Taiwanese milling in transition
January 01, 1993
by Teresa Acklin
This article is based on a paper presented by Charles C. Lai, vice-president, Chia Hsin Flour, Feed and Vegetable Oil Corp., Taiwan, before the 1992 annual convention of the National Grain and Feed Association.
For several years, Taiwan's government has played an important role in the country's grain and milling businesses. That role, however, is changing, as the government seeks to liberalize and deregulate the economy. The flour milling industry is still protected and controlled by government regulations, but events in other grain sectors indicate that this soon may no longer be the case.
In 1976, the Soybean Importers Joint Committee (S.I.J.C.) and the Maize Importers Joint Committee (M.I.J.C.) were established under the authorization of the Ministry of Economic Affairs. S.I.J.C. and M.I.J.C. were charged with the following responsibilities:
1 Importing soybeans and maize on behalf of those in the feed and oilseed crushing industries.
2 Distributing to each local buyer his quota of maize or soybeans.
3 Establishing the quantities of maize and soybeans to be imported.
4 Helping the government establish an equilibrium fund in order to stabilize internal prices of soybeans and maize.
5 Sending buying missions to exporting countries, including the United States, South Africa and Thailand.
Because of the government's liberalization policies, S.I.J.C. and M.I.J.C. were dissolved in 1988, and the restrictions on the import of soybeans and maize were lifted. Tariffs on these commodities were reduced. Deregulation resulted in a shakeout in the oilseed industry, with several crushers failing to hold their ground in the new, intensely competitive environment.
In the case of wheat, however, imports remain under the control of the Taiwan Flour Mills Association (T.F.M.A.), which represents the country's 36 flour mills. T.F.M.A. provides the same basic functions for its members that S.I.J.C. and M.I.J.C. provided theirs.
The T.F.M.A. purchases and imports wheat on behalf of its members. The quantity of wheat to be imported is determined by the government. Each of the country's mills receives a fixed portion of the imported wheat to grind into flour. The country's largest flour mill is allowed to purchase 5% of total wheat imported. Most other mills, even if newer and larger, are authorized to purchase no more than 1.5% of the total wheat supply. Until recently, this quota system has had the effect of inhibiting further investments in flour milling.
In each of the past five years, Taiwan has imported 850,000 tonnes of wheat, mostly from the U.S. Recently, Taiwan has started to purchase wheat from Canada, about 108,000 tonnes annually. In 1991, the country purchased 50,000 tonnes of wheat from Australia. Wheat purchasing from the U.S. is by open tender, whereas purchases from Canada and Australia are handled through negotiations between the T.F.M.A. and the wheat boards of the exporting countries.
Of the wheat imported from the U.S., about 40% is dark northern spring (14.5% protein), 40% is hard red winter (13% protein) and 20% is white wheat.
The Taiwanese government has set up an equilibrium fund for wheat imports totalling about 2.3 billion NT dollars. The current equilibrium price, the price paid by individual millers to the T.F.M.A. for their wheat quotas, is US$195 per tonne. The fund currently is managed by the Ministry of Economic Affairs, although this responsibility may be shifted to the Agriculture Council.
Nearly half of the country's 36 flour mills are located in northern Taiwan. These mills are served by the port of Keelung. A third of the mills are located in the center of Taiwan and are served by the port of Taichung. The rest of the mills are situated in the south, where discharging of wheat takes place at Kaohsiung.
Wheat flour millers have come to fear that the government soon may lift import controls on wheat, a move that would make their industry much more competitive. In anticipation of such a move, flour millers have been increasing investments in equipment and process automation. As a result, Taiwan's total flour milling capacity has been increased to more than 2.8 million tonnes per year, a level nearly three times the country's yearly flour output.
Because it is protected by the government, the flour milling industry in Taiwan has been a stable one. However, since the government is promoting a liberalized economy, wheat imports soon may be deregulated.
The current situation is fraught with difficulties. Some of these are the following:
1 Many allege that the quota system is unfair. For example, President Enterprise Co., the largest food company in Taiwan, enjoys the largest wheat quota (5%) under the T.F.M.A. regulations. This company has asked the association to increase its quota to 10%. President has threatened to try to dissolve the existing system if its request is not granted.
Other companies are not pleased. One of these, Lian-Hwa, has built a new flour mill with daily capacity of more than 100 tonnes. The combined capacity of its two flour mills exceed the capacity of the President mill. Still, Lian-Hwa only is authorized to purchase 5% of the total amount of wheat imported, the same amount allocated to President.
2 Uncertainty about operating in a deregulated industry has resulted in the recent construction of surplus capacity. Most of Taiwan's mills are 25 years old. The initial investments have been paid back. Millers now have money to reinvest in the building of larger mills and in upgrading and renovating existing facilities. And they have done so, to help ensure that their companies are geared up to operate and succeed in a more competitive environment which would be inaugurated with the lifting of import controls.
3 Flour users are challenging the monopoly of T.F.M.A. The chairman of the Taiwan Confectionery Biscuit and Flour Food Industry Association has asked the government to lift import controls, permitting associations of flour users to import their own flour. The request was rejected last spring by the Agriculture Council. The biscuit association alleges that the quality of Taiwanese flour cannot compare with that of Japanese flour. And Japanese millers can provide flour in more varieties, the biscuit companies charge. Also, the price of Taiwanese flour is higher than that of flour made in Hong Kong, South Korea or Singapore.
4 While the government policy is to liberalize the economy, no one knows when the import controls on wheat will be lifted or changed. Most millers are fearful that once liberated, their industry will suffer losses. Some mills will fail. This was what happened in the soybean crushing industry when it was deregulated.
Two additional trends in Taiwanese milling should be mentioned. First, because of increasing demand for higher quality flour, a few flour milling companies are seeking foreign joint venture partners to help improve current technologies.
Second, Taiwan's millers may need to look outside the country for future flour markets. An obvious market would be mainland China, where Japanese millers have made inroads.