David McKee

‘Kitchen to the World’ is the largest exporter and importer of food products in Southeast Asia.

“Kitchen to the World” is a phrase sometimes used by official promoters of Thailand’s thriving export-oriented food industry. Hyperbole aside, there is much truth to this slogan. The country has been the world’s leading rice shipper for almost 25 years and is among the biggest suppliers of aquaculture and seafood products to the international market. Also, the CP Group, a global player in feed and poultry production, is a Thai company. The record is quite impressive for a medium-sized, middleincome country. Among the nations of Southeast Asia, Thailand is both the largest exporter and importer of food products, though it is only fourth largest in population and trails both Malaysia and Singapore in per capita wealth.

Food processing of all types is a vibrant sector that has attracted much international investment targeting both the domestic and foreign markets. It has also been a source of new business start-ups. There are at least 1,200 medium and large companies registered and several thousand more small firms or producers at the cottage-industry level.

Challenges to this key part of the Thai economy have been many. Recently, the Avian flu has been of great concern. Another ongoing and persistent threat is low-cost competition from Vietnam, India and other countries that are opening themselves more and more to the world economy. But Thai producers have shown a resilience that has come from the ability to adapt and move into new higher value-added niches.

GRAIN PRODUCTION AND TRADE

Rice gave Thailand its start as a major food exporter. Milled rice production in recent years has been stable at about 18 million tonnes. Steady per capita consumption of 110 kg leaves over half the crop for export and other uses.

Thai exports in 2005 fell to 7 million tonnes from 7.3 million tonnes the previous year, as Vietnamese white rice, the cheapest category, gained a substantial share in African countries on prices U.S.$20 to U.S.$30 per tonne lower than Thai rice. At the same time, competition from India reduced Thai exports of parboiled rice, a category that is about 25% of all Thailand’s rice trade. However, shipments of high-priced fragrant jasmine rice, for which the main markets are the U.S. and China, continued to go up. Thailand’s position in the last major category, premium white rice, which primarily goes to Iran, Iraq and other Middle East countries, is still strong due to inadequate supply from Vietnam.

Paralleling the drop-off in exports, there has been a sharp rise in rice stocks to record levels approaching 5 million tonnes, from just 1.7 million tonnes at the end of 2003.

Indeed, domestic market prices and the level of exports are usually a function of government intervention buying, a practice designed to stabilize production and farmgate prices. Exports will rise in 2006 as the government must dispose of its stocks, thereby lowering the average price for Thai rice.

Maize is the second-leading grain crop and a major contributor to Thailand’s feed industry. The sector, now recovering from the impact of the Avian flu on poultry demand, will consume all but about 150,000 tonnes of a total crop of 4.2 million tonnes from two annual growing seasons. In 2004, maize exports had reached nearly 400,000 tonnes, mostly to Indonesia and Malaysia.

The government still operates a mortgage program for maize farmers to stabilize domestic prices. Thanks to higher loan rates, government purchases under the program doubled to more than 115,000 tonnes in 2005. There are no quotas or tariffs on maize trade between Thailand, Myanmar, Laos and Cambodia under the terms of the Joint Economic Cooperation Agreement between the four countries.

FEED INDUSTRY

Charoen Pokphand, or the CP Group as it is usually known, is one of Thailand’s best known, wealthiest and globally focused companies. It got its start as a humble feed trader more than 80 years ago. The feed industry has played a vital role in the development of Thailand’s agro-industrial complex, and the rise of the CP Group has mirrored that development.

Thailand should produce close to 11 million tonnes of feed in the current year. CP Group is by far the largest producer, though it faces competition from regional and multinational players that have invested in its backyard.

Poultry production and seafood each account for half of the total feed value. The large share of demand from aquaculture is special in the case of Thailand. About 90% of fish and shrimp production gets exported. Thailand is the world’s number one exporter of king prawns. It was the world’s leading seafood exporter until overtaken by China a number of years ago.

In addition to operating several plants dedicated to production fish and shrimp feed, CP Group has integrated vertically and forward into farmed seafood production, just as it did with poultry earlier. Export demand for frozen shrimp remains strong, particularly from the U.S., and domestic consumption of farmed fish is going up at the expense of poultry.

The CP Group now owns feed plants in seven Association of Southeast Asian Nations and 30 countries around the world. In the 1980s and 1990s, it made a major push into China, where it built 100 plants. In Thailand, it has diversified into telecommunications, petrochemicals and other industrial products.

WHEAT FLOUR MILLING

Shrimp and fish farming are also a major source of demand for Thailand’s wheat flour milling industry. About 30% of all flour production is used either as a binder for pellet production or for breading of finished products.

Thailand has about 10 modern flour mills that will grind 1.2 million tonnes of wheat in 2006. Two new mills have contributed to a 30% expansion of national milling capacity. Wheat flour production has been increasing at an annual rate of 10% recently.

Another segment of wheat flour demand is instant noodles, which are gaining favor among urban consumers at the expense of rice. Flour demand for bread, cake and pastry has also been going up, thanks to higher incomes.

Thailand has been one of the major import markets for flour in the region due to the relatively high cost of domestic production. But millers have been given a boost by a new tariff rate structure on wheat of only U.S.$2.50 per tonne compared to five times as much for flour. This will help keep imported flour at around 5% of total consumption.

OILSEEDS

Thailand has long tried to stimulate domestic soybean production as a second pillar alongside maize to supply its feed industry. However, domestic production has stagnated at below 250,000 tonnes even though total demand for soybean meal has steadily climbed. Farmers prefer maize, which has had much better improvement in yields.

As a result, soybean crushers in Thailand depend on imported soybeans. Total soybean imports are expected to decline due to a decreased domestic crush of just 1,030 tonnes. In general, soybean crushers face a difficult environment due to price controls on soybean oil, competition from imported palm oil, which is approaching 1 million tonnes and is monopolized by the government, and increased use of whole soybeans for human food and for full fat feed.

Overall soybean meal demand continues to increase. Despite a 5% tariff versus none on beans, soybean meal imports should exceed 2 million tonnes in the 2006-07 marketing year, compared to 1.7 million tonnes in 2004-05. One factor is a fall in fishmeal production, though still important at over 400,000 tonnes per year.

After years of remarkable expansion in the agricultural sector, South America’s largest country is encountering numerous problems that are hindering growth.

Brazil is an agricultural powerhouse. Its net food trade surplus of U.S.$29 billion in 2005 — the greatest of any country — is sufficient testimony to that.

In the past 20 to 30 years of rapid development, the country’s agricultural and food processing sectors have gone from strong to stronger. While orange juice and coffee were the original basis for its export successes decades ago, oilseed and feed-based industries have more recently shown the most dynamic growth.

Brazil’s total soy complex (beans, meal and oil) exports have now surpassed the U.S., thanks to rising soybean shipments in 2005. It is also the top exporter of poultry meat with volume projected to reach 3 million tonnes this year. Brazil is second in pork and among the top five in beef exports.

Overall, Brazil’s agricultural exports have increased remarkably from U.S.$13 billion in 1990 to U.S.$32 billion last year. But after years of heady expansion, there is now a building sense of crisis brought on by a convergence of challenges: a strong currency; repeated droughts; plant diseases; inadequate transport infrastructure; environmental conflicts; food safety issues; low international commodity prices and farmers that are heavily in debt.

The international competitiveness of Brazil’s economy itself presents a major problem to agricultural enterprises. In just two years, the Brazilian Real has appreciated from about 3-to-1 to 2-to-1 against the U.S. dollar. This has removed much of the profitability from Brazilian farming by lowering the local currency price that producers receive for exported products.

OILSEEDS

The aforementioned problems have had the greatest impact on soybeans, the unrivaled king of Brazilian farming. The soy complex accounted over one third of agricultural exports and 12% of all Brazilian exports in 2004. But record global soybean production in 2005-06 exceeds demand by about 10 million tonnes, and is causing a buildup in stocks and lower prices. Consequently, the area planted to soybeans in Brazil will shrink for the second year in a row in the 2006-07 growing season to about 21 million hectares.

Costs of basic inputs such as fertilizers and fuel, which are mostly imported, have gone up much more than the Brazilan Real, and are further squeezing profits.

Most of the expansion of soybeans has been in the frontier region of Mato Grosso, which has poor soil that requires heavy use of fertilizers.

Cheap land and labor, good technology and economies of scale make Brazil the world’s lowest-cost producer of soybeans, but much of this advantage is lost after factoring in the expense of getting beans first to ocean ports and then to major international markets.

New cultivation in Brazil is as far as 2000 kilometers (km) from seaports, compared to a maximum of 300 km for most Argentine production. Three quarters of U.S. soybean production reaches export ports via river barges, but in Brazil the same proportion is moved by truck over congested, often pot-holed and unpaved two lane highways. Transport costs in the delivered value of Brazilian soybeans to major markets like Europe or China are a multiple of U.S. beans.

The fragmentation and dispersed location of the Brazilian soybean crushing industry has caused it to lose ground against arch-rival Argentina, whose huge port-based plants, some with capacities of more than 12,000 tonnes per day, have enabled it to increase its share of oil and meal exports at the expense of Brazil.

Brazil has about 80 operating oilseed plants scattered around the country that are owned by around 50 companies. The largest is about 4,000 tonnes per day, which is only medium-sized by today’s standards. More than a dozen plants have been shut down in the past few years, and total daily crushing capacity, at about 137,000 tonnes, is now less than Argentina’s, which has greatly expanded capacity at ports.

A 12% tax on beans transported among Brazil’s 27 states for processing also work against economies of scale and consolidation in the crushing industry, and further skews production toward exports, which do not face this extra tax. Thus, soybean exports have steadily increased as a share of soy complex exports.

FEED

The rapidly expanding Brazilian feed industry presents a much brighter picture than oilseeds. Indeed, it is an example of a move upward on the value chain by producers confronted by low margins in basic commodities. Compound feed production in Brazil should reach 47 million tonnes in 2006, up from less than 20 million tonnes in 1994. This makes the South American giant the third-largest producer after the U.S. (145 million tonnes) and China (96 million tonnes).

In addition to abundant soybean meal, the feed industry benefits from Brazil’s self-sufficiency in maize. Annual production has rebounded to 41 million tonnes, of which 30 million is used in industrial feed. Brazil had been a net maize importer for many years, but it now exports more maize to Europe than it imports from Argentina in most years.

Poultry consumes 57% of feed production. The Avian flu has yet to reach Brazil and has been a boon for Brazilian frozen chicken and turkey exports, particularly to Japan, at the expense of Thailand and Europe.

The biggest national swine and poultry producers and exporters are Perdigao, Sadia, and Seara Alimentos, which is owned by Cargill. However, several large agricultural cooperatives in the state of Parana have made major investments in modern, integrated poultry production, in order to capture added value from their members’ maize and soybeans and to benefit from proximity to container ports. Parana now accounts for 25% of Brazilian poultry.

WHEAT FLOUR

Wheat for flour milling is the biggest line item on the negative side of the food trade balance. Indeed, the country ranks among the world’s major wheat importers. Brazil’s 206 mills, owned by 150 companies, grind almost 10 million tonnes of wheat per year. Wheat production in the southern states of Santa Catarina, Parana and Rio Grande do Sul supplies up to half of the demand in a year with good rainfall, but on average about 6 million tonnes get imported, mostly from nearby Argentina. Due to the Mercosur free trade zone, there is no import duty on wheat from the southern neighbor, but all other wheat faces a 10% duty.

Annual per capita wheat consumption in recent years has been steady at about 50 kg versus 38 kg for rice. During the last decade, wheat consumption has risen and rice has fallen.

Bunge, with a 100-year history in Brazil, is the largest milling company in the country. Cargill has had operations in Brazil for more than 40 years but entered the wheat flour market only a few years ago with the acquisition of a couple of mills.

GOVERNMENT INTERVENTION

It could be argued that the global competitiveness of Brazil’s agriculture and food processing sector has been due in large part to the abandonment of subsidies, intervention programs and high external tariffs by the government in the 1980s, requiring producers to respond to international market signals.

Government payments were only 3% of Brazil’s farm receipts in 2005, according to OECD figures, versus 18% and 34% for the U.S. and E.U.

Brazil was a member of the group of the six key countries in the now suspended WTO Doha round, and it stood firmly for the freeing up of agricultural trade through the elimination of subsidies and tariffs in rich economies like the U.S. and Europe.

But faced with a farm crisis at home, the Brazilian state has begun to intervene on a scale not seen in recent decades with purchases, payments and guarantees to help insolvent farmers.

Will the failure of the Doha round and huge farm losses in grain and soybeans cause Brazil to give up its relatively laissez-faire agriculture? That seems unlikely given the many successes generated by Brazil’s agricultural model.

Powerful Canadian Wheat Board fighting to keep its monopoly status.

Canada is a premier member of a small league of nations, along with Australia and Argentina, whose grain exports greatly exceed national consumption.

Annual cereals and oilseed production has been about 30 million tonnes in recent years, or more than one tonne for each Canadian. Consequently, at least two-thirds of this output is shipped to over 70 countries. On average, wheat from the Prairie provinces of Alberta, Saskatchewan and Manitoba provides 20% of all wheat in world trade, 65% of durum wheat, 15% of feed barley and 30% of malting barley.

Any discussion of the Canadian grain business must start with the Canadian Wheat Board (CWB), a nearly 70-year-old institution that is the single desk buyer and seller of all wheat and barley (excepting domestic feed-use barley) in western Canada.

Headquartered in Winnipeg, and with about 500 employees domestically and offices in Tokyo and Beijing, the CWB generates over U.S.$4 billion in export revenues in most years. The CWB has traditionally justified its monopoly status by its ability to provide a fair return to 85,000 Canadian grain growers through price pooling and elimination of payment risks, efficient contracting for transportation and storage and effective international marketing.

Critics of the CWB are many and legal challenges have been raised repeatedly by other countries as well as certain farmer groups, particularly those near the U.S. border who feel they should have the op- tion to sell directly when prices are better than those offered by CWB.

The E.U. and the U.S. complain that the CWB, as a state trading enterprise, gives Canadian grain an unfair advantage. Three guarantees provided by the government of Canada through the CWB have been judged by competitors as antifree trade. First, there is an initial payment guarantee, so if world prices fall, the farmer still gets a minimum price for his grain. Secondly, CWB borrowings are government guaranteed, and thus its interest rates are equal to those enjoyed by the largest international grain companies. Finally, the Canadian government assumes all payment risks associated with CWB exports.

The CWB counters by pointing out that all of its pricing is based on international market signals, and that the biggest distortion in the international grain trade results from the export subsidies provided by the E.U. and the direct payments made to farmers in the U.S., which accounted for over 40% of farmers incomes in both places, versus subsidies in Canada, which are less than 20%.

GRAIN STORAGE AND DISTRIBUTION

For the amount of grain it handles, the CWB is a lean organization. Though it does take title to almost all of western Canada’s grain, it owns few storage and transportation assets. Instead it contracts with railways, trucking companies and several large grain trading companies that own elevators and terminals across the country.

The largest of these include James Richardson International (JRI), Cargill, Parrish and Heinbecker, Patterson Grain, Saskatchewan Wheat Pool and Agricore United. The latter two are 100% publicly traded companies and the rest are privately held.

To better mimic a free grain market, the CWB has learned to be flexible in payment and delivery arrangements. Farmers are very often paid on delivery by the grain traders, who act only as CWB agents in this regard.

FLOUR MILLING

One industry group that generally sees itself as benefiting from the CWB system is Canadian millers, who use over 3 million tonnes annually. With just one phone call, they can obtain their wheat at the same price as paid by all competitors. CWB pricing is set off the Minneapolis Grain Exchange and is transparent to the entire industry based on a daily fixing at 1:30 p.m.

Despite the elimination of any possible cost advantage in wheat purchasing, the industry has endured a fair degree of consolidation. There are 43 industrial mills with a total of 11,000 tonnes per day of installed capacity for whole and white wheat flour and another 1,300 tonnes of durum capacity.

Just five companies own 17 of these mills and produce 80% of the country’s flour. Number one is ADM, which has a 40% market share with seven mills scattered across four provinces. The next company in line is J.M. Smucker with its Robin Hood brand. It has three mills plus a mixing plant and an 18% share.

The industry has undergone significant investment in modernization in the last 10 years but almost entirely in existing facilities. Only one greenfield plant, Rogers Foods in British Columbia, which is owned by Japan-based Nisshin Flour Milling, has been built in recent memory. Capacity utilization is roughly the same as in the U.S.

Mutual accusations over export subsidies aside, one big effect of the North American Free Trade Agreement (NAFTA) has been to create a truly North American market for flour-based products. There has been a gradual increase in nearly every product category in twoway trade between the U.S. and Canada since NAFTA’s inception.

Canada is both exporting to and buying from the U.S. much more wheat flour and products such as pasta, mixes and breakfast cereals than it did 10 years ago. One industry rule of thumb is that for such products the U.S. now supplies 10% of Canadian demand while Canada supplies 1% of U.S. demand.

One particular success has been oats, where yearly exports to the U.S. generally exceed 1 million tonnes for feed, but in the last several years, a number of new oat mills have been built in the Prairies to supply the surging U.S. consumer demand for whole grain products.

FEED MILLING, OILSEEDS AND BIOFUELS

Feed milling is one grain-related industry where CWB involvement is minimal. Commercial production of complete feeds is about 15 million tonnes out of a total requirement of 27 million tonnes for all poultry and livestock in the country. The rest is mixed non-commercially on the farm. According to the Animal Nutrition Association of Canada, there are about 450 commercial feed plants in the country.

Some of the grain trading agents of the CWB mentioned above count among the largest feed producers, including Cargill and Agricore United (30% owned by ADM). Feedrite, based in Winnipeg, is another major player.

The benefits of the North American trade relationship are emphasized by the even balance in feed: 650,000 tonnes of exports to the U.S. and 740,000 tonnes of imports from the U.S. to Canada in 2004-05. However, Canada depends on its southern neighbor for about 3 million tonnes of maize per year.

In Canada, rapeseed is known as canola, and it is considered the country’s third most valuable crop after wheat and durum.

Canada produced 7.7 million tonnes of canola in the 2004-05 crop year. Of that total, about 3.4 million tonnes was exported whole, and the equivalent of an additional 2 million tonnes was exported as meal and oil.

Soybean production has climbed steadily in recent years to more than 3 million tonnes. More than 1 million tonnes is now exported.

Biodiesel production in Canada is just starting to take off, so fewer oilseeds may be exported in the future. Canada’s handful of existing ethanol plants are mostly in Ontario and rely partly on maize imported from the U.S. New laws, regulations, and subsidies have been put in place to stimulate greater production. Current plants will be expanded and several new plants are on the drawing boards. Some may use wheat, barley and possibly straw and wood.

How development of an ethanol industry will affect the position of the CWB is unclear. What is clear is that the CWB may lose parts of its monopoly in the not too distant future.

The new Conservative Party government of Prime Minister Stephen Harper, elected in January 2006, made dismantling of CWB authority part of its platform in order to win support from disgruntled western farmers, who at a minimum want a dual marketing system. The CWB may have to cede some powers, but judging from history, it will not be without a fight.

Growing demand for biodiesel sparks the need for increased rapeseed production.

The diesel engine was invented in Germany about 120 years ago, with the first ones running on rapeseed (canola) oil. But the diesel engine’s success was assured only with the exploitation of petroleum diesel at the end of the 19th century.

Now Germany has become a world pioneer and leader in production and use of biodiesel. Production in 2005 was about 1 million tonnes, consuming about half of the country’s total rapeseed oil production.

Capacity is being added rapidly. High world oil prices and a zero tax on biodiesel (versus €.50 per liter for mineral diesel) are fueling the expansion.

The oilseed crushing industry, which is dominated by six large plants owned by Archer Daniels Midland (ADM), Cargill and Bunge, has invested significantly to convert capacity from soybean (imported) to rapeseed (mostly domestic) crushing. Once all current projects are completed in 2006, Germany will be able to produce about 3 million tonnes of biodiesel per year compared to total diesel usage of 25 million tonnes.

In addition to the major multinationals, there is a second tier of players in the German biodiesel industry, about 30 companies all told. These are smaller private firms which have sprung up mostly to refine biodiesel fuel using crude vegetable oil purchased from the major multinational companies mentioned above. Several have their own extraction or extrusion capacity as well.

A critical part of the equation for this new industry is the rapeseed supply. The rapeseed crop rotation in Germany, which is every three or four years, is already approaching the maximum level. In 2006, there should be a large increase over the 1.3 million hectares planted last year.

There is always the option of importing rapeseed from neighboring countries or refining soy oil produced from imported beans. But that calls into question one of the reasons for the tax breaks given to biodiesel production, which is to stimulate a new market for German farmers.

Due to high world energy prices, and the limits on domestic rapeseed production, the German government has already decided to start taxing biodiesel, but initially at just .10 per liter. That will not do much to reduce the attractiveness of biofuels for blending.

Germany’s love affair with biofuels will likely require consumers to adjust to higher prices at the supermarket as well as at the pump, and greater demand for oilseeds and increased biodiesel production will also require some adjustments by both wheat flour millers and feed producers.

FLOUR MILLING

In Germany, milling has traditionally been the domain of family-run enterprises whose ownership often spans generations. There are about 130 mills processing more than 5,000 tonnes of wheat per year. Just six of those mills processed more than 200,000 tonnes per year. In the north, there are only 1.7 mills per million people, while in Bavaria, Germany’s largest state, the figure is 7.2 mills per million people.

Despite the large number of operating mills, well over half of German flour production is now controlled by just three companies.

Hamburg-based VK Muehlen AG, one of the largest milling groups in Europe, has the largest share of the German market through its subsidiary Kampffmeyer Muehlen AG. It also has milling operations in Poland and Hungary.

Werhahn Muehlen KG, based in Neuss in the Ruhr Valley, has the second-largest share, while Grain Millers, which owns the single largest mill in terms of output (Rolandmuehle in Bremen), rounds out the top three, grinding about 350,000 tonnes of wheat and rye per year.

Wheat flour consumption has been gradually increasing, permitting millers to continue to prosper. Most of them are members of Germany’s renowned “Mittelstand,” the medium-sized enterprises that are the backbone of German milling industry, which employs about 5,000 people.

Mill closures take place, but they are mostly limited to small mills, which were often sideline operations for their owners in the first place, processing less than 500 tonnes per year.

CONSUMPTION PATTERNS

German millers have benefited from two consumer phenomena that would appear to conflict: family meals and fast food. On one hand, there is the traditional consumption at mealtimes of bread. Indeed, dinner in Germany is referred to often as “Abendbrot” or “evening bread,” when bread and rolls are eaten with cheese and cold cuts in most homes.

On the other hand, the trend toward non-traditional eating habits — i.e. fast food — has helped to gradually raise percapita consumption of wheat to a level of 53.5 kilograms (kg). In addition to more flour-based snacks, this means visits to hamburger restaurants, the even more ubiquitous Turkish doner kebab stands, and kiosks selling sausages. Wheat-based products, such as buns, pita pockets and rolls, are a key part of every fast-food meal.

Rye bread has been a traditional staple in Germany, but it has been in slow decline on a per-capita basis for decades, as German consumers have come to prefer whiter, lighter and sweeter breads. Rye consumption now stands at just 9.4 kg per capita versus 13.2 kg two decades ago.

WHEAT, RYE AND BARLEY

Germany is self-sufficient in, and frequently an exporter of wheat, barley and rye. These three grains totaled 38 million tonnes of the country’s grain production (46 million tonnes) in 2005. The price supports of the E.U.’s intervention system help sustain a level of production well above national and European demand.

Only about 25% of Germany’s 2005 wheat production total of 24 million tonnes was needed to cover domestic milling needs. Almost half of the crop is high-quality wheat, and much of it is traded throughout the E.U. The remainder is used by the feed industry and for industrial uses.

Of the 12 million tonnes of barley produced in 2005, much of it still goes into intervention stocks and then is rerouted for exports, mainly to Iran, Saudi Arabia and other Persian Gulf countries. Germany’s malting plants take all the barley that does not exceed the maximum protein level for brewing, and usually need to import malting barley from France as well. The prolonged decline in demand for rye had resulted in up to one-third of the crop going into E.U. intervention stocks. Since the intervention price was the same for all grains, this was the best outlet for growers. In 2005, the E.U. removed rye from its price support system.

Rye is the most suitable grain crop for the sandy soils of northeastern Germany. Without the intervention price support, rye has become economical as a component in cattle and hog feed. Formerly producers of compound feed resisted rye, but prices as low as €70 in recent years have convinced them to partly substitute it for maize and wheat in hog and cattle rations.

ETHANOL

More than anything, rye growers are counting on political support for ethanol production to sustain them.

Despite the prolonged hype over biofuels and the stimulus provided by the Kyoto Protocol, Germany’s ethanol industry has been slow to take off.

Today, there are three ethanol plants, all started up in 2004 and 2005. They are located in eastern Germany, where wheat and rye greatly exceed the demand of the declining population for food and feed, and where plant construction costs receive a state subsidy of up to one-third.

Two of the plants near the Polish border in northeastern Germany, owned by the Sauter Group, operate on rye, with annual capacity of a 500,000 tonnes. The third plant, near Leipzig, has a capacity of 700,000 tonnes of wheat per year.

These amounts do not constitute a supply threat to German flour mills. However, some millers are worried that wheat demand for ethanol, along with reductions in wheat planting in favor of rapeseed, will drive up prices.

The Ukrainian Grain Association (UGA) was founded seven years ago with the grain trade as the basis of its membership. Today, seventy of its members are corporations and the rest of the membership is made up of private individuals. The principle members are large international grain trading companies such as Cargill, Toepfer, Glencore, Louis Dreyfus, Bunge, W.J. Trading and Ramblers. In addition to these there are a large number of local grain processing companies, some of which are large holding companies in their own right.

World Grain recently talked to Nikolay Kompanets, founding president of the Ukrainian Grain Association and discussed the association’s role in the reform of the country’s grain industry, as it becomes a major world player

WG: First of all, please tell us something about the activities of the Ukrainian Grain Association.

Kompanets: The president and board of directors of the association represent the interests of all grain exporting and importing companies to the government at various levels. For example, when a problem (with wheat shortages due to crop failure) arose in 2003, the Ukraine had to import grain. The association responded well in this crisis to remove government obstacles to imports. On the other hand when it is necessary to export wheat, the association is there to facilitate the trade.

WG: What about reform of the grain sector?

Kompanets: We are preparing the needed laws, including laws regulating grain exports and laws for the support of the agricultural sector. Practically all laws that concern the development of agricultural markets pass through the UGA for discussion before being sent to the Presidium of the Confederation of Ukrainian Associations. One of the most important reforms has been the elimination of any subsidies on the import or export of grain or oilseed crops.

A problem is that the moratorium on land sales has put the brakes on agricultural reform. If land becomes a commodity, the production process will change radically, and grain will become a much more technologically intensive crop. The owner of the land will invest the money necessary. Today no one is doing this.

Everyone is afraid that someone will buy up all the land. But no one is going to take it away. The land should belong to someone who can take care of it and get a good harvest. Yes, today I believe this is the most critical question that must be resolved.

WG: How do you foresee the role of Ukraine in world grain markets?

Kompanets: In 2002 Ukraine became the number six grain exporter in the world. Of course the crop failure for milling wheat in 2003 set us back, but the Ukraine still exported 3.2 million tonnes. Furthermore, our country earned over U.S.$2 billion from the agrarian sector.

Naturally, the country is going to export wheat, barley and other grains. In most years at least 10 million tonnes will be exported. For now our domestic grain requirement is 20 to 22 million tonnes, but if the livestock industry develops that will go up to 30 million tonnes and the rest could be exported. In other words we have the ability in the medium term to export 30 million tonnes in a good year. Ukraine in any case will operate on a world level. Our grain production and export potential has barely been tapped.

All sorts of records were broken at the 16th Annual International Association of Operative Millers (IAOM) Middle East and Africa District Conference and Trade Show, which took place from October 4th to 7th in Tehran, Iran. Superbly organized by the Federation of the Iranian Associations of the Flour Milling Industry, the event attracted an unprecedented 950 participants to the modern and high-tech IRIB International Conference Center on the northern edge of the metropolis of 14 million. The number of trade show exhibitors for the three days also surpassed all previous years, with over 50 companies and organizations represented and several others having been turned away when the available space filled up early.

While the host country’s large and vibrant milling industry accounted for over two thirds of the attendance, 350 people from 34 other countries came as well. Neighboring Turkey’s mills and equipment suppliers sent the largest contingent with 59 and Egypt the next most with 29. Thanks to their high profile in Iranian mills and in grain and nutrition related government agencies and research centers, there were 120 women, more than ever before, to listen to presentations by milling experts from five continents.

In his opening day remarks, Abulfazl Ahmadkhanlou, president of the Federation of the Iranian Associations of Flour Milling Industries, stressed that the main challenge faced by Iran’s 300 milling companies is to improve the quality and nutritional value of their product. This in part explains the Federation’s enthusiasm to host this year’s IAOM Conference. The average Iranian consumes 120 kg to 150 kg of wheat per year, one of the highest totals for any country.

Up to half of the 12 million tonnes of wheat required by the country’s nearly 80 million people was imported in the past. However, Iran has made big strides in wheat production, and achieved self-sufficiency in the past year. But there is still a need to import up to 2.5 million tonnes of high quality wheat for blending. Furthermore the capacity of the country’s milling industry at 20 million tonnes per year is only 50% utilized meaning that mills must learn to compete on quality.

Papers at the conference covered the latest developments in flour milling technology, from grain storage and handling through every step of the milling process to bagging and flour correctors and improvers. At the request of the organizers the audience was treated to a discussion of flour fortification (see box on page 26) from many angles. Of the 25 presentations in the total speakers program of 560 minutes 40% was devoted to fortification.

On the final day of the conference the Iranian organizers passed the baton to Ahmed Bouiada, President of the Federation Nationale de la Minoterie du Maroc, the millers association in Morocco that will host next year’s event from September 25 to 27 in Marrakech. Complete information about that event will be available in December 2004 at www.aommarrakech.com. A goal of next year’s conference is to significantly increase participation by African millers, especially from French-speaking countries. To this end, plans have already been made to provide simultaneous interpretation of the speeches into French as well as Arabic.

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Whether China continues its policy of food protectionism or shifts to market governance, a shift in its grain policy could alter the tides of the global grain trade.

China is the world’s number one producer of wheat and rice, and second in maize after the U.S. Its total grain output at 435 million tonnes is, like its population, just over 20% of the world’s total. These facts alone mean that even incremental changes in China’s grain economy can cause major swings in the world grain trade.

Developments in the Asian giant’s cereal production have been far from incremental in recent times. In 2003 the country experienced its fifth consecutive year of declining production. Grain output has fallen 15.7% or roughly 80 million tonnes from the peak in 1997, and is now below consumption by 50 million tonnes. The deficit is spread among all three of the major crops. Thanks to better weather and such measures as lifting of ceiling prices, reduced taxes and more subsidies to farmers, this year’s winter wheat harvest is up 3% on the year but still well short of consumption. The U.S. Department of Agriculture forecasts rice production will stage a recovery, but still fall 10 million tonnes short of consumption. Maize is expected to decline again, but at a slower rate.

So far abundant state grain reserves, accumulated in a period of surplus production in the late 1990s, have been drawn down to make up for these deficits. Consequently the effect of China’s half-decade of grain deficits has yet to be fully felt on world markets. In fact, China’s leaders apparently experienced a change of heart about the usefulness of these huge reserves of deteriorating quality, and chose to accelerate their reduction by encouraging exports at the same time as the country’s wheat and rice production began falling well below internal demand.

With its inventories depleted, China now seems to be at a crossroads in its grain policy. On the one hand, it can use massive subsidies and other measures to attempt to continue the previously sacrosanct practice of food security, which dictated that the nation should be self-sufficient for at least 95% of its grain needs. Or it can follow a new route, determined by its comparative advantages and the principals of a market economy. This route would eventually lead to much higher grain imports and make it a more fully integrated member of the international grain economy. The latter course would be more in the spirit of China’s accession to the World Trade Organization in 2001, and would likely produce the greatest economic benefit for the country overall.

GRAIN SELF-SUFFICIENCY

The question may not be whether China should, but rather if it can reasonably maintain the level of grain self-sufficiency of its recent past, indeed of its long history. It is true that the Middle Kingdom accomplished the remarkable feat of quadrupling grain production from 100 million tonnes in 1960 to more than 400 million tonnes in 2000. China’s average per hectare yields of 3.8 tonnes for wheat and 6.2 tonnes for rice are well above the world averages of 2.7 tonnes and 3.9 tonnes respectively, though China’s figures may be somewhat inflated by under-reporting of planted area.

It is also true that worldwide alarms were raised once before when Chinese wheat imports spiked to 10 million tonnes in 1994, to make up for lower harvests at a time when both per capita grain consumption and total population were climbing more rapidly than now. That year Lester Brown’s book, “Who Will Feed China,” used straight-line projections to predict that China would need to import more than 200 million tonnes of grain early in the next century. However even before the book appeared, policies had been put in place that quickly raised production to such levels that within just a few years, excessive amounts of grain were being put in reserve.

This time around, the obstacles to a recovery of grain self-sufficiency are more daunting.

First of all, China’s breakneck economic development has taken much prime agricultural land out of production. Grain sown area has declined from 90 million ha in 1998 to 76 million ha in 2003. This year all kinds of measures have been announced by the central government to halt the rapid shrinkage of agricultural land. In the case of wheat, the problems have to do as much with falling water tables from increased use and long-term drought.

RURAL POPULATION AND COMPARATIVE ADVANTAGE

Another problem for the Chinese government is that promoting grain production can detract from the more critical goal of improving the livelihoods of China’s 800 million rural residents.

The rural/urban income gap in China is among the largest in the world, and is widening. In 1997 the ratio was 2.47: 1.0, but by 2003 had risen to 3.24:1.

To help raise their incomes, China’s skillful farmers have been given more and more freedom to grow what they choose. Large numbers have been switching from wheat, corn and rice to more labor intensive and higher-value crops such as cotton, oilseeds, fruits and vegetables, and even landscape plants.

To counter such trends the central government has had to provide extra incentives to make grain growing more attractive to peasants. This includes lowering Value Added Taxes (VAT) on grain production and subsidizing some inputs.

The government has other conflicting policy goals as well when it comes to grain. The country announced in 2000 that tree cover should be increased from 7% to 15% of the country’s land area. Much of this is to be accomplished by requiring that any field on land above a certain slope should be planted with trees, whether for fruit and nut production, forestry, or some other use. Cooperating peasants are compensated with wheat flour or rice from government stores.

Now with widening grain deficits, this policy seems to have been sidelined. In 2002 there were 44 million ha returned to forest, but only 3.3 million in 2003 and just 660,000 ha in the first half of this year.

In taking these marginal, terraced lands out of grain production, China has stated its faith that its large investments in biotechnology research — second only to the U.S. — will enable it to continue raising grain yields on good crop lands.

MAIZE PRODUCTION

China’s biggest impact on world grain markets in the last five years has been through corn exports. By rapidly drawing down its maize reserves, China vaulted into the position

of number two corn exporter after the U.S. In the process, more easily financed Chinese shipments, in smaller vessels over shorter distances, were able to shut out U.S. shipments from many traditional markets in East and Southeast Asia for a number of years.

This year China suddenly called a halt to most of its maize exports. A recovery of the feed industry, devastated in preceeding years by the SARS outbreak and the avian flu, has increased demand.

Over 66% of maize is for feed use. While 13% is for human consumption, more and more corn in China is going to industrial uses as well, ranging from fuel ethanol to starch and MSG. The industrial share is already nearly 12%.

There is now speculation about when China might begin importing maize from the U.S. The consensus is that China’s domestic prices will have to go up, and international corn prices and bulk vessel rates will have to come down before such shipments become feasible.

OPAQUE RESERVES

Lifting the veil of secrecy surrounding its grain reserves is one major contribution that China could make to the transparency and stability of international markets. The government does not publish any official reserves data, supposedly for reasons of national security.

Many analysts question whether anyone in China really knows what grain stocks there are in the country.

During the previous campaign to raise production, which started almost 10 years ago, responsibility for grain self-sufficiency was delegated to the approximately 40 provincial-level governments. Grain reserves are held by the central, provincial and various levels of local government constituting thousands of reporting entities. All would have various motivations for either under- or over-reporting both the strategic and commercial reserves — or they simply may not know the real total.

In addition more and more of the grain sector is controlled by private companies, which may or may not give accurate figures to the government.

THE CASE FOR TRADE

In 2001 China was accepted into the World Trade Organization. At that time many analysts expected an immediate rise in the country’s grain imports and

a reduction of exports. China did after all have to agree to liberalize its grain trade by 2005.

Instead the opposite happened. In 2002, China’s first full year of membership, grain imports fell, and exports rose. By providing VAT rebates and authorizing special railway tariffs, China was able to sustain its corn exports.

In one important area, however, China has mostly abandoned its policy of food security and government intervention. In the briskly growing and volatile oilseeds trade, China has already integrated into world markets. China, the world’s number four producer of soybeans at 16 million tonnes, could supply most of its own needs up until 1994. Since then it has seen its imports of beans rise to a peak of over 20 million tonnes in 2003. (See related story in WG’s March issue, p26.)

China’s policymakers recognized early on that grain security could not be extended to include the soybeans needed to sustain rising meat consumption. Only the virgin farmlands of Brazil could fill that demand. But even here the country’s commitment to free trade has shown some limitations, as the government used sanitary rules to halt South American shipments in the spring of this year when the domestic crushing industry suddenly found itself overpurchased at high prices.

One thing is without doubt: despite 800 million rural dwellers, agriculture will account for a constantly shrinking part of China’s economic output. Last year for the first time, the value of imported food and agriculture products exceeded that of exported products.

And China certainly can afford to buy more grain from the outside. As agricultural economist Lester Brown likes to point out in his controversial and alarmist predictions about world food price inflation, China’s $120 billion trade surplus with the U.S. could buy the entire American wheat crop twice over.

By the same token, China’s bulging government coffers would allow it also to follow the route most often taken by richer countries, by increasingly subsidizing its farmers. In May a 25% increase to the Ministry of Agriculture’s budget was announced, raising it to 250 billion yuan (US$30 billion), with the extra funds earmarked to support grain growing.

Will China, thanks to its growing economic might, feel sufficiently at ease in the international order to open its door to more and more imported grain? This will depend in part on how quickly China’s farmers respond to the latest round of government incentives. If harvests continue to falter, China will be forced to buy increasing quantities of wheat, rice and even maize. World grain prices could hang in the balance.

China’s grain growing regions

Northeast: Jilin and Liaoning provinces are where China’s maize production is most heavily concentrated, creating huge surpluses and leading to exports, which peaked at 15 million tonnes in 2002-03. Livestock feedlots and conversion of maize to starch and fuel ethanol are being promoted. Further north in Heilongjiang province, in addition to corn, japonica rice is grown on large farms. The surplus is sometimes shipped by rail and boat to the heavily rice-consuming southern provinces, but the overburdened railways have caused bottlenecks.

North-central plain: Two-thirds of China’s 90-million-tonne wheat crop is produced on the north China plains in Hebei, Henan, Shandong and in parts of Anhui and Jiangsu provinces. This winter wheat requires irrigation in what has become a severely drought prone region threatened on its northern and western margins by desertification. Throughout this wheat zone, falling water tables are drying up wells and leading to water shortages and increased soil salinity. Higher value crops, such as cotton, are competing with wheat for irrigation water from already depleted aquifers.

South and southeast: The staple crop of all the provinces on or south of the Yangtze river is rice, making up most of China’s 120-million-tonne annual harvest. Wheat consumption in this region is only a few kilograms per person but is going up as wheat-based convenience foods make inroads on traditional diets. Especially in the booming coastal provinces of Guangdong, Fujian and Zhejiang, new industrial parks, housing developments, expanded road networks needed to accommodate China’s burgeoning car culture, and even golf courses and theme parks have contributed to the loss of more and more paddy land. Guangdong and Shanghai are major markets for corn from the north.

Sichuan province: This is China’s most populated province with 115 million residents. It covers a huge basin on the middle reaches of the Yangtze River and has for centuries been a net supplier of rice to the rest of the country. The Three Gorges dam has improved navigation, allowing easier transport of rice in larger vessels down river and feed grains and oilseeds upriver. The province is the birthplace of two of China’s top four feed milling companies.

West: China’s population density thins as one moves north and west from Shanxi, Shaanxi, Ningxia and Gansu to Inner Mongolia, Qinghai, Xinjiang and Tibet. Grain growing becomes more of a subsistence activity and livestock husbandry is the main rural livelihood. Mutton production has gone up 62% in just five years thanks to big increases in sheep (20%) and goat (32%) herds, now estimated at 136 million and 162 million head. This has led to severe overgrazing in this semi-arid region, contributing to desertification. To avert environmental catastrophe, livestock numbers will have to be reduced, or more feed grains will need to be used.

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China’s flour milling sector faces rationalization amid changing consumption and quality demands

China’s wheat flour industry is by far the largest in the world, grinding up 115 million tonnes annually. Given its size, the rapid pace at which it is evolving is remarkable.
The changes are many and varied according to the segment, but the major trends can be neatly summarized as bigger mills and improved quality. With roughly two-thirds of milling capacity unused, rationalization has been inevitable. At the same time, higher incomes and diversifying diets have increased the demand for better flour.
The industry is structured along the lines of China’s economy, with one group of mills, many of them foreign owned, catering to the increasingly upscale tastes of the country’s prosperous urban residents. International retailing giants like Carrefour and Wal-Mart are becoming ever more commonplace in China’s big cities. It is no longer just the highest income groups but now also the mainstream urban shoppers who are buying routinely in such supermarkets. These stores tend to carry large selections of packaged baked goods, instant noodles and other wheat-based products, frequently supplied by joint venture food processing companies.
Many mills are exploiting the increasing demand for special purpose flour from these food processors that — with their brand reputations at stake — will pay a premium to get consistent quality with the right functionality.
Traditionally Chinese millers produced only medium gluten flour that was suitable for the noodles, steamed bread and rolls and dumplings that constituted the bulk of China’s wheat-based diet. Now with eating habits changing, and convenience foods playing a bigger part, the demand for high quality wheat has risen. In China “high quality” means either high gluten flour needed to make premium noodles and pan bread, or the low gluten flour that is best for soft products and biscuits.
The wheat varieties for these flours have had to be imported in the past, but now Chinese plant breeders are coming out with similar varieties adapted to China’s growing conditions. Farmers who make the transition to these varieties are getting a premium for their grain, which more than compensates them for the typically lower yields. Many villages are now limiting their members to only high-quality seed to simplify shared combine harvesting and avoid segregation problems.

MAJOR PLAYERS

When its economy began opening to the world, China proved irresistible as an investment target to flour milling enterprises in the neighboring countries of East and Southeast Asia, where flour consumption had in many cases long ago stopped growing.
Most of the leading millers in Japan, Taiwan, Hong Kong, Singapore and Malaysia have built, acquired or taken a share in flour mills in China, with the biggest wave of activity taking place from the late 1980s and throughout the early and mid-90s. Asian companies involved in this phase include Lam Soon, Prima Limited, Great Wall, Lien Hwa, Uni-President Enterprises as well as Federal Flour Mills and Malayan Flour mills.
Competing with these international players in the high quality segment is a number of domestic agribusiness groups. Four of them are beginning to consolidate their position in two of China’s major wheat provinces, where they have easier access to the lowest price wheat.

The Wudeli Group and Hualong Group in Hebei Province are both private companies and have total daily capacities of 3,000 tonnes and 2,400 tonnes respectively. To the south in Henan Province are the Lianhua Group and Jinyuan Flour Co., two state-owned enterprises with 2,500 tonnes and 2,200 tonnes of capacity, respectively. Along with Beijing’s Guchuan Group at 1,800 tonnes and situated in the same zone, these enterprises make up five of the six largest milling companies in China.
The biggest flour miller in China is COFCO (China National Cereals, Oils and Foodstuffs Import and Export Corporation). As its name suggests, COFCO is the former national grain trade monopoly. Now that China’s international and domestic grain trade has been semi-liberalized, COFCO has been repositioning itself by taking up stakes in grain and oilseed processing concerns. It controls seven flour mills with six brands in six provinces in the wheat zone and further south, approaching 4,000 tonnes of total capacity. COFCO reports it annually grinds 1.2 million tonnes of wheat for a total flour production of 850,000 tonnes.
More recently COFCO has partnered with ADM at their giant Zhanjiagang port grain and oilseeds processing complex to expand a flour mill to 750 tonnes per day.
ADM has expressed considerable interest in expanding its wheat flour milling operations in China, most recently voiced in June by the company’s chairman and chief executive officer, G. Allen Andreas. Following those comments, ADM later said its flour milling partners have expressed interest in significant expansion in a number of processing areas.
RURAL MILLING

At the opposite end of the industry spectrum there is extreme fragmentation. China’s official government statistics state there are 40,000 rural flour mills in China that have less than 50 tonnes daily capacity each, with a total annual milling capacity of 100 million tonnes among these mills. As much as 50% of farming is at a subsistence level, with peasants receiving flour back from village mills such as these for the wheat they have grown.

What is not known is the utilization of these tiny family and village run mills. Many are only operated in fits and starts on a tolling basis as farmers bring their wheat to them. It is probably safe to assume that the vast majority of these mills will vanish sooner rather than later, perhaps in the next 10 to 20 years, as subsistence farming declines in China’s drive toward modernization.

At the next level up are 7,800 mills classified as “small scale” with capacities of 50 to 100 tonnes per day. The bulk of these are owned by rural cooperatives that compete fiercely to provide low cost flour to a rural population whose income has been growing at barely half the rate of city dwellers.

Here the margins between wheat and flour are tiny, and the pace of rationalization has been rapid as well. In recent years groups of rural cooperatives have been forming loose alliances and building large modern mills with daily capacities of 200 tonnes or more, while closing their own individual small, inefficient mills in the process.

These new milling enterprises keep capital costs to a minimum by using 100% domestically manufactured equipment for which there are many suppliers, such as the leading Chinese mill designer, Golden Grain in Zhengzhou. Joint ventures such as Buhler Wuxi and Satake Suzhou ensure that the latest international milling technology is also available on a locally manufactured basis. This allows even the joint venture milling companies that service the high quality end of the market to keep investment costs down by buying in-country.

Much of the rural milling activity is concentrated in China’s prime wheat zone in the northern provinces of Hebei, Henan and Shandong. The three provinces account for 70% of China’s wheat production. (See map on page 40.) Average annual per capita wheat consumption in these provinces is 170 kg in contrast to just 2 kg in Guangdong province in southern China where rice predominates.

MIDDLE SEGMENT GETTING SQUEEZED

Getting squeezed between the high quality special flour producers at the top end and the low cost rural millers at the bottom are hundreds of medium-sized mills of 200 to 400 tonnes per day capacity.

This middle segment has the most state-owned enterprises. A high proportion of them are outfitted with expensive imported equipment. Neither able to match the quality parameters or marketing prowess of the top end producers, nor able to meet the low capital and operating costs of the rural millers, hundreds of these mills have been stilled. Included among them are a great many fully imported, top-of-the-line, European-made mills. The likeliest scenario for these nearly bankrupt companies is takeover by healthy milling groups.

Total flour consumption in China has increased at a rate of only 1% per year since 1997, and per capita consumption at only 0.3%. This is reflective of a higher living standard and diversified diets, and it has partly mitigated official worries over the steadily declining wheat harvests in China.

On the other hand, no growth or even a likely decline in flour consumption will speed the consolidation now taking place among millers.

LONG VIEW

The restructuring of China’s milling industry began only in the mid-90s. Minimal profitability in all but the still limited specialty end of the business has so far precluded participation by international milling concerns in this process.

Still, a long period of consolidation of domestic millers seems inevitable. Is it fair to conjecture that in China a level of concentration will eventually be reached equal to Europe and the United States? If that were the case then the Middle Kingdom would end up with just a few companies each milling 25 to 35 million tonnes of wheat per year.

Supposing that China’s milling industry becomes reasonably profitable by that time, these few companies would easily have the scale and resources to become global players themselves.

Milling in China Ч at a glance:

75 mills greater than 400 tonnes daily capacity

1,550 mills of 200 to 400 tonnes daily capacity

7,800 mills 50 to 100 tonnes daily capacity

40,000 mills of less than 50 tonnes daily capacity

8 largest milling companiesТ total daily capacity: 20,000 tonnes

Grinding capacity: 350 million tonnes per year

Capacity of small mills (<50 tpd): 100 million tonnes

2003 wheat utilization: 105 million tonnes

2003 milled wheat: 90 million tonnes

2003 flour consumption: 77 million tonnes

Flour consumption per capita: 58 kg

Flour consumption growth since 1997: less than 1% per year

Non-commercial (on farm) production/consumption: 60%

Flour end products: 50% noodles

Chinese millerТs acquisition expands geographic reach, product mix

HONG KONG, CHINA Ч New Dragon Asia Corp. has acquired the assets of a flour manufacturing facility valued at $1.33 million, which is located in Penglai City of Shandong Province.

“The acquisition will expand New Dragon AsiaТs production capacity by approximately 30% and contribute an estimated U.S.$3.0 million in additional sales annually. Furthermore, it will provide resources to address ChinaТs rapidly growing economy and strong consumer and commercial demand for instant noodles and other flour-related products,ТТ said Heng Jing Lu, chief executive officer.

The newly acquired facility, which utilizes Swiss machinery as well as production technology from Japan and Korea, has daily production capacity of 100 tonnes.

Lu said that the acquisition complements the companyТs ongoing strategy to expand New DragonТs geographic reach and product mix, with a particular focus on attracting commercial customers. As an example, he cited an order for specific-use flour from purchasing agents of KFC in China, potentially worth over U.S.$1 million. KFC, a subsidiary of Yum! Brands, has opened 700 locations in approximately 150 cities in China since 1987. “The production of flour with specific commercial applications represents an important component of New DragonТs growth strategy,ТТ said Lu.

He added that the company is focused on expanding its presence in international markets, as well as urban markets in China.

In July 2004, the companyТs flour products received Grade A certification by the China Green Food Development Center, an organization solely authorized by the Chinese government to issue the “greenТТ and organic label to food producers.

“As our customer base expands in and outside of China, the green food label is particularly important,” said Lu.

Export sales in 2003 represented approximately U.S.$1.14 million. Lu noted that the company is supplying trial orders to the Canadian market and that Korea continues to be an important market, with New Dragon exporting approximately 80 million (35g) packets of noodles to Korea in 2003, representing approximately 3% of total sales.

Lu noted the company is continuing its efforts to penetrate supermarkets and chain stores in ChinaТs urban areas by focusing on raising consumer awareness of New DragonТs brand name and products.

Headquartered in Shandong Province, New Dragon Asia markets its product line through a network of 216 key distributors and 16 regional offices in 27 Chinese provinces with an aggregate production capacity of approximately 110,000 tonnes of flour and more than 1.1 billion packages of instant noodles.

A consolidated, more efficient feed industry is emerging, with scaled up plants and improved infrastructure.

In the Yangtze Delta port of Zhanjiagang north of Shanghai, an ADM soybean extraction plant can crush 13,000 tonnes of imported beans per day. The state-owned company Nanyang Tianguan Enterprise Group in Henan province has opened a starch plant that processes 4,000 tonnes of wheat daily. At the northeastern Port of Dalian, a new malthouse soaks 1,500 tonnes of foreign-sourced barley per day. Further north in Jilin, a recently completed plant will consume 1 million tonnes of maize per year to produce 300,000 tonnes of fuel ethanol.

Each of these facilities ranks among the largest of their type in the world. They are evidence of the rapid transformation taking place in China’s grain processing industries.

The trend is now toward greater efficiencies through bigger and bigger plants consolidated into industry groups with the financial resources to build them. In flour milling (see article on page 46) the construction of plants of 500 tonnes per day or more — despite huge nationwide over-capacity — is accelerating.

During the first two decades of China’s economic opening, the main story was rapidly rising grain and meat consumption, making easy the entry of large numbers of new industry players. Since 1997 total grain consumption has leveled off, and per capita meat consumption in the cities, but not the rural areas, is growing slowly now. China, it seems, has already reached the level of development where grain-based foods are a decreasing part of the diet, and only increasing industrial and feed use of grains in larger more efficient plants will maintain total consumption levels.

PORK DOWN — POULTRY, FISH UP

A change in China’s meat-eating habits, and commercialization of China’s meat and aquaculture industries offers the most potential for increased use of feed grains and soybean meal. Indeed, the huge overhang that exists for soybean crushing capacity (60-million-tonne capacity vs. 30-million-tonne crush) and industrial feeds production (150-million-tonne capacity vs. 80-million-tonne output), indicates that major companies are betting heavily on this.

Though hog inventories have grown, the share of pork in China’s meat diet has fallen from 85% to 65% already since the mid-1980s. At the same time poultry’s share has increased from 10% to 20%. Eight out of 10 hogs are of the backyard type, but poultry production is much more commercialized, with breeding, hatching, feed, slaughtering and further processing done by large companies who work with contract growers, some of which are becoming sizeable operations themselves.

At less than 12 kg per capita, China’s poultry consumption is still quite small compared to other ethnic Chinese societies like Taiwan (34 kg per capita) or Hong Kong (57 kg per capita). Thus the upward potential seems high. And as the share of backyard production inevitably decreases, the largest feed milling groups and oilseed crushers will reap the biggest share of the growth in demand from the integrated poultry operations.

In pork production a transition to feed lots has already begun. One unknown is whether intensive feeding of hogs over a shorter lifespan in feedlots versus backyards will lead to greater or less feed consumption per animal. When one considers that China produces half the world’s pork, and has 470 million hogs, the vast majority of which are still in farmers’ backyards, this question takes on significance.

What is certain is that greater feedlot production will mean more use of industrial feeds from larger companies, further contributing to feed industry consolidation.

AQUACULTURE

China produces more than 70% of the world’s farmed fish and shrimp. In 2003, China reported production of 17.4 million tonnes of cultured freshwater fish, 520,000 tonnes of cultured marine fish, and 490,000 tonnes of cultured marine shrimp.

The potential of this so-called ‘specialty market’ to create growth in China’s feed industry should not be understated.

Already some oilseed industry insiders reckon that as much as one-sixth, or 5 million tonnes, of China’s total soybean meal consumption is going for aquaculture uses. Most aquafeed rations contain 25% to 30% soybean meal, but soybean meal inclusion can be as high as 50% in some fish feeds.

Total feed and soybean meal demand should keep rising steadily as consumption of fish and shrimp goes up and the industry continues to shift away from traditional manure-based freshwater and trash-fish based marine fish farming practices. Adoption of high quality feeds and modern culture techniques help farmers eliminate water quality and other environmental problems that are associated with traditional technologies and low quality feeds. It also allows for production of “green” aquaculture products that are healthier and that meet the demands of increasingly more discriminating consumers, both domestically and abroad.

The Chinese government and U.S. soybean producers have been jointly promoting the nutritional benefits of soy-based feeds and feed-based aquaculture in terms of producing higher value, better quality products. Part of the task is convincing operators that both fish quality and farmer profit improve with the use of high-quality feeds and sustainable technologies. As fish farming becomes more the domain of agribusiness and less of peasant households, this educational process will be easier.

Recent expansion of the Chinese aquaculture industry into the offshore ocean environment, to produce high-value marine fish in submersible cages, will further broaden the market for high quality fish feeds. Steady growth in this new sector is forecast, with strong backing from the Chinese government.

To meet the growing demand for quality seafood products, the government has mandated that future increases in production may come only from aquaculture, providing expanded opportunities for aquafeed industries.

FEED INDUSTRY CONCENTRATED

Like oilseed crushing, where the ADM/Wilmar Group/COFCO combination have a 20% share of crushing capacity — and a much higher share of the biggest, most modern plants — the feed industry is becoming more concentrated.

The leader is Thailand’s CP Group which invested heavily in the 1980s and ’90s and has around 110 mills producing 7 million tonnes of feed in 29 provinces. This represents more than half of the company’s total production, which is spread among a dozen countries, and helps CP rank among the top five feed companies worldwide. CP Group’s strategic focus in China is now on value added products through investments in integrated swine and poultry operations with further processing, some of which are in special sanitary zones and are targeting export markets.

The Hope Group, a private Chinese company based in Sichuan Province, is the number two player with 50 feed plants.

The company and its founders, the Liu brothers, have achieved a near legendary status in the annals of Chinese business. It was started by four brothers in the early ‘80s at the outset of the Chinese economic reforms, when there was no modern feed milling industry at all. They are said to have sold their watches and bicycles in order to finance a quail and chicken hatchery. Next they became one of the first private feed millers to offer special feed for hogs. Much of the Hope Group’s expansion came through the acquisition and turnaround of numerous nearly bankrupt state-owned feed mills in the last 10 years.

In 2001, Forbes Magazine estimated the Liu brothers’ combined fortune to be the largest of any family in China. The Hope Group has diversified into the dairy industry, banking and real estate development. In 1995 the four brothers have split up the feed milling assets, resulting in three new affiliated feed companies: New Hope, East Hope and West Hope. Liu Hongyao who remains as president of the Hope Group is one of the most influential businessmen in China, and has won much recognition for his philanthropic activities.

Tongwei Group in Sichuan, which is a leader in aquafeed, and the Liuhe Feed Co. in Shandong each have around 2 million tonnes of feed production and round out the top four in the industry.

Consolidation still has some ways to go, however, as this quartet makes up less than 20% of all compound feed production in China.

STORAGE AND TRANSPORTATION INFRASTRUCTURE

One obstacle to lower feed ingredient costs and to the creation of even larger grain processing facilities, drawing raw material and servicing customers over ever wider areas, has been transportation bottlenecks and insufficient storage infrastructure.

Much has been done to solve these problems in the last decade. A World Bank-funded program carried out in the 1990s — the largest ever for the purpose — added several million tonnes of modern grain storage in numerous sites along major rivers and ocean ports. Indeed with declining strategic reserves and harvests, there may be a large excess of grain storage capacity in China now.

Ocean ports where most of China’s new soybean crushing capacity has been located have received much private investment to build state-of-the-art facilities for quick unloading of soybeans and other grains from Panamax vessels.

The overburdened state railway system has not received the same influx of funds and has been subject to huge strains to transport minerals to fuel China’s industry. This competition for rail capacity has complicated the internal movements of domestically produced grains.

On the other hand a rapidly expanding network of motorways, much of it privately financed, is facilitating delivery of product from processors to customers over larger areas, threatening smaller local feed and flour millers whose main competitive edge had been proximity to their customers.

UNPRECEDENTED SCALE

With the largest single market of any country, and much-improved transport and storage infrastructure, China is presenting an opportunity for unprecedented scale in plant size and industry consolidation in grain processing. In oilseeds and feed, multinational companies have stepped in to take advantage of expanding demand from the meat and aquaculture industries. Homegrown Chinese companies, more often private than state-owned, are demonstrating they too have the technical, financial and management resources to compete at the same level — but only within China for now.

Wheat and maize have long been the dominant commodities of the international grain trade. However in terms of volume shipped and value in commerce, the soybean, technically a legume, has been gaining on its two rivals.

Global trade in wheat and corn has mostly hovered in the range of 100 to 110 million tonnes and 70 to 80 million tonnes, respectively, for more than 20 years. On the other hand soybean shipments have shot up from 31.6 million tonnes in 1995-96 to 67.5 million tonnes forecast for 2003-04, according to United States Department of Agriculture’s estimate. Further raising the soybean’s profile has been a more than doubling in prices to the highest levels in more than a decade at well over U.S.$300 per tonne in the first quarter of 2004.

China’s relentless economic growth and rising living standards account for over two-thirds of the increased world trade. The country’s imports of soybeans are expected to reach 23 million tonnes in the 2003-04 shipping season; in the 1995-96 season, China was still importing less than one million tonnes. China’s own soybean harvest at 16 million tonnes in 2003 is the fourth largest in the world, but it has failed to increase significantly in recent years despite greater demand and government measures to protect and stimulate the crop.

Underlying the sharp rise in China’s soybean imports has been a huge expansion in China’s soybean crushing capacity, fueled by domestic and international investment. That capacity is now estimated by industry analysts at 55 to 60 million tonnes per year, up from less than 20 million tonnes in 1995.

It is clear that the industry expects China’s soybean use to continue going up. The actual crush in 2003 was 24 million tonnes, taking up only about half of installed capacity. In 2003 alone, China’s soybean crush went up by around 3 million tonnes, but an additional 7 million tonnes of crushing capacity were added.

CONSUMPTION DRIVING DEMAND

Increased soybean meal demand is partially explained by rising per capita meat and fish consumption. The average urban dweller consumed 43 kilograms of meat, eggs and poultry in 2002, a 26% rise since 1994. In the countryside, the figure was 22 kg per capita, but the increase was 44% over the same period. Aquaculture products consumption has increased 55% since 1994 to 13.2 kg per urban resident in 2002. Poorer rural dwellers consumed only 4.4 kg, but that was a 66% rise.

However one must go deeper than these trends to explain the huge jumps in China’s soybean consumption. Most important has been greater soybean meal inclusion in animal feed production. (See related story, “Soy’s growing importance” in China’s feed industry, in WG’s June 2003 issue, page 28; E-Archive #64035.)

The expansion and modernization of China’s feed milling industry, where new investment peaked in the early ‘90s, has led to an increase in the share of industrially produced compound feeds, and therefore of soybean meal, in China’s overall feed use. Soybean meal and equivalents were only 8.7% of all feed in 1994-95, but by 2002-03 that had risen to 15.5% out of 140 million tonnes of total feed. Yet China still has some way to go to reach the level in most developed countries, which is in the 20% to 25% range.

PORTS SEE PROCESSING BOOM

China’s soybean production is centered in the northeastern provinces of Heilongjiang, Jilin and Liaoning, as well as in Shandong, opposite Korea. The old crushing capacity is located inland away from ports in these regions, and consists of hundreds of small and medium sized plants of typically 100 to 400 tonnes per day capacity, with just a handful of facilities that process above 1,000 tonnes per day.

Many of these facilities operate only a few months a year immediately after the harvest, and a large number — 400 to 500 — of these plants have been shut down permanently. This former capacity may have amounted to 15 million tonnes per year and was fragmented among almost 1,500 plants just six years ago.

The new crushing capacity, on the other hand, has been built at deepwater ports and close to population centers around which modern integrated poultry operations and aquaculture farming are concentrated. These new plants dot China’s thriving coastline from Dalian in the northeast to Guangxi province bordering on Vietnam. Some industry insiders put the number of facilities built in recent years — almost all of which process more than 1,000 tonnes per day — at more than 50. All of them are set up to process imported beans, and they explain the huge increases in China’s soybean purchases abroad.

The booming Chinese market has been a boon to some specialized international equipment suppliers.

One Indiana, U.S.-based grain storage and handling company has already installed multiple units of a new model of its most powerful silo-bottom reclaimers at a number of sites in China that permit storage of 6,000 tonnes of soybean meal in 24-meter diameter concrete silos with fully automatic discharge rates of 400-tph. The company told World Grain that these capacities for meal are already substantially larger than anywhere else in the world and that in response to new demand from China, it designed a ‘Super Silo and Reclaim System’ for 16,000 tonnes of meal with automated discharge.

While there are still a great many players, the new investment in large scale plants has already led to considerable consolidation in the industry. The dominant force is the ADM/Wilmar Group in partnership with Cofco, China’s largest state grain company, with installed daily capacity of 30,000 tonnes. Their flagship operation is East Oceans Oils and Grains, located on the Yangtze River north of Shanghai, where an expansion to more than 12,000 tonnes daily capacity was completed early this year, making it one of the largest crushing facilities in the world.

The same companies control 12 other operating entities in China, and account for about 20% of the total oilseed crush in China. Another global player, Cargill, has two crushing ventures in southern China, one of which is slated for expansion to 6,000 tonnes per day.

The biggest domestic company is the Huanong Dalian Group which is now operating six plants with about 11,000 tonnes of total capacity. In 2003 the company reported crushing 3.5 million tonnes of beans. It will soon be building a new facility a few hundred kilometers up the Yangtze River in Nanjing.

A number of other larger state-owned soybean crushers in China’s northeast region have begun to reposition their operations, tying up with local investors to build large plants in ports to process lower cost foreign beans arriving in panamax vessels. The Port of Dalian, which offers 1.2 million tonnes of grain elevator capacity — thanks to a World Bank project completed in the late 1990s — is the site of several projects.

One of them is by Japan’s biggest oilseed crusher, Nisshin Oillio, which is beginning construction of a 2,000-tonne-per-day plant adjacent to its existing 800-tonne-per-day plant. The company intends to exploit China’s lower manpower and energy costs to ship meal, edible oil and soy-based products to its nearby home market, which could lead to a reduction of output there.

Indeed Japan is already taking more than two-thirds of China’s meal exports, which may greatly expand given the extra capacity of these efficient plants situated at large ports. Meal exports have yet to exceed one million tonnes per year. Still, several Southeast Asian countries have for some time been getting regular shipments from China, which enjoys several advantages over far away suppliers in North and South America. Smaller vessels of 5,000 to 10,000 tonnes are practical over the shorter distances, give access to shallower ports, and, with the quicker transit time, ease the financing burden.

The fact that many of the new plants have been designed for high protein meal — though there is little demand in China for it yet — indicates that soybean meal exports were part of their strategy from the outset.

Another impetus to increased soybean meal exports is that China still imported 1.7 million tonnes of edible oils in 2003. The country’s newly built crushing capacity could satisfy that demand, so long as the 7 million tonnes of meal produced to make that quantity of oil could be exported at satisfactory prices. If this occurred, China could gain the lion’s share of the market for imported soybean meal in other Asian countries at the expense of existing suppliers in the Western Hemisphere and India. In 2003, total Asian soybean meal imports were around 9 million tonnes.

SOYBEANS TRADE

China has added soybean processing capacity at a tremendous rate because of very healthy gross crushing margins. Oil and meal prices based on the higher price of domestically grown soybeans guaranteed handsome profits to the modern factories processing lower-cost imported beans.

Now with the doubling of world soybean prices and a temporary slowdown in Chinese demand due to the avian flu, one could ask whether too much capacity has been built. However, investors can still comfort themselves by multiplying China’s 1.3 billion people by Taiwan’s soybean annual crush of 90 kg per capita. For China to attain this level it would need to crush nearly 120 million tonnes, or twice its current capacity. It could be only a question of time, perhaps years rather than decades, before global soybean trade volumes surpass both wheat and corn.

Soybean’s wide variety of applications

by Dr. Irfan Hashmi

The astounding amount of uses for soybean products is the primary factor in its growing demand, particularly in food products but also for industrial uses. The whole soybean contains about 40% protein. Soybean uses can be divided into three major categories: oil products, whole soybean products and protein products.

Oil Products

The oil products can be broken down into glycerol, fatty acids and sterols. Refined oil products can have either edible or industrial uses. Edible products include coffee creamers, margarine, mayonnaise and pharmaceuticals. Technical uses include anti-static agents, caulking compounds, fungicides, inks and paints.

Whole Soybean Products

Whole soybean products are primarily edible products such as the seed; bean sprouts; baked soybeans; full-fat soy flour used in various products of baking; roasted soybeans used in confectioneries, soy nut butter and soy coffee; and other soy uses in traditional foods, such as miso and tofu. These are excellent sources of protein and dietary fiber.

Soybean Protein Products

Soy protein products can be categorized in four groups: soybean meals (which are used in many feed products), soy flour, soy concentrates and soy isolates. The edible uses include baby food, candy products, cereals, yeast and beer. Examples of technical uses are adhesives, antibiotics, binders, cosmetics, plastics and textiles. Soybean meal is considered a premium product because of its high digestibility, high energy content and consistency.

Isolated soy protein is the most refined form of soy protein and is often used in finished meat products to improve eating quality, cooking tolerance and enhance flavor. It is also commonly used in baked goods to boost nutritional value. Its most common form is powder, but can also come in granules and structured fibers. Isolated soy protein contains 90% protein on a dry basis.

Soy protein concentrates are prepared from defatted soybeans by removing the water-soluble carbohydrates. Soy protein concentrates take on the flavor of the foods they enhance and tend to improve the overall quality because they retain moisture and will hold flavor through multiple cooking processes. They contain about 70% protein and 23% dietary fiber. The two most common forms of soy protein concentrates are textured soy protein concentrates and powdered functional soy protein concentrates.

Soy flour is high in protein (twice that of wheat flour) and low in carbohydrates and is usually mixed in with whole grain flours in recipes. It has a wide variety of uses such as in baking and in sauces. Soy flour is the least-processed form of soy protein and typically contains higher levels of dietary fiber. Soy flour is prepared by grinding and screening soybean flakes either before or after removal of oil, and protein content varies from 40% to 54%. Soy flour also varies in fat content, particle size and the degree of heat treatment.

There are two types of soy flour available, full-fat flour and defatted flour, from which the oil has been removed during processing. Textured soy flour is made from defatted soy flour and is compressed and dehydrated. Available in flakes, small strips, chunks or granules, it maintains the texture of foods.