr. Sosland's presentation.
In thinking about and talking about the flour milling industry, which I do frequently during the course of the year, I'm inclined to describe the industry as having gone through one of the most dramatic transformations of any business, especially one that is food-related, in America in recent years. This assessment reflects the dramatic shift in the structure of the industry, mainly through consolidations and acquisitions of various companies.
The milling business in 1992 is totally different from what it was in 1970, the year I've arbitrarily selected as marking the start of the modern milling era.
But, if a revolution has occurred in flour milling in general, then durum milling has been turned topsy-turvy. The ownership of durum milling capacity is radically different from what it was two decades ago. Durum milling has witnessed the entry of several major new companies, along with smaller producers who operate significantly-sized mills, primarily for their own needs. It has also seen capacity cutbacks by milling companies that once were major players. On balance, the entrants into durum milling outstrip in number the “new boys'' in non-durum milling.
Perhaps the most important aspect of the revolution in durum milling is the shift from ownership entirely by companies independent of pasta manufacturers to the point where we now estimate that at least 50% of the industry's capacity, if not more, is either captive (that is owned by a pasta company), contracted to supply a large share of its output to a pasta company or involved in a toll-milling contract with a pasta company. By way of comparison, only a single mill in the non-durum milling sector, representing less than 2% of total capacity, is owned by a flour-using company the Toledo, Ohio, mill of Nabisco.
The trend toward captive or dedicated milling of durum wheat, which began within recent decades, is an issue of great importance. It obviously reflects an economic judgment on the part of pasta companies, as well as by those who have been willing to build and to operate mills dedicated to supplying a single plant or a single company, that a dedicated plant has cost, service and quality advantages. I'm not enough of an expert on your industry to render an opinion on these matters. Indeed, most of the people with whom I've spoken, including those who operate mills free of these relationships and who thus might be inclined to be critical, expressed understanding, if not support, for this ownership pattern.
At the same time, as a long-time observer of relationships between flour millers and flour users, I have any number of doubts on this score. From the quality point of view, a mill in a single location has less choice of durum wheat origins than would be available to a multiple-mill supplier, even less of a choice than a single mill located in the heart of the durum territory compared with a mill located adjacent to a pasta plant in an urban area. This would seem to me to be particularly important in a period when durum wheat supplies are tight.
From the economic point of view, I won't argue the issue of semolina costing and pricing, but let me simply note that a mill with a single customer, which is the case with most dedicated plants, inherently has several operating disadvantages. Unless transfer pricing is executed with a great deal of care, many sorts of misleading allocations may arise. This is a situation I've observed in Britain where flour millers are also the leading bakers. An independent miller would probably be uncomfortable with only one customer, no matter how warm the relationship; similarly, a mill dedicated or contracted to a single large customer which has a need to sell production excess of that one customer's needs often finds itself facing an unfriendly competitive situation. Competitors don't make very good customers.
In pursuing this subject, I remind you that the trend in the overall flour milling-flour using industry has been opposite to the one prevailing in pasta durum milling. Thus, Nabisco, while still owning one large flour mill that supplies the needs of several of its bakeries, disposed of other mills in the belief that its capital could be better deployed and that its ability to buy flour at favorable costs would not be impaired. Sunshine Biscuits, which once was supplied almost entirely by captive mills, got out of milling to free up capital and to facilitate a focus on retail merchandising. At one time or another, other large baking companies owned flour mills, but all of these have been sold, primarily for the same reasons that influenced Nabisco.
Along a same, but also somewhat different line, is the move by Pillsbury, which uses massive quantities of flour in a wide range of consumer products, to dispose of half its mills since Grand Metropolitan of the U.K. has owned the company. GrandMet is regarded as a premier consumer products company something that I sense many of you aspire to be and you can't help but want to explore their decision that the interests of the company were best served by operating with much less capital tied up in internal milling.
I could not help but add here a personal note. We are publishers. For many, many years we operated our own printing plant to produce our various magazines. It was one of the great moments in our company's history when we decided to sell the printing business and to contract our printing with outside vendors eager for our business. I must tell you that I'm very pleased not to have to worry about running my own printing plant.
Outpacing other mills.
Along with the growth in pasta consumption has come impressive growth in durum milling. Indeed, this sector of milling has expanded at a much faster rate than the non-durum sector. The current daily capacity of durum mills, including 19,000 hundredweights (855 tonnes) under construction, is 152,595 hundredweights (6,867 tonnes), meaning an active total near 130,000 (5,850 tonnes). In the early 1970s, which you will remember I designated as the start of the modern milling era, durum milling capacity was 62,050 hundredweights (2,793 tonnes). Thus, in the past 20 years, durum milling capacity has more than doubled; it actually has increased by 146 per cent.
The capacity of the total U.S. milling industry, including durum, is 1,373,000 hundredweights (61,785 tonnes), compared with 991,000 (44,595 tonnes) at the start of the 1970s, meaning an increase of 39%. Need I note that the increase in durum milling capacity accounts for 91,000 hundredweights (4,095 tonnes), or one-fourth, of the industry's net capacity gain in the past 20 years.
Another way of looking at durum's relative importance is its share of total industry capacity. Currently, we estimate that durum milling accounts for 11% of total wheat milling capacity in the United States, up from 7% two decades ago. You obviously are leading the parade when it comes to impressive growth in milling.
You also should be pleased to know that we calculate that slightly more than half of the current durum milling capacity is in new mills, which we define as plants built since the end of World War II. The reason you should be delighted with this is that new plants offer efficiencies and technical benefits, regardless of how much these may vary. The fact that slightly less than 18% of the non-durum milling capacity is in new plants says something about the relative economies of building a new durum mill versus a new plant producing other types of flour.
Back to the earlier discussion about the advantages and disadvantages of captive or dedicated mills, I cannot also help but wryly observe that some might say the reason for the larger number of brand new mills in durum is not just the growth in the market but the attraction of the market for those who build these plants.
Durum milling is characterized not only by a considerable volume of captive milling, but also in part by the application of economic criteria different from what governs decisions about new mills in the non-durum sector of the industry. Participation of foreign investors influenced by cash flow and exchange movements is much greater in durum milling than in non-durum milling; farmer cooperative participation in milling is confined to durum, and captive durum milling includes, you must admit, some of the more colorful people to appear on the American food scene. Having spent a lifetime in the wheat foods industry, I can't resist saying that somehow you've attracted people more inclined to media coverage than any other business sector we're involved with.
On the other hand, the trend toward captive or contract milling, as well as the other characteristics I've described about your business, means that some of the more aggressive companies in milling have either minimized their participation in durum milling, or have stayed away from the business. That is a development whose cost to you is difficult, if not impossible, to measure.
Of course, the ebullience in durum milling tracks the growth of pasta consumption in the United States. The Census Bureau estimates production of semolina and durum flour in 1991 at 25.3 million hundredweights (1,138,500 tonnes), up a hefty 27% from the level of five years ago. Current semolina production is up 71% from 14.8 million hundredweights (666,000 tonnes) in 1970. That increase is very nearly double the rise of 37% in total flour production since 1970. Semolina output growth pretty well tracks estimates of the expanding market for pasta.
Indeed, these data on semolina production provide an excellent way of assessing the growth in the market for products made domestically. In the same five-year period that semolina production gained 27%, from 20 million to 25.5 million hundredweights (900,000 to 1,475,000 tonnes), total domestic disappearance of all flour rose about 12%, or from 302 million to 340 million hundredweights (13,590,000 to 15,300,000 tonnes). Use of flour in total as well as semolina outpaced modest population gains in this period, with the result that per capita consumption increased.
The efforts we've made to measure durum milling capacity have led to findings of special interest to your industry. You will remember my earlier estimate of 130,000 hundredweights as being the current daily operating durum milling capacity. We believe that a substantial part of this, say around 25,000 hundredweights (1,125 tonnes), represents “swing'' capacity, that is mills capable of grinding durum and also other wheats. Production at these mills moves back and forth depending on demand and economics. I'm confident you're aware that a durum mill requires a greater purification system than does a regular flour mill, which means that the maintenance of this much “swing'' capacity requires a sizable extra investment. We interpret this investment as reflecting confidence concerning the outlook for semolina and durum flour demand, as well as a willingness to respond to the seasonality in the demand for your products.
Seasonality in durum milling is emphasized by the fact that in 1991, the month of peak production, January, accounted for 1.8 times (nearly twice) the output of the low month, September. Contrast this with the entire wheat flour milling industry, including durum, where output in the peak month was only 1.2 times the low month.
As a result of this pronounced seasonality, it's difficult to come up with an analysis of durum milling capacity in relation to annual demand. In looking at the milling industry in total, we determine the industry's annual capacity by multiplying daily capacity by 307 (a calculation of grind at six days per week). The result is that wheat flour mills are running at 90% of capacity, a very healthy rate.
Doing the same calculation for durum is not easy. But if you eliminate the “swing'' capacity and reduce the estimate of daily durum capacity to 105,000 hundredweights (4,725 tonnes), the annual capacity becomes 32 million hundredweights (1,440,000 tonnes). The Census Bureau says 25 million hundredweights (1,125,000 tonnes) of semolina and durum flour were produced last year, which indicates a run of 78% of capacity, which is below the industrywide 90%, but still a fairly respectable figure. Yet, I remind you that in the months of peak grind, durum mills run well above 100% of six-day capacity.
While we're not completely satisfied with the calculations, the picture that emerges is one of ample durum milling capacity, not just to meet current demands, but also to accommodate the foreseeable future, regardless of the level of optimism about future pasta growth.
From almost any point of view, these data are positive measurements of the health, not just of your industry, but of wheat foods in general. This is an important point. While pasta has enjoyed much success on its own, because of the qualities of the products you make and the way you have merchandised them, you, like bread bakers and the producers of all the other wheat foods, have benefited tremendously from a favorable consumer perception of the word “wheat'' and what foods made from wheat mean to a healthful diet. From the times when most wheat foods struggled for acceptance with consumers, who generally believed they were well advised not to serve wheat-based products, to the present marvelous, if not miraculous, situation is one of the “wonders of the world'' when it comes to those of us who keenly watch changing food consumption patterns.
One point I want to emphasize is that this is not some God-given blessing that will endure forever, as much as many of us would like to believe this is the case. It is a favorable perception about wheat foods that we must nurture. It requires us to do everything we possibly can afford to do to support industrywide efforts to educate consumers and providers of nutrition information; it requires diligence to protect what I sense may go down in history as one of the greatest consumer product franchises of modern food history.
The past several decades have been years of exhilarating growth for wheat foods. Somehow we have to find the way to assure this trend will continue. While I claim no expertise in this field of industrywide promotion, I have a strong feeling that the new Dietary Guidelines (U.S. Dietary Guidelines in 1990 recommended that consumers eat six to 11 servings of grain-based foods each day) and the role of our government in coming forward strongly with its “Food Guide Pyramid'' may be the answer. I certainly hope it is.U.S. PER CAPITA CONSUMPTION ESTIMATES OF PASTA
From all sources
| ||billion lbs.||in millions||per capita|
|*Please note: Pasta production statistics are not available from all sectors of the market. Pasta production from the following sources is not reported to the U.S. Bureau of Census and, therefore, must be estimated for purposes of this calculation:|
| refrigerated pasta (a product with more than 14% moisture)|
| some pasta used in restaurant industry|
| pasta used in value-added or institutional products (i.e. macaroni and cheese kits, dinner kits, frozen|
|entrees, canned or jarred pasta products)|
| specialty pasta products|
|Source: This is a compilation of statistics from U.S. Dept. of Commerce, Bureau of Census and estimates from the National Pasta Association, a trade assication representing manufacturers of pasta products.|