China’s milling industry grinds more wheat than any other country, about 80 million tonnes per year out of a total wheat crop that reached 114 million tonnes in 2008-09 before declining this year. In communist times, tens of thousands of small mills serviced an area no larger than a township, China’s smallest political division, taking in local wheat to produce flour for villages and towns nearby.
The picture has been changing rapidly in the 30 years since market-oriented economic reforms started. There has been a steady trend toward larger mills mainly selling to food processing companies that target the country’s burgeoning urban population.
Huge numbers of new mills have been built despite a longterm downward trend since 1993 in per capita wheat consumption. By most estimates, there is 300 million tonnes of annual wheat milling capacity, nearly four times demand. However, much of this capacity has already been permanently idled.
TOP TIER MILLING GROUPS
The most dramatic development of the last several years has been the emergence of an upper tier of wheat milling groups operating nationally. The consolidation process is still at an early stage, but already the top three players are processing nearly 6 million tonnes at their multiple mills.
Industry insiders predict that these largest milling groups could account for 20 million tonnes of wheat, or about 25% of China’s total production, within five to 10 years. By developed country standards, that is still not a very high degree of market concentration. But at such a level, these companies would already have entered the ranks of the world’s largest wheat millers.
The top three players in China’s wheat milling industry are different kinds of companies. The number one wheat flour producer is Wudeli Group, based in Shijiazhuang City, 200 kilometers south of Beijing in Hebei province. The company’s five mills, with 13,000 tonnes of daily capacity, process about 2.8 million tonnes of wheat per year. The mills are located across Hebei, Henan and Shandong, China’s three most important wheat-growing provinces on the northern plain straddling the Yellow and Huai Rivers.
COFCO, a state-owned company that is China’s largest domestic food processor, ranks second in wheat flour production. It operates 10 mills in six provinces including three in Henan and two in Jiangsu next to Shanghai.
Asia’s largest agribusiness group, Singapore-based Wilmar Industries, with $24 billion in annual turnover, has used an aggressive strategy of investment in new plants to rapidly become the third largest wheat miller in China since entering the sector only a few years ago. It started with investments in three large mills in China’s highly urbanized and industrialized but traditionally rice-eating Guangdong province. More recently, it has commissioned two mills in Henan province, each with a milling capacity of 1,000 tonnes per 24 hours. Additional new milling plants in the wheat-growing zone are reported to be on Wilmar’s drawing boards. The contest in wheat taking shape between national champion COFCO, with headquarters in Beijing, China, and foreign-owned Wilmar, whose top China management sits in Shanghai, is just one theater of a wider competition across the largest sectors of the food industry. The two companies are also the leaders in vegetable oil production and branded sales. Wilmar has been unofficially restricted from increasing its share in edible oils any further, so it has started to divert part of its enormous cash flow into new wheat mills as well as rice milling, where it is also competing head to head with COFCO to achieve the greatest economies of scale and to build national brands.
Pressure from the Wilmar Group, with its highly efficient state-of-theart mills, has forced the two leaders to change their growth strategies. Both privately held Wudeli Group and COFCO have expanded by taking over existing mills. In the case of the later, these were often struggling government-owned enterprises. Now both companies have started to invest in new milling capacity at "green field" sites.
Consolidation in China’s milling industry is not confined to the top tier of companies. Equipment suppliers estimate that today there are up to 100 companies processing over 100,000 tonnes of wheat per year, compared to just 40 companies five years ago. These companies are competing for slices of an overall market that is no longer expanding.
Total wheat flour consumption in China has been flat for a number of years due to the decline in per capita consumption and a leveling off in the total population. Increases in market share by the largest milling groups have coincided with the closure of thousands of mills in villages and small towns. This trend has been accelerated by the shift in population from rural areas to bigger cities in all parts of the country.
While there has been a general homogenization of the urban diet throughout China, it is probably safe to say that northern city dwellers have increased their rice consumption at a faster rate than their southern counterparts have decreased theirs in favor of wheat-based products.
Still, a recent study of China’s wheat industry conducted by Beijing-based agricultural consultant BOABC estimates that 45% of Chinese rely on wheat as a staple food, and in the wheat region that figure increases to 80% and even to 90% in rural areas of the wheat zone.
Despite the consolidation trend, "fragmented" is still the best word to describe China’s milling industry. Henan province, which produced 30 million tonnes of wheat and milled 15.2 million tonnes in 2009-10, more than any other province, epitomizes that fragmentation.
In a meeting, Henan Province Agriculture Department officials stated that there are 1,800 wheat milling enterprises in the province, each with annual sales revenues exceeding 5 million yuan ($735,000). At 2,500 yuan per tonne of flour, this means a minimum of 2,000 tonnes of flour per year without factoring in bran.
The provincial agricultural officials do not keep track of mills below this size, but they say these mills now probably account for an insignificant portion of all flour in the province.
Henan is centrally located and mostly flat with a rapidly improving road network that facilitates transportation of wheat and wheat flour, a factor that has greatly contributed to the closure of small mills that had been protected from larger competitors when roads were poor. The Department estimates there are 330 producers of specialty flour in Henan. These are generally larger, technically more sophisticated mills that produce either high gluten or low gluten flour for use by producers of western-style bakery goods or frozen dumplings and steamed rolls.
Unrelenting consolidation is still a factor, however, as there are at least 10 milling companies based in Henan that process more than 100,000 tonnes of wheat annually, according to a study by BOABC.
GRAIN POLICY CHANGES
Changes in national grain policy are also helping to speed the closure of small and medium-size mills. To meet the twin goals of national food security and improvement of rural incomes, China’s national grain authority, Sinograin, has increased its purchases of both rice and wheat from farmers at state-set minimum prices. This grain is put into the national reserve and regularly auctioned off to millers. Sinograin and its provincial counterparts have bought 27 million tonnes of wheat through the end of July 2010, compared to 35 million tonnes for the same period the previous year.
Sinograin now pays cash on delivery to farmers for wheat via rural commodity exchanges. Formerly farmers waited to be paid until the nearby township mills could grind their wheat and sell it. These typically cash-strapped smaller mills now are at a serious disadvantage competing with financially strong and technically sophisticated big millers to buy wheat of varying quality at auction from the government.
Procuring the best wheat is a major factor in China’s super-competitive milling industry. In the past, over 80% of wheat production was long-established, easy-to-grow, medium-gluten varieties that were acceptable for making traditional soft noodles or steamed buns in villages.
These days, China’s large food processing companies demand either high-gluten flour that provides the tensile strength needed for dumplings or leavened bread, or low-gluten flour most suitable for steamed bread and rolls. But above all, they demand the consistent quality that large, technically competent milling groups are best prepared to deliver.
Millers and agriculture department officials in Henan province report success in working with growers to introduce improved wheat varieties. China has very active wheat breeding programs that have delivered dozens of new varieties with desirable gluten and protein levels and acceptable yields. Compared to five years ago, the share of high quality wheat has increased from just 20% to over 50%, according to provincial officials.
WHEAT IMPORTS AND FLOUR EXPORTS
Large mills in the southern coastal areas import some high-quality wheat from the U.S., Canada and Australia to blend with local flour for western-style bakery products. But China’s total wheat imports are likely to remain less than 1 million tonnes due to the system of Tariff Rate Quotas that China instituted with its accession to the WTO. The total quota is 9.8 million tonnes, but 90% of it is reserved for state purchases. China’s government is not interested in seeing high-quality, low-cost foreign wheat undercutting artificially high domestic prices while the country enjoys surpluses, so only the 10% allocated to the private sector is used.
China’s wheat flour exports, according to International Grains Council data, are 850,000 tonnes per year, but about half of this goes to Hong Kong, which is treated as a separate administrative region for statistical purposes, and the balance most likely goes to southeast Asian countries, some by cross-border trade, since they enjoy a free trade agreement with their giant neighbor.
For now, China’s wheat sector is fairly self-contained, but there may come a day when milling groups in China, processing 10 or 20 million tonnes of wheat in a mature and consolidated market, reach out beyond their borders not to export flour or buy wheat, but to acquire significant shares of the grain milling industry in other countries.