Milling & Baking News - November 25, 2014 - 17



Rabobank describes flour milling
industry as ripe for further change
NEW YORK - Having weathered the
low-carbohydrate diet phase and the
consolidation of leading wholesale
baking companies, the flour milling
industry has "demonstrated its resilience" and is attracting outside investors, according to "AgFocus," a paper
issued this month by Rabobank.
The report, which suggests considerable opportunity remains for milling
companies large and small, even after
the recent wave of milling consolidation, was prepared by Stephen Nicholson, vice-president, Food & Agriculture Research & Advisory, Grains and
Oilseeds. Mr. Nicholson's background
includes assignments with responsibilities in purchasing for The Earthgrains Co. and commodity analysis at
The Coca-Cola Co. Also a contributor
to the report was Sterling Liddell, senior vice-president, Food and Agribusiness Research, at Rabobank.
While the creation of Ardent Mills earlier this year represents the "largest structural change in the history of the U.S.
milling industry," Rabobank said this
change and other consolidation "do not
spell doom for the remaining players."
"Rather, they create opportunities
for these companies to compete by
identifying niche products, geographic advantages and strategic customers
and partners," Mr. Nicholson said.
Specific Rabobank suggestions for
competing in the new milling world include identifying "post-merger orphan
customers, expand milling capacity, acquire a competitor, develop a strategic
partnership, vertically integrate your
mill and /or identify new niche products
such as ancient or multi-grain flours."
Even as new opportunities are surfacing, challenges have grown, too.
"The cost of entering the sector has
increased, with more assets in stronger hands and the remaining sector
players seeing the value of their mill(s)
increased, and wanting to be compensated accordingly," Rabobank said.
In the period ahead, the largest and
smaller companies will contend with
the industry changes in distinct ways,
Rabobank said.
"While smaller milling companies
will experience challenges competing
with new and larger entities, the larger
consolidated mills will face the task of
managing a larger enterprise and combining corporate cultures," the report
said. "These internal challenges are
likely to create opportunities for smaller
bakingbusiness.com / world-grain.com

players. Larger milling companies first
face the hurdle of proving themselves in
the marketplace for both wheat producers and flour buyers by being price competitive, bringing corporate cultures
together and by standardizing sales and
customer service. The clear advantage
of larger milling companies is their national footprint, which will give them
a competitive advantage in sourcing
wheat, being able to reach more customers, spreading costs over a large number

Business

lower the more efficient)," he said.
"For this reason, the trend toward
whole wheat flour could be very profitable for the industry, as the extraction rate is 100%."
A number of regional differences
are evident in capacity ownership by
company, Rabobank said. The report
said Ardent Mills will be the leading
company in the spring wheat growing
area. Capacity comparisons were made
using the Grain & Milling Annual, published by Sosland Publishing Co.
"Ardent Mills will have the majority of the milling capacity in California
(35.9%), Illinois (52.4%), Minnesota

'Millers are under constant pressure to drive
costs out of their operations. While these
improve profitability of their mills, the key
factor is pressure from customers to keep prices
competitive and at continually lower levels.'
- Stephen Nicholson, Rabobank

of mills and bringing a larger number of
products to the table."
Elaborating on overall industry
trends, Rabobank credited the milling
industry for having endured changing diets, consolidation and capacity rationalization because of sluggish
demand. At the same time, the report
calls growth prospects for milling
"modest" at best. Population growth
will be the principal driver of whatever growth is generated.
The authors noted that while total
flour production has grown slightly
over the last 30 years, the number of
mills producing flour has fallen by a
third since the mid-1980s.
These mill closings and industry consolidation reflect pressure to maximize
industry efficiency, Rabobank said.
"Millers are under constant pressure
to drive costs out of their operations,"
Mr. Nicholson said. "While these improve profitability of their mills, the
key factor is pressure from customers
to keep prices competitive and at continually lower levels."
Mr. Nicholson identified still another way mills have become more
efficient in recent years - gradually
raising extraction rates (the percentage of the wheat kernel milled into
flour, rather than feed).
"The national average conversion
factor and/or extraction rate is better
than the generally accepted industry
conversion rate of 2.3 (bushels of wheat
per hundredweight of flour - the

(44.1%) Pennsylvania (50.1%) and Texas
(56.1%)," the report noted. "In the major
hard red winter wheat growing states,
Ardent Millis is the significant player
with 44.6% of the milling capacity, versus ADM, which controls just 21.9%."
The latter company is a leader in a
number of states, though, including
Indiana (79.7%), Missouri (49%), New
York (47%) and Tennessee (55.4%).
Grain Craft is the leading milling
company in Alabama (48.4%), Georgia
(73.9%), Idaho (100%), Oregon (100%),
Montana (47.7%) and Utah (54%).
"And with the purchase of Cereal
Food Processors, Grain Craft has the
largest milling capacity share in Kansas, at 32.4%," Rabobank said.
Soft wheat milling areas tend not to
have the same degree of market leadership, Rabobank said.
"The soft red winter wheat growing areas east of the Mississippi river
are splintered between the large and
many smaller millers," Mr. Nicholson
said. "In Rabobank's view, this region
is where potential expansion and outside investment is possible due to the
fragmentation. This area produces
several varieties of wheat and is located close to many bakers and food
processors (e.g., the Chicago area).
"Similarly, the Pacific Northwest offers opportunities for further expansion and investment due to the several
varieties of wheat grown there, export
opportunities form P.N.W. ports and
wheat imports from nearby Canada." MBN
Milling & Baking News November 25, 2014 / 17

http://www.bakingbusiness.com http://www.world-grain.com

Milling & Baking News - November 25, 2014

Table of Contents for the Digital Edition of Milling & Baking News - November 25, 2014