Profiling Pakistan's milling industry
Oct. 27, 2014
by David McKee
Pakistan is the largest country where wheat is the staple grain of nearly the entire population. With 6 to 7 times more people, China and India consume much more wheat, but in both nations rice surpasses wheat in importance.
Industrial roller mills in Pakistan have risen to the challenge of grinding up to half of the 24 to 25 million tonnes of wheat harvested in the country every year. They provide not only for Pakistan’s 180 million mouths, but also produce up to 700,000 tonnes of flour for export to Afghanistan in some years.
Despite the economic weight of the milling sector domestically, it has had a relatively low profile within the international grain industry. This may have to do with the degree to which it is self-contained. With the exception of some Karachi mills, the 1,200 commercial mills operating in the country process almost exclusively domestic wheat. Aside from Afghanistan, few other countries buy wheat flour from Pakistan. Very little milling equipment is imported as low-cost local manufacturers supply complete plants. There is minimal foreign direct investment in Pakistan’s milling sector, the scale of the industry notwithstanding.
The complexity of the business environment for milling goes a long way toward explaining the lack of international investors. Erratic power supply means that mills can only operate without interruption for several hours a day in most places, depending on the season.
Though there is little more than 50% capacity utilization industry wide, new mills continue to be built, keeping profit margins razor thin. The government intervenes in the market by buying several million tonnes of wheat per year and subsidizing its allocation to mills on a quota system for part of the year, thus serving to keep weaker mills in business and distorting the market. At harvest time, interprovincial and even interdistrict bans are frequently placed on wheat movements to enable the provincial food departments to meet their procurement targets.
Finally, security issues related to escalating conflict in a number of regions complicate all types of business dealings.
Wheat and wheat flour trade
The largest concentration of wheat mills is in Punjab Province, which accounts for 56% of the population but three quarters of national cereals production.
One of the world’s largest canal irrigation systems crisscrosses the Indus River plain that extends most of the length of the country. Wheat has been cultivated there for millennia. Abundant water from the Himalayan snowmelt allows for reliable yields that have been steadily increasing thanks to the introduction of improved varieties.
Larger commercial farms capable of selling directly to millers are the rule in Punjab as compared to other parts of the country. As a result, the province is a large net supplier of both wheat and wheat flour to the rest of the country.
Millers in Sindh, Balochistan and Khyber Pakhtunkwa (KPK) Province (former Northwest Territories) as well as the federal capital Islamabad buy much of their wheat from Punjab and then compete with wheat flour produced by Punjab millers. Sindh Province, which is semi-arid over much of its area, cannot grow enough wheat to feed all its inhabitants including the 20 million in the megalopolis of Karachi.
Pakistan has been an irregular player in international wheat markets. In some years it is open for imports and in others it has exported surplus stocks. There have been years in which both have occurred. When wheat and wheat flour prices rise excessively and exceed international market prices, sometimes due to a high level of demand from Afghanistan, the government allows Karachi mills to import boatloads of wheat. Sea transport costs to the mills, some located directly at the port, can be lower than the cost of 1,000 km to 2,000 km of truck transport from Punjab.
The first roller mills built in Pakistan from the 1950s to 1970s relied on equipment imported from Europe. A number of mills with Miag equipment manufactured in Germany in the 1960s and 1970s are still operating.
Most mills built since the 1980s are based on a cookie-cutter, 5-story plant design using equipment referred to as “Russian mills,” though it is 100% produced in Pakistan. The technology is actually a 1970s Bühler design licensed to a manufacturer in Ukraine. It became the standard machinery for most new mills built in the former Soviet Union and particularly in the former Soviet Republics of Central Asia.
Some of this equipment was installed in Afghan mills before and following the Soviet invasion. Equipment from old dismantled mills in Turkmenistan and Uzbekistan acquired by Afghan traders ended up in Pakistani mills. Domestic manufacturers began making parts and eventually copied the entire equipment line. The only mill components still imported from Russia are the steel rolls, but the term “Russian mill” has stuck.
Leading international milling equipment suppliers have found Pakistan to be a difficult market to penetrate despite the industry’s size and the apparent need for more advanced technology.This has to do with low milling margins that make it difficult to get a payback on imported equipment.
A turnkey 8-roller body mill, the most common size, including plant building and warehouses, can be constructed for just $500,000 excluding land costs. Owners lease out entire mills to former competitors in Peshawar for just $2,500 monthly, such is the stock of excess capacity among the 60 mills clustered around the city.
These obstacles notwithstanding, larger milling companies in some urban areas, particularly in Islamabad and Karachi, have begun to replace the decades-old technology with the latest equipment from abroad.
A number of factors have combined to start to make the choice of imported equipment feasible. In recent years government has more than doubled industrial electricity rates as one solution to generate funds to pay back the investment cost of badly needed new generating capacity and to encourage reduced consumption. After the latest increase, electrical energy now constitutes up $11 per tonne or two-thirds of a mill’s variable grinding costs not including wheat.
Manual and semi-skilled labor rates have also doubled in the last five years. Some mill owners are keen to mechanize more of the handling of wheat and flour to reduce the number of men needed to unload bags of wheat from trucks and stack them before unstacking them again to feed wheat into the plant.
Cost savings aside, the key motivation for buying new equipment is to produce higher quality flour that is demanded by large industrial bakers and other food processors in urban centers.
Milling practices vary across Pakistan depending on type and quality of flour demanded in the local market. In Punjab Province, mills extract between 12% and 18% bran. In urban areas, extraction rates are higher, with 55% to 60% of the wheat kernel converted to atta flour for baking flat bread (nan) in traditional tandoor ovens or for chapatis on griddles. The remainder is divided between fine flour (maida) demanded by industrial bakers and semolina (sooji) for confectionary products. In more rural areas, extraction rates are lower at up to 88% with 70% to 75% processed into atta.
In Peshawar, the capital of the KPK Province, wheat mills cater to the tastes of the dominant Pashtun population whose staple is nan. Extraction rates are 88% converted entirely to atta. There is some local production of maida and sooji, but much of it is imported from Punjab mills.
Up to half of Peshawar mill output is exported to Afghanistan, where the demand in Kabul and other cities is for higher quality, finer, whiter, 82% extraction flour for baking Afghan-style flat bread. In households and at neighborhood bakeries Pakistan flour may be blended with darker, lower extraction local flour. Or conversely it is mixed with 75% extraction flour coming from modern mills in Kazakhstan to make an even higher quality nan.
Pakistan still has a large informal milling sector made up of chakkis (stone mills), some water powered, mainly operating in villages. However, roller mill flour from industrial mills has replaced chakki atta in the diets of many villagers for much of the year. They may grind their own wheat as long as it lasts in local chakki mills, but choose to buy flour for at least part of the year thanks in part to its subsidized price.
The government food departments in all of Pakistan’s provinces provide subsidized wheat to the privately owned mills, a practice dating back decades. There are no state-owned mills in the country. These schemes, which vary considerably from province to province under Pakistan’s highly devolved federal system of government, have two main goals: ensure farmers receive a minimum price that will serve to guarantee that the country remains self-sufficient in wheat production; and to enable government intervention to mitigate price rises in the lean months leading up to the next harvest.
The Punjab Food Department operates the largest scheme. It targets annual purchases during the harvest in April to June of about 4 million tonnes out of total government procurement of 6 million tonnes. This wheat is received and stored at 600 collection centers. The majority of them are open area facilities technically known as Cover and Plinth (CAP).
Distribution of the subsidized wheat takes place in Punjab beginning in mid-November and continuing to the start of the next year’s harvest in mid-April when wheat prices normally fall.
There is little doubt that the scheme helps to stabilize the prices paid by millers for wheat and the prices received by farmers. Government pays farmers, particularly smaller ones who could not afford to store their wheat long after harvest, a higher price than they would get selling to traders immediately.
Large farmers and traders who do speculate by holding on to wheat for several months after harvest are not able to raise their prices as much due to the government wheat allocations to millers beginning in November in Punjab and as early as September in KPK and Baluchistan provinces.
Quotas are assigned based on a mill’s daily capacity calculated per government norms as 20 tonnes per roller body, with no mill allowed quota for more than 8 roller bodies. In practice, because of load shedding (power outages) and the age of their equipment, few mills achieve production rates above 10 tonnes per day per roller body.
The importance of the wheat quotas varies from mill to mill according to the season. Because the number of mills has grown while the government has limited its total wheat procurement for budgetary reasons, the allocation to any mill is rarely enough for more than a few hours of daily production.
Financially weak mills may only operate when subsidized wheat is available. Strong, well-managed mills are able to stockpile sufficient good quality wheat after harvest when prices are lower so that they have little need to buy from the government poor quality wheat with high levels of impurities.
In good crop years the Punjab Food Department wheat price may be higher than that available in the market even four or five months after harvest. The official minimum support price paid to farmers has been fixed at 3,000 rupees ($306) per tonne for a number of years. The Punjab Food Department sells the wheat to mills at the same price, without adding the costs of bagging, storage, transport and storage.
There are numerous drawbacks to long-standing public grain policy. Because wheat millers could always count on the government to store wheat and release it onto the market in the quantities needed, they have built relatively little warehouse and silo storage capacity.
In contrast to the highly modern feed milling sector that has much steel silo storage, the entire system of government wheat procurement and distribution is based on inefficient and corruption-prone bagged transport and storage.
The size of mills has been constrained by the government quota system that covers only up to 8 roller bodies per mill. Many uncompetitive and financially weak mills have been kept in business simply because they qualify for subsidized wheat part of the year. Indeed, there are many “ghost mills” that have not operated in years but whose owners, including members of parliament, illegally sell their wheat quota to other mills.
Pakistan’s roller milling industry is critical to food security in a country where wheat flour accounts for over 70% of average caloric intake. Whether heavy government involvement helps or hinders its performance of this key role remains subject to debate.
David McKee’s grain industry consultancy, Key International LLC, provides market research, feasibility analysis, technical studies and project guidance to companies and organizations. He can be reached at email@example.com.