Northwestern Europe in transition
October 01, 1994
by Teresa Acklin
Flour milling in northwestern Europe faces further adjustments as markets, agricultural policies evolve.
The introduction of roller milling more than a century ago marked the start of flour milling as we know it today in the northwestern European Union. Before that, wheat was ground at home or locally on mill stones. The meal so produced was distributed in a small area surrounding the mill.
Roller milling began to change this. It was economically necessary to produce a minimum of several thousand tonnes of flour in order to pay for the new flour mill. Consequently, distribution of the product had to cover a wider area.
The product of the roller mill was so superior to the stone ground product that it was easy to find customers for roller milled flour. This supported a wider ranging distribution effort, initially in a radius of about 50 kilometers around the mill.
This range of economic distribution has grown greater through the years. In most cases, it is a function of the time it takes a truck to bring flour to a customer. Improved roads, a preponderance of bulk deliveries, heavier loads permitted on the roads and the evolution in commercial haulage all have contributed to expanding the economic distribution range of flour in northwestern Europe to 300 km and more.
Flour mills continued as owner managed family businesses in the majority of instances in the roller mill era. Around World War I, a small number of cooperative flour mills were started by bakers and consumer cooperatives.
Roller milled flour was so much better than the stone ground variety that initially, customers queued up to buy it. This demand made marketing of roller milled flour unnecessary at the time, and flour millers have been slow to develop marketing techniques for their products ever since.
More than 75% of the wheat used in roller milling during this period was imported, and as flour mills were built, it was only logical to locate them in areas with easy access to imported wheat. This meant building mills in seaports close to population centers London, Bristol, Liverpool, Southampton, Antwerp, Rotterdam, Amsterdam, Bremen and Hamburg or along waterways from the seaports in locations such as Manchester, Brussels and all along the Rhine and Meuse rivers and estuaries.
During the first third of the century, the technology for roller milling was bought mainly off the shelf from mill machinery producers. Flour millers made only minor changes to this, sometimes to the detriment of the process.
After World War II, the flour milling industry began a gradually accelerating process of concentration and reorganization that is not yet completed. This process has been heavily influenced by outside forces, such as the Common Agricultural Policy and revolutionary changes in the distribution of consumer products made from wheat flour.
Concentration and rationalization in the industry took place for internal economic reasons and because of forward integration into consumer products made from wheat flour. But the economic playing field was altered more fundamentally.
The influence of E.U. agricultural policies
The extension of the distribution range of flour mills was one piece of the puzzle that contributed to the tendency toward concentration in flour milling, but it was not an important cause for change. The most important factor causing change in the European flour milling industry is the CAP.
E.U. agricultural policy has made imported wheat extremely expensive relative to domestic wheat. It has gradually eliminated controls and impediments at borders between the various countries constituting the E.U., and it has stimulated the creation of a rapidly expanding wheat starch industry that produces large quantities of vital wheat gluten. Vital wheat gluten added to wheat flour, along with certain fungal enzymes, can improve the baking quality of flour produced from E.U. wheat almost to the levels of flour produced from imported wheat.
The result is that it was no longer economical to use large quantities of imported wheat. Up until 20 years ago, the majority of wheat milled in northwestern Europe was imported. Today, flour millers on the European continent have to use E.U. wheat almost exclusively to compete.
Those mills located in production areas where they can originate wheat from producers have gained a considerable economic advantage over the traditional flour mills situated on the waterways tributary to import ports. Mills in production areas have a substantial cost-price advantage of U.S.$15 per tonne or more over those in traditional locations because they do not have to transport the wheat.
With the cost of transporting bulk flour only marginally higher than the cost of transporting bulk wheat, this difference enables flour mills in wheat-producing areas to penetrate markets outside the distribution area normally considered to be economical. With the problems and delays in moving bread and wheat flour across national borders eliminated, cross-border traffic of products is steadily increasing. This complicates the evolving flour market situation in the continental E.U. even more.
The European flour milling industry also is facing changes in the markets for its products. Access to end users is increasingly controlled by large supermarket chains and by large flour-using industries. Some of these users are vertically integrated and own flour mills, as are the manufacturers of wheat starch. In all cases, the outlets to customers are squeezing the margins of bakers and snack and biscuit makers, who in turn try to squeeze their wheat flour suppliers.
Shifting flour export markets
The export of wheat flour to destinations outside the E.U. has more than doubled in the past 15 years to 4 million tonnes, wheat equivalent, in 1993-94. Originally, the export of E.U. wheat flour was purely a means of absorbing excess milling capacity. Two periods of remunerative flour exports during the early and later 1980s encouraged flour millers to expand milling capacity for export.
Currently, some large Continental flour mills utilize more than half their milling capacity for export. Any interruption of the flow of flour exports from the E.U. probably would cause this capacity to be directed to the internal market, but outside of the region where the mill normally markets its flour in effect, an “internal export” market within the E.U.
It is possible that the reduction of subsidized E.U. wheat exports as agreed to in the General Agreement on Tariffs and Trade can have an influence on subsidized E.U. wheat flour exports. Wheat flour, on a wheat equivalent basis, forms a part of overall E.U. wheat exports.
There are economic advantages to exporting wheat flour rather than wheat. Consequently, subsidized E.U. flour exports may not be reduced in absolute quantity, even though the quantity of subsidized bulk wheat exports then would need to be reduced even more.
Even so, it seems very unlikely that subsidized E.U. flour exports will be able to expand much in the future. It can be hoped that subsidized wheat and flour exports will not be necessary in the future, but this is probably not realistic for the coming years. This means more E.U. milling capacity could be redirected from export outside the E.U. to export within the E.U.
The road ahead
In the concentration and rationalization in the flour milling industry, very few of the traditional family-owned milling companies still exist today. In large part, the northwestern E.U. flour milling industry is becoming organized as larger-scale processing industries.
It is not certain that the full extent of the structural changes have been fully recognized. The flour milling industry continues to be very traditional, despite the changes in ownership and management.
It is possible to draw some conclusions for the future out of the developments in the past 15 years. The competitive advantage of mills in wheat-growing regions can be used to expand markets for wheat products over longer distances at competitive prices.
Wheat products increasingly are being traded over longer distances and across national borders. Now that official border controls and hindrances are gone, continuing impediments to this movement are language barriers between the mill and the customer; different quality requirements in different regions and for different end products; logistical problems in furnishing in-time delivery; and problems in providing technical support to customers at a distance. In practice, it looks as if these impediments can be removed in time.
In this competitive environment, milling margins tend to come under pressure. Flour mills in wheat-producing regions tend to expand their output; this reduces their costs further compared with flour mills in traditional locations, which find it difficult to maintain their traditional output. The safety valve of expanding export markets seems to be getting stuck as GATT limitations on subsidized wheat exports take hold.
After a lengthy period of a rather stable and predictable wheat price structure, E.U. wheat prices could become much more volatile as the CAP reforms take hold and wheat surpluses diminish and possibly even disappear. In a competitive flour milling environment, this could depress milling margins on balance. Flour mills holding positions in cheaper wheat will tend to use these positions to compete against mills that do not have such favorable positions.
Even U.K. flour millers, who benefit from access to relatively cheap wheat and the high costs of transporting flour from the Continent, may not be entirely protected from competition at the level of their current milling margins. A certain limited leveling effect on U.K. milling margins could occur as a consequence of low milling margins on the Continent.
In time, it is possible that flour mills along the Danube in Slovakia and Hungary could compete in the eastern E.U. on the basis of the cheap, high-quality wheat available in this area. It seems very unlikely that such a movement of flour could become significant before the end of the decade, but the potential is there.
The foregoing points to the likelihood of further adjustments in the flour milling industry in the northwestern E.U. in the years ahead. Such adjustments will probably only be made in the context of relatively low milling margins for the traditional flour mills. It is difficult to see how milling margins on the Continent could be moved up to the levels of some years ago under these circumstances.
A.P. van Stolk, formerly a leading figure in the European grain trade, is an adviser on agriculture to the European Commission.