March 26, 2013
by Meyer Sosland
Olam International Limited plans to expand its presence in Africa’s agricultural economy and with the official opening of a state-of-the-art wheat milling facility in Accra, Ghana in early 2012, the Singapore-based company made a strong statement of its intent.
The new wheat milling facility is a stepping stone to Olam’s long-term strategy in Ghana, at a cost of $55 million. It forms part of the increase in planned investment in wheat milling facilities in select locations across Africa announced by Sunny Verghese, chief executive officer of Olam International, at the mill’s inauguration ceremony.
“This event marks another milestone in our goal to become a major wheat miller in Sub-Saharan Africa, as we consolidate our West Africa expansion into the mid-market grain supply chain here in Ghana,” Verghese said at the inauguration. “This investment will enable us to unlock mutual value, contribute to the country’s food security and capitalize on the increasing demand for flour-based products here on the African continent while extending our lasting partnership with the people and the government of the country.”
The mill processes 500 tonnes of wheat per day to give it a per annum production capacity of 115,000 to 125,000 tonnes of flour per annum. The facility can store 40,000 tonnes of wheat, and it can store 2,000 tonnes of flour. All of the mill’s flour is shipped to customers in bags.
The key components of the mill comprise storage capacity, cleaning and grinding sections. Ghana has a moderate climate so there is no need to have any specialist climatic control equipment.
The six-story, 1,115-square-meter mill was built deliberately spacious in the event Olam decides to double the facility’s capacity.
“For this new mill we have been working with a new supplier/mill contractor from Turkey,” KC Suresh, president and global head, grains, Olam International, told World Grain. “By working with different mill contractors, we can keep our options open for future contracts. It has taken just 12 months from finalizing the project details to commissioning.”
Istanbul, Turkey-based Alapala Machine, Food, Industry & Trade Inc. built the complete mill including the steel structure building, warehouse, silos and all the electro-mechanical works.
The electricity for the mill comes from the grid, much of which is generated by renewable hydro-power in Ghana. At the mill, Olam is also looking at a rainwater harvesting project, which will reduce the facility’s water dependence by half. It should be completed before the start of the next rainy season.
Growing Ghanaian market
Olam noted that it currently has the third largest share of Ghana’s wheat flour market, and that its goal is to soon move up to second. Olam has a 15% share, and it expects to reach 25% within a short period.
“In addition to our sustainability goals, we have been very keen to develop a product whose quality is most suitable for Ghanaian style bread-making, which is very different to western concepts of what good flour should be,” Suresh said. “We have assessed local tastes, and what quality means to a Ghanaian baker, and adapted our operations to that end.”
Initially Olam started with so-called English flour, which is suitable for the English style of bread. The by-product of this is bran for animal feed. “Going forward, we are going to produce flour more suited to French bread such as baguettes, cakes and pastries,” he said. “We are also looking at developing whole-wheat flour.
“All our flour is targeted toward artisanal bakeries, varying from medium to very small bakers. As of now, the retail market for wheat flour, both in pure and blended forms, is insignificant.”
Olam estimates that Ghana’s per capita consumption of flour is around 17-18 kg (22-24 kg per capita wheat) per year. Suresh noted this puts Ghana 20% to 30% below per capita levels across Sub-Saharan Africa.
“Based on our rough assessment, the current consumption for wheat flour in sub-Saharan Africa is around 22-24 kilos,” he said.
“With an increase in income levels and demographic changes, the demand is expected to grow a gradual 4% to 5% per annum, but with a sustained marketing effort, it may even be possible to reach 8% to 10% per annum growth.”
Olam is seeing a shift in Ghana from traditional crops such as cassava, corn or yam to wheat-based foods. Suresh noted the underlying reasons could be the following:
• Ghanaians are looking for convenience, as people are becoming more mobile and unwilling to spend long hours cooking.
• As incomes increase, people aspire to eat more globally recognized food such as wheat and rice.
• Wheat-based foods have also become more affordable due to strong GDP growth.
• Wheat-based foods are mainly consumed by urban populations.
“Presently, most of the wheat consumption is in the form of bread (butter, sugar and tea bread varieties), which is consumed plain, with margarine or with local curries,” Suresh said. “It can often be eaten in out of home/mobile situations. Other wheat-based foods include biscuits, pasta and noodles, and are eaten in smaller quantities.”
Olam sees itself as a key partner in the sustainability of the areas it operates in.
“As with all of the business platforms within Olam, our grains business encourages and supports several sustainability programs. For example, in Ghana we are working with the bakery industry to help it modernize, improving productivity and pricing,” he said.
“As an end-to-end supply chain manager, Olam’s grain business is in a unique position to be able to ensure that processing happens close to end markets. This helps cut down on the environmental costs of transportation and helps ensure local industry benefits local populations with increased jobs and food security.”
Olam said that its new Ghanaian mill is aimed at making the country self-sufficient in wheat flour and signifies the company’s continued support for the country where it is a leading player in the cocoa, cashew, cotton, rice and sugar supply chains and operates a packaged foods business.
Olam Ghana employs over 500 people, and this number is set to increase to nearly 1,500 in the next three years. One-hundred will be employed at the new wheat facility.
“Our end-goal in Africa is to build a pan-African presence primarily through greenfield projects, while keeping our options open for value acquisitions,” Suresh said. “The Ghanaian mill can be seen as a first step toward this greenfield strategy. In Nigeria however, we chose to enter through the acquisition of Crown Flour Mills, the third largest wheat miller in the country.
“When seeking to create an asset, acquisition is not necessarily the best strategy as the acquired asset is often unknown and can be difficult to manage. We therefore often adopt a greenfield strategy where we build a milling unit from scratch.”
Suresh noted that historically, Ghana has not had the modern infrastructure found in developed grain-producing countries.
“The setup of the new Ghanaian mill has therefore resulted in several lessons learned, which is valuable for the execution of any future milling project in similar environments,” he said.
He said Olam’s on-the-ground experience will give the company much greater credibility in strengthening its engagement with suppliers and reinforcing its leadership in the industry.
Suresh said that Olam’s strong presence in Africa gives the company a competitive advantage.
“Africa is at the heart of Olam. Today, we are one of the leading agribusiness companies in Africa with a direct presence in 24 African countries, and we handle 4.1 million tonnes of agri-commodities on the continent each year,” he said.
“Through our wheat milling business, we will not just be reaching out to new customers but supporting those already looking to Olam for products such as rice, sugar, and various packaged food goods. This gives us the confidence and strength to expand our grains business in Africa.”
Olam currently has two mills in Nigeria and one in Ghana. The company is working on a few other mill projects in sub-Saharan Africa (Senegal and Cameroon). Across all sites, Olam’s utilization rate is 70% and current wheat processing capacity will soon be 4,000 tonnes per day.
The primary target of Olam’s flour mills are the local markets they are located in, but the company is developing an export strategy as well. “We have also started exporting to Mali, Togo and Burkina and have created sales and distribution structures in these countries,” Suresh said.
Since the climate in West Africa is not conducive to growing wheat, millers in this region rely on imports and traditionally Ghana’s wheat has come entirely from North America. Olam is seeking alternatives.
“We are exploring alternative sources from Europe and South America. In this way, we can retain flexibility to use the optimum mix of originations based on cost and quality,” he said.
As with all company’s whose margins are tied to the fluctuations of commodities, pricing — particularly in the volatile markets of the last few years — is a main challenge.
“On the global wheat market, the price has increased by 20-30%, and as a result, our input costs have risen sharply,” Suresh said. “The market, however, offers strong resistance to any corresponding price increase, as bakers struggle with price point issues and intense local competition. Maintaining business profitability in the wake of spiraling food prices is a pressing issue not just for Olam but for the whole of the food industry. This is where our hedging capabilities help us to protect margins.”
Suresh noted that in an effort to address this cost issue, Olam has driven innovation and utilized responsible communication.
“For example, in Ghana we initiated a health program to educate consumers about the proven health benefits of brown bread. In the long term, we believe that the commodity prices will revert to the mean and the grains business will remain attractive to Olam.”