Unique markets for Thai flour millers
April 01, 1996
by Teresa Acklin
In the second of two parts, Editor-in-Chief Morton I. Sosland looks at the use of flour for shrimp feed and the effects on Thailand's milling companies.
Flour milling in Thailand is not only one of the fastest-growing milling industries in the world, but also one of the most unique, reflecting the rising importance to almost 30% of current output of shrimp feed as an outlet for the country's flour mills.
A recent trip to Bangkok and visits to the headquarters of the country's three largest milling companies provided insights into the development of the milling industry. Interviews were conducted in Bangkok in the offices of United Flour Mill Public Co., Ltd., with Pracha Raksincharoensak, managing director and head of flour milling; Kamon Punponsin, senior vice-president of Laemthong Corp. Co., Ltd., who manages the group's flour milling interests; and Eam Ngamdamronk, president, C.P. Trading Group Co., Ltd., a part of the Charoen Pokphand Group.
Also interviewed were Prasit Dam-rongchietanon, vice-president, and Sumeth Laomoraphorn, assistant vice-president, of C.P. Trading; and Somchai Kungsamutr, assistant vice-president and general manager of Bangkok Produce Merchandising, also a C.P. division.
The Thai milling industry has an unusual relationship with Japanese millers. Nippon Flour Mills, Japan's second-largest and oldest milling company, has acquired a 10% interest in U.F.M., buying 5% stakes from both the parent Metro Group and the Mitsui Group, a large Japanese trading company. Indications are that Nippon Flour Mills is in the process of negotiating to buy an additional 10% stake in U.F.M.
When Nippon acquired its initial stake in 1994, U.F.M. explained this by noting, “Nippon will help upgrade production technology to ensure U.F.M. products meet the Japanese standard, which is a prerequisite to the attempt to penetrate the markets of Japan and Western countries.”
In effect, U.F.M., as Mr. Pracha explained, was signaling a shift from the time when Japanese mills looked upon Thailand as one of their principal export markets to a time when Thai mills, especially U.F.M., would seek to move flour into Japan, to neighboring countries like Laos and Vietnam and, obviously, even farther afield. At the same time, he noted severe competition with flour from France in neighboring markets, where French flour sold in a range of $200 per tonne, or $100 a tonne less than Thai mills needed just to break even.
A major aspect of this market-building effort with Nippon of Japan involves the manufacture of pre-mixes, partially with Japanese technology, as well as making other added-value products, such as noodle flour especially milled for quality noodle makers. Mr. Pracha said Thailand, even as an emerging country with millions of people, suffered from a shortage of skilled bakers, and he indicated that U.F.M. believed strongly in the prospects for expanding the pre-mix market, both within Thailand and in neighboring export markets.
At one time, Japan moved as much as 50,000 tonnes of flour in wheat equivalent to Thailand in a year, but that quantity has gradually shrunk, down now to around 30,000 tonnes, as Thai milling capacity expands.
HIGH WHEAT IMPORT DUTY. In discussing the economics of flour milling in Thailand, Mr. Pracha noted that the mills were free to buy wheat from whatever sources they preferred. At times, two or more milling companies join in making purchases, but for the most part, each mill covers its own requirements. He estimated that imports were typically divided about 50-50 between hard and soft wheats, with protein requirements affected by the growing market for bread as well as the importance of gluten content of flour used in shrimp feed.
At one time, he said, U.F.M. bought 70% of its wheat from the United States and 30% from Australia, but other sources also were now competitive, especially Canada. At one time, Saudi Arabia was a major source of wheat for Thailand, but that country has cut back production to the point that it is no longer a supplier.
He stressed the force of the U.S.$40-per-tonne import duty on wheat, noting it meant that flour is sold in Thailand within a range of U.S.$400 to U.S.$600 per tonne in bags of 22.5 kilograms each.
Because of the refund of the duty that is made when flour or flour products are exported, millfeed for many years had to be exported in order to recover the duty assigned to it equally with flour. The government changed that process several years ago, Mr. Pracha explained, reducing the refund on feed exports to a range of $10 to $12 per tonne and increasing the refund on flour. As a result, much of the domestically produced millfeed moves to the fast-growing Thai feed manufacturing industry.
At one time, the refund rate on both flour and wheat millfeed was 1 baht per kg; with the change noted above, the refund rate on flour was raised to 1.28 baht per kg and on wheat bran was reduced to 0.3 baht.
At Laemthong, a family-owned business, Mr. Kamon related how this group had grown from being a grain trading business, primarily handling Thai maize for export, into not just flour milling, but also feed manufacturing, production of chickens and shrimp, real estate and even milk processing. Laemthong was the second group to build a mill in Thailand, erecting a plant with 150 tonnes of daily capacity in 1972.
Laemthong now operates an A mill of 350 tonnes that includes equipment from Buhler of Switzerland and Sangati of Italy, and a 450-tonne B mill with equipment supplied by Buhler, making for a total of 800 tonnes of daily capacity. According to Mr. Kamon, the company annually grinds about 150,000 tonnes of wheat.
Mr. Kamon disclosed that Laemthong early next year would enter into a contract for the construction of a C mill at its site, with daily capacity in a range of 350 to 400 tonnes.
Noting that shrimp feed takes at least a third of his company's current flour production, with the major quantity going into its own feed, but also to other shrimp feed manufacturers, Mr. Kamon described the rapid pace at which this market was growing. He said shrimp feed probably represented the fastest-growing market for flour anywhere in the world, underscoring the advantages of climate and resources that Thailand has for producing shrimp.
He pointed out that while insisting on a relatively high level of gluten, shrimp feed manufacturers were not as demanding as bakers and other flour users on such items as ash.
FLOUR MARKET GROWTH. In addition to the importance of export markets for shrimp, Mr. Kamon also noted the rising market in other countries for shrimp feed made in Thailand. He said that shipments of shrimp feed had been made to Indonesia, Sri Lanka, India and Vietnam, countries that are eager to see whether they could replicate the amazing success Thailand has had in this area of aquaculture.
In agreeing with estimates that the Thai market for flour is currently increasing at a rate of 10% per year, and that this is down from 20% five or six years ago, Mr. Kamon observed that the current growth was from a much larger base.
When asked about the entry of the C.P. Group into flour milling specifically for shrimp feed, Mr. Kamon expressed confidence that a company like his would still be able to be competitive in selling flour to shrimp feed makers. He said the current price for flour sold for shrimp feed was about 10.2 baht per kg, compared with 11.75 to 15.8 baht for flour for baking and other food uses. The higher price would apply to special flour milled for high-quality noodles and steamed buns popular in Chinese cuisine.
He acknowledged that recent sharp advances in global wheat prices were making milling “more difficult,” in view of the flour price increases that have been necessary. He said that a practice of buying wheat ahead had made it possible to avoid dramatic increases thus far in the current crop season, but added that this would change with shipments after November 1995. He said most mills had gone to a month-to-month wheat buying program.
A POWERFUL PRESENCE. While both U.F.M. and Laemthong occupy either their own buildings or those owned by their parent company, C.P. in Bangkok is a company whose presence is powerful, if not even awesome. Founded in Thailand 72 years ago, the Charoen Pokphand Group Co., Ltd., including many of its entities with shares that are traded on securities markets in Europe and Asia, is one of the largest groups in the world with a base in agriculture.
The group's turnover in 1994 amounted to U.S.$6.5 billion. Its feed business is defined as “fully integrated poultry and swine operations with some 70 feed mills in 10 countries, now the world's third-largest producer of animal feed; bred and sold over 400 million broilers and produces over 300,000 tons of poultry meat.”
After starting in vegetable seeds, the business now includes seed, fertilizer, agricultural chemicals, feed manufacturing, flour milling, shrimp production and a range of genetic and biotechnology interests in agriculture. It is credited with making aquaculture the main foreign exchange earner of Thailand.
While emphasizing its agricultural base, C.P. has become a leader in international trading, marketing and distribution, real estate and land development, petrochemicals, automotive and industrial products, and telecommunications. Only recently it was granted a license to install more than 2 million new phone lines in the Bangkok area.
C.P.'s operations broadly reach across Southeast Asia, and the group has been among the leaders in the development of agro-industry in China, where its initial focus has been on feed manufacturing and livestock and poultry production. Only recently has it built its first flour mill in China, in the northeastern province on the Bohai sea.
Never playing much of a role in flour milling, it was C.P.'s entry into China milling and its unusual mill in Thailand, installed within a feed manufacturing plant, that prompted this visit. Mr. Eam, who heads the C.P. International Trading Business Group, explained that the group provides in-house trade service in handling both exports and imports of the group's products as well as procuring raw materials for feed plants.
The group has 17 overseas offices and had a turnover in 1994 of U.S.$860 million. It handles the export of Thai shrimp as well as chicken meat, while also procuring wheat and maize.
The 1992 annual report for C.P. Feedmill Co. described the flour mill project by noting, “Regarding shrimp feed production and distribution, the company will have a vertically integrated extension in production with the construction of a wheat flour mill (wheat flour is the main ingredient in shrimp feed production) in Samut Sakhon province. The construction, started in 1992, is expected to be completed in 1993. The mill will have an annual capacity of 54,000 tonnes and will produce wheat flour as a raw material for shrimp feed production.”
In pointing to the booming pace of the Thai shrimp industry, Mr. Eam cited the technology introduced by the C.P. group that prompted the growth. C.P. makes about 550,000 tonnes of shrimp feed per year (wheat flour accounts for 25% to 35% of shrimp feed), which in turn represents 70% of the Thai shrimp feed market.
To put that production in perspective, he pointed out that the group annually made 8 million tonnes of feed for poultry (both chicken and duck), swine and cattle. He said that several other countries, most notably China and Indonesia, had been experimenting with shrimp aquaculture but that their progress had been hindered by disease problems.
The C.P. flour mill, now with 500 tonnes of daily capacity using Buhler equipment, is obviously not a conventional flour mill. All the C.P. officials would indicate is that the mill, as compared with a conventional plant, had a shorter flow, did less sifting and had lower costs. Extraction rates were not disclosed.
SECOND MILL PLANNED. Mr. Prasit, whose responsibilities focus on raw materials for feed manufacturing and thus include flour, claimed that C.P. was able to produce flour at a lower cost than it could buy it on the open market, while acknowledging that some millers contended otherwise and that C.P. continued to be a sizable flour purchaser. “They can't compete against our wheat-buying ability and lower costs of production,” he said.
As if to underscore his confidence, Mr. Prasit disclosed that C.P.'s plans were well advanced to build its second Thai flour mill in a southern port city. This plant would not be located in an existing feed plant but would be built before the feed plant and shrimp production have been fully developed in that area.
He acknowledged that this investment reflected optimism about the outlook for Thailand's shrimp feed industry, while recognizing that governmental policies on wheat duties had limited the growth potential.
This led Mr. Eam to point out that the 200,000 tonnes of shrimp exported annually from Thailand account for U.S.$2 billion of export earnings. The principal shrimp markets are Japan, Europe and the United States. Besides C.P. and Laem-thong, another flour milling company, Nisshin-S.T.C., manufactures shrimp feed.
The C.P. officials tend to see the main food patterns in Southeast Asia and China turning, in the short-term, to increased consumption of meat and poultry. Citing the area's fast-rising population and the physical limit on paddy rice production imposed by land availability, they also acknowledge that flour-based foods have an important role to play in this region of amazing market growth.