Flour Milling: Looking to the New Century
August 01, 1998
by Teresa Acklin
In a speech to the Association of Operative Millers, World Grain Editor-in-chief Morton I. Sosland describes changes in the U.S. milling industry and U.S. and global prospects for the 21st century.
My first talk to the A.O.M. was about 30 years ago at a conference in Dallas (Texas, U.S). At that time, I had decided to reflect a tentative degree of optimism about the future of flour milling, even though a lot of industry people were not very positive. I called attention to the very first signs of a turnaround in the American flour market from the terrible abyss into which the industry had fallen during the 1950s and 1960s.
In the intervening years, when that early prognostication proved right and even understated, I've spoken to you with what might be called ascending optimism. I look upon this occasion as offering me the chance to declare that American milling today is at the very heart of global acceleration in the business.
The excitement one senses in America is not unique to this part of the world. I have had occasion in the past year to travel a good part of the world, and in every country I have visited, talk is heard of new flour mill construction, of adding capacity, of modernizing plants to take advantage of technological advances.
Of course, much of the excitement I observed last autumn was in Asia, where recent economic and financial turmoil obviously has slowed the pace of investment. Yet, both millers and equipment manufacturers broadly agree that this is the most exciting time in their memory. The only other period that might have surpassed the current era was the revolution a century ago when steel rollermills replaced stone grinding.
It probably would be wrong to describe what is happening currently as a revolution. After all, it has taken three decades of reversal to precipitate this activity. Yet, for those who wondered in the past if U.S. millers would ever commit to large-scale investments in new plants, in modernization and in embracing the opportunities presented by a growing market, the environment probably comes as close to a miracle as anything we will have experienced.
Increasing U.S. Flour Production
Let us first look at U.S. flour production and the principal force that has driven it on an upward path to rising consumption. U.S. mills in 1997 produced a record 18.3 million tonnes of flour, up 290,300 tonnes, or 1.6% from the previous year. This, of course, was the first year in U.S. milling industry that output exceeded 18.1 million tonnes.
Flour production last year was up 2.3 million tonnes, or 14%, from what it was at the start of the decade in 1990. The increase during the entire 1980s was 3.3 million tonnes, or 25%. In the 1970s, the output rise was 1.4 million tonnes, or 12%.
While I hope you would agree that such increases are impressive all by themselves, they are remarkable when compared with the previous 70 or so years. In effect, flour output at the start of the 1970s was little different from what it had been previously in the century, except for brief interludes around World War I and II when exports soared in response to relief shipments.
American milling in most of those earlier decades had to contend with a static market, although sight ought not be lost of the dramatic changes that occurred among various types of flour, most notably the precipitous drop in household use and the accompanying explosion in commercial baking.
Growth in production in the past three decades has prompted a nearly parallel rise in milling capacity, but with the important distinction that capacity additions lagged output growth. This is highly important because it made the past 30 years different from the previous chapter in American milling's history, when capacity, more often than not as a result of dramatic swings in export business, tended to get ahead of demand. As a very capital intensive business, milling is extremely vulnerable to excess capacity.
Counting from 1970 as the base the year I like to say marks the start of the modern milling era U.S. production in 1997 showed a gain of 6.85 million tonnes. Daily milling capacity is converted into an annual figure by multiplying times 307 days of operations. We calculate that annual capacity in the same period rose 6.4 million tonnes, or 453,000 less than the rise in output. That difference of 453,000 helps explain milling's relative prosperity (a word millers almost never use), as reflected in milling operations.
Since 1986, flour mills in the United States in every year have operated either within a hair's breadth of 90% of six-day capacity or above. That is a considerable improvement from running time percentages in the low 80s in the 1970s. It is a massive improvement from operations that often were less than 70% in earlier years.
Of course, grind above 90% of capacity partly accounts for recent large-scale investments, not only by operators of existing capacity, but also by companies new to the industry. These investments have prompted more than a few worries that millers were returning to their old ways, getting ahead of the market in adding capacity. Concerns are heard that any slowdown in demand growth or excessive ebullience could revive past terrible excesses.
Let me observe that thus far these concerns do not appear to be justified, although all of us who watch the industry have had their moments. Capacity expansions in several cases have been accompanied by the closing of old mills; in others, plants were reconfigured to result in a modern mill but not necessarily one with significant capacity expansion.
Recent positive trends in flour milling may be attributed primarily to a single powerful force of expansion in U.S. consumption. But before we examine just what U.S. market growth has meant to American milling, let us look at flour exports, which have fallen to the point that they are nearly inconsequential.
It does not take much history in U.S. milling to recall a time when exports provided the horsepower that accounted for milling's prosperity or its doldrums. Yet in 1997, exports, at a trifle above 498,950 tonnes for the second year in a row, were not only about the smallest in 30 years, but accounted for less than 3% of production. Considering that prior to 1970, exports often were 10% or more of output, rising as high as a third in the immediate post-World War II period, that is great change.
Under some scenarios, I may be tempted to say that the removal of exports as a significant influence is all to the good, that it is positive for American milling to be no longer dependent on the vagaries of this business. But there is one big problem with such a statement. U.S. flour exports have not fallen because the overall market has shrunk. Indeed, just the opposite is the case. World exports of flour have actually risen year after year, at a time when total trade in wheat has been stymied.
The problem is that U.S. millers have not been competitive in this fast-growing market, being outsold by the Europeans. U.S. millers have been relegated to a position of inconsequence, while Europeans are doing two-thirds of the growing world trade. The reasons for this center on a playing field tipped in favor of the Europeans by the European Commission.
The United States once was the world's leading flour exporter. Now, its shipments are surpassed by five E.U. member countries and also by nations such as Turkey and Argentina. If the United States had only a third share of world flour trade (it was well above 50% in the 1960s), production of flour in 1997 would have been 1.8 million tonnes more than it actually was (that is 5,890 tonnes of additional daily capacity).
The offset, of course, is the glorious performance of the U.S. domestic flour market. I am especially pleased to note that our rapidly growing flour demand is the envy of European millers. U.S. domestic disappearance of flour in 1997 rose to another record, 18.2 million tonnes. That is up 7.9 million tonnes, or 76%, from 1970, my benchmark year.
It is extremely important to know that the 76% rise in total U.S. flour consumption exceeds by a factor of much more than two the rise of 31% in the U.S. population in that same period of time. No other food industry of the size of grain-based foods has come anywhere near to realizing such a consumption increase. Sure, there are individual foods like chicken, and yes, there are some parts of grain-based foods, like rice and maize meal, that outshine wheat flour. But for an industry of our size to realize such consumption growth is remarkable.
The major share of the credit for this expansion goes to rising per capita consumption of wheat flour. From a level above 90 kilograms at the start of the 20th century, U.S. per capita consumption of flour fell to an all-time low of 49.5 kg at the start of the 1970s. This was near the time when I first spoke to the A.O.M., expressing the view that new perceptions about the nutritional merits of bread and other grain-based foods may be persuasive enough to put a floor under use and may even reverse the downtrend.
I, nor anyone else who might then have been called an unrealistic optimist, grasped what was about to happen. In one of the wonders of the contemporary food industry, per capita flour consumption roared back from that 49.5-kg low to reach 67.5 kg in 1997. Such a rate equates to annual demand gains of 498,950 tonnes of flour, which requires 1,587 tonnes of daily capacity.
At 67.5 kgs, per capita flour consumption in 1997 is the highest since World War II when food rationing bolstered demand. It has regained a major share of the usage drop that occurred in the earlier decades, when total consumption, like production, held steady year after year as decreasing per capita use offset the benefits of population gains.
We have identified three principal forces driving the gains in flour consumption. They are:
Lifestyle influences, such as the growth in fast food, the rush to convenience, eating on the go, more than half of all meals eaten away from home, and a willingness, even eagerness, to try new food.
New understanding about nutrition, meaning that bread is no longer considered fattening; indeed, bread is viewed as a complex carbohydrate that has a key role in diets for children and adults, powerfully backed up by the Food Guide Pyramid and Dietary Guidelines for Americans that officially endorse doubling per capita consumption from current levels.
Demographic changes are also very positive, including an increase in the numbers of older people, who suddenly are spending a larger share of their food dollar on grain-based foods; the ethnic mix shift to Hispanics and Asians, who traditionally consume more grain foods; and the geographic move to the Sun Belt, where ethnic influences are most powerful.
Such a brief list neglects the great changes that have occurred within the U.S. industry itself, most notably in-store baking; the new focus of wholesale bakers on brands and product enhancement; proliferation of wholesale and retail outlets focused on niche products like bagels, tortillas and premium baked foods; and the tremendous impact of mass merchants like Wal-Mart on how food is sold at retail. I would not know how to predict the effect of Internet retailing on grain-based foods, but I am confident it will be great.
Coincident with unprecedented growth in the market for flour-based foods, huge changes have been occurring within U.S. flour milling itself. Having looked at flour production and consumption in the past three or so decades, it is essential to appreciate that the structure of milling has gone through equally amazing change.
The number of flour mills in America has been halved in the past 30 or so years, dropping from 423 in 1965, the first year Sosland Publishing Co. published a “Directory of Milling,” to below 200 for the first time in 1996 and now at 195 in the 1998 “Grain and Milling Annual.” Hardly any trend is more consistent than the yearly fall in mill numbers. But do not forget that we are producing more flour than ever before in history.
Mill closings are mostly confined to plants with daily capacity of less than 227 tonnes, the number of which have dropped from 358 in 1965 to only 86 in our 1998 directory. Let me also note that the number of mills with capacity above 227 tonnes has sharply increased, from 65 to 109.
It was not until 1994 that there were more mills with capacity greater than 227 tonnes than smaller plants. Those mills below 227 tonnes accounted for 85% of the plant number in 1965. They are now down to 44%. Mills with capacity above 227 tonnes now account for 56% of the number and for 89% of the capacity, compared with 15% and 64% three decades ago.
I wrote a thesis for my undergraduate degree about flour milling, and I remember one of the matters that I focused on was to identify the most efficient size mill. At that time, milling executives believed that there was little efficiency to be gained in having a mill with more than 227 tonnes daily capacity. I guess that the average mill then was well below 91 tonnes. The industry average rose to near 136 tonnes at the start of the 1970s. It went above 181 tonnes in 1979, through 227 in 1986, passed 272 in 1993, and for the first time this year exceeds 317 tonnes.
That U.S. flour mills are getting larger and larger is, I am sure, no surprise to you, although it is not a subject we hear much about. Along that line, it is interesting to note that the U.S. now has 55 flour mills with daily capacity of 453 tonnes and above and that these 55 mills have combined capacity of 39,163 tonnes, or 62% of the industry total.
Certainly, the larger mill trend is not solely a U.S. phenomenon. Visits in the past several years to milling locations in Japan and Indonesia, for instance, have left me stunned by the enormity of plants built to take specific advantage of the delivery of imported wheat by ocean vessel and the distribution of flour in huge metropolitan areas like Tokyo and Jakarta.
I hardly need make the point here about the efficiencies of adding capacity to an existing plant as compared to building at a greenfield site. Any student of milling, though, has to be intrigued by the tensions between economies of scale versus the economies of mill location. In a nation as large as the United States, where wheat and millfeed markets and local building codes and regulations vie with the location of customers in investment decisions, I would suspect that there is a limit to mill size that does not loom so importantly in other parts of the world.
We have kept a record over the years of new flour mills built in the U.S. since the end of World War II. Our data would indicate that less than 30% of the current U.S. non-durum milling capacity is housed in new flour mills, while two-thirds of the durum milling capacity is newly built in that same period of time.
Of course, a large part of the milling capacity in pre-World War II plants has been modernized over the years. This renovation and modernizing is picking up pace, prompted by the pluses of new technology, growing demand for flour and the desire to keep up with an industry that has never lost its hotly competitive environment.
No talk focusing on the outlook for flour milling into the next century could be complete without addressing the great changes that have occurred in the ownership and management of flour milling. If plant structure has dramatically changed, then ownership structure has been revolutionized.
Let us look first at the companies that are ranked as the 10 largest milling companies at three points: in 1975, in 1985 and currently. The astounding fact is that six of the 10 companies listed in 1975 are no longer in business, including the number one of twenty-plus years ago. On a more positive note is the fact that two companies that did not even make the top 10 in 1975 are not just now on that list, but are two of the top four.
The largest company currently accounts for just about 22% of capacity, double the share number one had at the start of the 1970s. The four largest companies now have 63% of the total and the 10 largest have 83%, compared with 34% and 61%, respectively, in 1973.
While this portrays consolidation as the order of the day, milling's rate lags the aggregation characterizing many other industries. Indeed, as dramatic as the shifts may be in milling, I sense the industry's consolidation falls short of what has occurred, say, in the cracker and cookie or even the wholesale segment of baking.
Milling has experienced nothing like the merger of the two largest U.S. wholesale bread bakers that happened in bread baking in recent years. No milling company dominates its industry in the way that Nabisco does cracker and cookies and Frito-Lay does in snacks. It is apparent that the buying power of the customers for flour has increased faster than what we see as milling consolidation. Furthermore, the shift in power to buyers has been accelerated by trends toward mass merchandiser domination of food retailing.
The Biotech Factor
I would not want to talk about milling consolidation without at least touching on that most tender subject usually described as captive or dedicated milling. Much of the new durum milling capacity is in mills serving a specific pasta plant, sometimes as a joint venture and sometimes with common ownership.
I sense that this trend is driven both by economic gains associated with vertical integration as well as by changing quality requirements. What has occurred in durum milling is not a trend I see extending into other parts of the industry, although heed must be paid to those who argue otherwise. Milling's vertical integration, other than in durum, has mostly been directed toward securing wheat origination, not flour customers.
These issues relate to that great unknown biotechnology and its impact on wheat production and certainly on milling and baking. From its initial emphasis on improving field yields, biotechnology is entering into a phase where research centers on product and quality improvements to be derived from gene manipulation.
I am inclined to agree with those who say biotechnology will have as much to do with the future course of milling and baking as any other single force. While I do not necessarily accept that biotechnology will totally transform this industry, woe to the company that does not keep informed and alert to the possibilities of new wheats requiring new sorts of milling and totally new baking systems.
Milling's economics at many companies for many years has been sustained by a single-minded focus on low-cost operations combined with an aggressive acquisition policy. One result of this was rather cautious some might use a harsher adjective capital spending.
American millers have not now suddenly become profligate. Yet, there is no question that companies that once frowned on buying new equipment have come to appreciate the merits of new technology. They now want to invest in equipment that raises yields and boosts plant efficiency. They are attracted by equipment manufacturers selling new equipment and plants at costs hardly different from what was offered a decade or so ago.
A great deal of this enthusiasm for modern technology reflects the expansion in demand for flour. Unlike the totally new technology that made global flour milling so exciting 100 years ago, the changeover from the 20th to the 21st century in all likelihood will, at least in the United States, be affected by continued growth in demand, not by any revolution in how flour is milled. There is every reason to expect the demand growth of the past 30 or so years to continue well into the next century, as long as the people and companies that make flour-based foods continue to focus on improving quality, holding down costs and product innovation. I would hope that flour millers, as well as the companies that provide bakers with mixes, frozen doughs and similar products, will intensify their own efforts to join with bakers and other food manufacturers to assure that consumers receive the attention they deserve in the progress of this industry.
I would go so far as to declare that the 21st century holds out the real possibility of becoming the golden age for American flour milling and for milling in other parts of the world. The foods that are made from flour and many of them are much different, much better and of greater value than at the start of the 20th century ought to become the centerpiece of healthy eating for an expanding global population.
Grain-based foods as an industry is well on the way toward achieving that dream. I can think of no more exciting or potentially rewarding place to be as the new century and millennium approach than right where you are in flour milling.