Going from margin to mainstream

Rice importation and production have been on the rise in eastern and southern Africa.

As a cereal crop and staple food, the place of rice has rapidly shifted in many countries of eastern and southern Africa from the margin to the mainstream. Both importation and local production of rice have been on the rise.

In rapidly developing Mozambique, high quality rice is now the preferred grain of the burgeoning urban middle class. Colorfully packaged Thai varieties occupy entire aisles of shelf space in gleaming new supermarkets of Maputo, Beira and Nampula, while maize meal dominates only in public markets.

Foreign firms, sometimes backed by their governments, have acquired vast tracts of farmland for creation of rice plantations. China and Vietnam are reported to each have 100,000-hectare grants in southern Mozambique.

rice-harvesting-kpl-tanzania

Rice harvesting at Agrica’s KPL farm in Tanzania’s Kilombero Valley 450 km from Dar es Salaam. Photo courtesy of Carter Coleman.

Among the geographically and culturally diverse countries from Khartoum to Cape Town, the two top rice producing countries are Madagascar and Tanzania with 2.5 million tonnes and 1.4 million tonnes, respectively.

The top importing country is easily South Africa with 1.1 million tonnes, thanks to its big economy and large numbers of urban consumers. Three other aspiring middle-income countries each buy about 500,000 tonnes per year from outside: Mozambique, Kenya and Angola.

In all of sub-Saharan Africa, only economic giant Nigeria tops Madagascar as a producer and South Africa as an importer. A few national and sub-regional snapshots serve to illustrate the enormous variety of the rice industry in this half of sub-Saharan Africa

MADAGASCAR

Among African countries, rice plays the biggest dietary and economic role in the giant Indian Ocean island where the 23 million people consume about 300 grams daily per capita.

Milled rice production of around 2.6 million tonnes is on a par with Nigeria and accounts for nearly 20% of all rice grown south of the Sahara. Imports of around 300,000 tonnes per year ensure variety and high quality packaged rice to city dwellers while cheaper varieties and grades help keep a lid on prices. Poor farmers grow the crop as much for subsistence as for cash.

MOZAMBIQUE

In an interview with World Grain, a top manager of a leading Mozambican food importer stated that rice imports have been increasing on a year-to-year basis by 5% to 7%. Maputo accounts for 60% of the country’s total rice imports, he estimated. The rising middle class overwhelmingly prefers rice to maize meal.

Large importers bring rice in 25-kg and 50-kg bags in break bulk vessels saving $7 or $8 per tonne over containerized shipments. Vessels sizes are mostly 5,000 to 15,000 tonnes but sometimes 30,000 tonnes.

“New players are coming into the trade. Traditional wholesalers have begun their own imports in containers with their own brands,” the industry insider added. “More and more traders are now getting into rice imports.”

He estimates there are more than 50 importers now, but the top five still have a 50% market share.

KPL has a 500 kW biomass gasification plant powering 600 tonnes per day capacity silo dryers. The six MFS/Stormor silos have a total of 4,800 tonnes storage capacity. Photo courtesy of Murray Dempsey

KPL has a 500 kW biomass gasification plant powering 600 tonnes per day capacity silo dryers. The six MFS/Stormor silos have a total of 4,800 tonnes storage capacity. Photo courtesy of Murray Dempsey

In Maputo, 80% of the imported rice is from Thailand. It is almost all 5% broken, but just 10 to 15 years ago the standard grade was 25% broken, before shifting to 15% broken.

In the less prosperous center and north, the standard is still 15% broken. The share of 25% broken is now very small. There is also more Pakistan and Indian origin rice in the Beira and Nacala corridors. Basmati rice is a small but growing share of the market.

Local rice is a sweet, long grain. Production is increasing in the rain-fed southern zone where it does well and now accounts for about one third of total consumption that stands at 750,000 tonnes. Some high quality domestic rice is also available in Maputo supermarkets from various rice millers in the south.

TANZANIA

“In a good year, Tanzania is self-sufficient in rice production,” said Carter Coleman, CEO of U.K.-based Agrica Ltd, operator of a large commercial rice farm in Tanzania. He maintains that exports to neighboring Uganda, Rwanda and Burundi, all members of the EAC as well as to eastern and southern DRC, can exceed volumes of low-cost rice coming in from Asia.

Much of the incoming rice is smuggled via Zanzibar. The Tanzanian island has a special status in the EAC and is allowed to impose only a 12% duty on rice. Four or five companies bring rice legally to the island where it is rebagged and transported along the coast to small “pirate” or “dhow” ports as the local media calls them. Official data have shown Zanzibar with by far the largest per capita rice consumption in the world.

Coleman, who is also vice-chairman of the Rice Council of Tanzania, thinks that the 75% EAC import duty will be needed for some time. The Rice Council has issued a position paper that says East Africa is decades away from competing with Asian exporters of rice on a cost basis.

“Farming is rocket science and farming in Africa is like farming on Mars. You must be totally self-sufficient. You need 1.5 times the number of tractors and combines because parts are not readily available.”

Rice production in Tanzania is in four main zones including the Tsonga River Valley in the south and Arusha/Moshi area near Mount Kilimanjaro in the north.

Production is a mixture of corporate farms and smallholders. ETG’s Kapunga farm with 3,000 hectares irrigated via a 12-km canal from the Ruaha River near the Malawi border is one of the largest. It was a Japanese government project in the 1970s and was only privatized eight years ago.

Coleman remains optimistic about better government control over smuggling thanks in part to the media campaign of the Rice Council supported by its 350,000 smallholder members. Agrica’s Tanzanian farm has plans to install center pivots to increase irrigated area from 1,445 hectares to 3,037 hectares with cropping during both the rainy and dry seasons.

Small farmers have been benefiting from introduction of new varieties and better agronomic practices. In the past, rice was sown by broadcasting. Now more transplanting is being introduced. New varieties include hybrids and aromatic varieties related to basmati.

OTHER EAC

Elsewhere in the Great Lakes Region, rice has a long history as a cash crop in certain well defined areas with irrigation schemes such as the Ruzizi Plain between Lake Kivu and Lake Tangayika, straddling Burundi and South Kivu province of the Democratic Republic of Congo (DRC) as well as in Uganda on the flood plain below Mount Elgon near the southeastern border with Kenya.

Internationally funded projects carried out decades ago built dams and canals and leveled land in these areas and the local population was introduced to rice cultivation.

Indian rice producer Tilde has invested in rice farming and milling in Uganda, focusing on the basmati varieties it is known for.

In Rwanda, there has been a recent push to carve rice paddies out of the bottom of narrow river valleys throughout the country, but yields in some rain-fed highland areas can reach six tonnes per hectare.

A multitude of donors have funded projects to introduce improved seed varieties, fertilizers, mechanized farming implements, and better drying and storage facilities. The results are often mixed but progress has been made. In Bukavu, the largest city in South Kivu, the Heineken-owned Bralima brewery sources locally from the Ruzizi Plain nearly all of its rice used as an adjunct. It was still importing rice from Asia several years ago and its need has increased as beer consumption has risen sharply. In remoter parts of DRC, such as the interior of South Kivu province, rice is an important rain-fed, subsistence crop that is hand sown, manually harvested and husked. Yields rarely exceed one tonne per hectare. Kenya’s rice imports are large because it has negotiated an exemption to the EAC common external tariff that allows Pakistan rice to come in with a 35% duty in reciprocity for special treatment of Kenya’s tea exports to Pakistan.

SOUTHERN AFRICA

In South Africa, imported rice consumption mainly by middle and highincome groups in large cities has more than doubled to 1.1 million tonnes from 523,000 tonnes in 2000. Diversified food majors like Tiger Foods import and package rice under their house brands. Still, the per capita consumption figure is low among the 55-million population as maize meal remains the main staple among most groups.

The pattern is similar in other large countries like Zimbabwe and Zambia.

Oil rich, highly urbanized and food import dependent Angola has seen foreign rice consumption increase by a factor of seven in a span of 10 years from 65,000 tonnes to 450,000 tonnes.

HORN OF AFRICA

Imported rice and pasta are traditional food staples accompanying a semi-nomadic herding and trading way of life in Somalia as well as ethnically Somali Djibouti and the eastern Somali Region of Ethiopia. Smuggling is rampant so reliable import numbers are hard to come by. In Djibouti, trade data showing 120,000 tonnes of imports indicates consumption of over 120 grams per capita daily.

Rice production is a relatively new phenomenon in Ethiopia, where cereals cultivation is an ancient practice, but is starting to take hold. Planted area has increased by several times since 2005 and government is forecasting a 140,000 tonne crop for 2014-15. Foreign investors have been granted large tracts of untitled land in the water-rich tribal lowlands of the southwest to be converted to major rice plantations through costly investments in land preparation.

On the highland plain around Lake Tana, the source of the Blue Nile, in the last decade farmers have increasingly learned to take advantage of annual flooding during the summer monsoon season by sowing rice instead of seeing traditional grain crops drowned.

Gradually, local rice is becoming a part of the urban diet in Addis Ababa and regional centers, just as it is increasing its “share of stomach” in almost all large cities of Africa.

Original PDF article as appeared in the World Grain magazine.

IAOM MEA celebrates 25th anniversary

Middle East and Africa District attracts more than 600 delegates from 45 countries to its annual conference  in Cape Town, South Africa.

The International Association of Operative Millers’ Mideast and Africa Conference (IAOM MEA) returned to Cape Town, South Africa to celebrate its 25th year Dec. 3-6, 2014. Over 600 delegates, exhibitors, and speakers came together from 45 countries during the three days to renew old ties, establish new relationships and to exchange the latest  information on technical developments in milling as well as data and trends in wheat markets.

South Africa’s National Chamber of Milling (NCM) hosted the event for the second time in just over four years. The first IAOM MEA in South Africa took place in 2010 shortly after the first World Cup in that country.

In his welcoming speech, NCM Chairman Peter Cook made particular note of the progress of flour fortification in Africa with 19 countries now mandating the public health intervention compared to just two countries, South Africa and Nigeria, 10 years ago.

25th Anniversary

The Middle East and Africa region continues to account for nearly half of the world’s trade in wheat at 73 million tonnes in 2013-14, according to the International Grains Council, and much of the global increase in milling capacity. On this basis, the IAOM MEA has not only proved sustainable but has grown substantially over the last quarter century.

Melinda Farris, IAOM executive director, presented plaques of recognition to four long-time members of the IAOM MEA Leadership Council who have led the transformation of their annual conference from a modest gathering of 25 or so millers and grain industry representatives 25 years ago in Cairo into one of the global wheat industry’s premier events. The four included District Director Ali Habaj of Oman Flour Mills; District Chairman Merzad Jamshidi; Essa Al Ghurair, Chairman of Al Ghurair Resources LLC; and Martin Schlauri of Bühler AG, Switzerland.

Jamshidi, who has played a vital role in the important participation of Iranian millers in the district over the years, identified as a major accomplishment “just the fact we have been able to consistently keep the events attractive for both the millers and suppliers. After all, 25 years is a quarter of a century. As for the future, we are trying to get more of the mills’ key personnel coming to the show with custom-made papers to serve their needs.”

Furthermore, the  event will “go to countries where traveling would be a bit easier and could act as a hub.”

The event’s formula for success includes its benefit to and support from major wheat exporters as expressed by Sean Cowman, regional manager – Middle East and Africa of CBH Group, a cooperative owned by 4,200 Western Australian grain growers. He noted that the conference “is a unique and invaluable link to industry stakeholders.” He said it provides the connection of “Australian grain from our growers to the end users in the Middle East and Africa. We enjoy seeing customers and industry colleagues at this unique and well organized event.”

Bühler’s Martin Schlauri offered his own vision for the future, saying the event “will remain a fixed date in the agenda of the milling executive. Building up sub-regions in MEA will bring the IAOM values and contribution even closer to the markets. This would allow to further focus on topics of specific regional interest, such as processing of maize or other grains.”

Schlauri predicts that as has happened in developed countries already, in the Middle East and Africa the grain processing industry will be challenged by changing consumer expectations and trends, such as food safety or GMO issues in the raw material. “These topics and more shall be on the agenda of the future IAOM MEA conferences,” he said.

Food Security

U.S. Wheat Associates (USW) President Alan Tracy used his opening day address before key industry players from the world’s major wheat importing region to announce the launch of a major new food security initiative based on a proposed full liberalization of the world’s wheat trade. Such a measure would be the most effective way to provide “genuine food security to the world’s wheat importers.”

He pointed out that as the most important global food grain, wheat “provides 20% of the calories consumed every day on earth and 20% of the protein for the poorest half of human population. Demand is growing, but not every country that consumes wheat can produce wheat.”

The USW concept would be based on government-to-government sectoral agreements under the auspices of the World Trade Organization. “In exchange for eliminating tariffs, licenses and other trade barriers, the world’s wheat buyers would have guaranteed access to exportable wheat supplies even when world supplies are down.”

Trading Session

The emergence of the Black Sea and Baltic Sea regions as origins for wheat to the region has been one of the biggest shifts in Middle East and Africa grain trade in the last quarter century. Indrek Aigro of Copenhagen Merchants, Denmark, pointed out that the eight countries of the Baltic Sea region have seen wheat exports rise from 9 million tonnes four years ago to an estimated 17 million tonnes in the current marketing year, accounting for much of the near doubling in net European Union wheat exports to 40 million tonnes in recent years.

Total Baltic Sea region wheat harvest will be 52 million tonnes, exceeding the previous record by 15%. Saudi Arabia and Iran have become the main destination of Germany and Poland’s milling wheat. The two countries now have exportable surpluses of about 11 million tonnes.

“Germany’s wheat is reaching many new markets because of the surplus,” said Aigro. That amount will be 7.5 million to 8 million tonnes. Eleven years ago, the three Baltic countries of Estonia, Latvia and Lithuania had no exportable surpluses, but now they are shipping out two-thirds of their production.

Andrew Vorland of Glencore Grain BV, Netherlands, surveyed the supply situation from the Black Sea, noting that the 35 million tonnes of wheat exports from Russia, Ukraine and Kazakhstan this year will constitute 24% of world wheat exports.

“Black Sea wheat is moving to 100 countries these days,” he stated. Russia’s 6.2 million tonnes of wheat exports to Egypt and 3.6 million tonnes sent to Turkey account for 60% and 86%, respectively, of the wheat imports of the two countries.

Even South Africa, once dependent on the U.S. and Argentina, has become a major outlet for Russian wheat.

Jean-Pierre Langlois-Berthelot of France Export Cereales reminded the audience in his presentation that nearly 100% of his country’s wheat exports go to North African and West African countries, with Algeria, Morocco and Tunisia as the largest markets but growing volumes heading to the francophone countries of West Africa.

After Asia, the Middle East and Africa are the most important destinations for wheat exports from Australia, taking 40% of nearly 20 million tonnes in exports in the 2013-14 crop year with the trend lower this year. Nick Poutney, regional manager for Graincorp, Australia’s largest wheat exporter, explained that among the seven ports operated in the east of Australia by Graincorp, “each port zone has a specific supply and demand dynamic and quality parameters.” But this year all test weights are quite strong, he said.

Dan Basse, president of AgResource, Chicago, Illinois, U.S., in addition to moderating the trading session, provided his own animated and insightful prognostication for global grain markets in the coming years with statements such as: “We think the super cycle in agricultural commodities is kind of dead,” and that with the price of protein going up, “this is the year of species, not of grain.”

Exhibition

Ninety exhibitors from five continents and 20 countries were present at the trade show held jointly with the conference at the Cape Town International Convention Center. Turkey’s contingent of 23 exhibitors was the largest. Italy followed with 11 companies present.

A handful of firms have been present at nearly every IAOM. Ihsan Mustafa Aybakar commented, “As Aybakar, it is our 24th conference. It is not about business alone anymore. We all look forward to catch up with members of the industry. It is the biggest sectoral networking opportunity for the region. You get to meet mill owners, grain traders, equipment and service suppliers. We will be attending in the future.”

The largest groups of exhibitors were mill manufacturers, steel silo companies, and suppliers of flour additives such as enzymes and vitamin and mineral premixes for fortification.

Management Forum and Technical Sessions

During the first day’s session a series of world-class speakers challenged conventional management thinking and encouraged listeners to doubt their standard perceptions, explore the unknown and push for innovation in their approach to business.

The Technical & What’s New Session, taking up the entire second full day, provided a platform for 16 speakers to present the latest technological developments in all aspects of wheat milling. Jeff Gwirtz, president of JAG Services, Manhattan, Kansas, U.S., offered one of the three keynote speeches of the day, pointing out that in milling operations “problems may exist without you knowing it.” He described an approach relying on “the importance of checking and knowing your flour sheet to solve problems.”

Feed Milling

For the first time the conference featured a Feed Milling Technology and Trends Seminar, held on the third day. Diets in many of the countries of the region are improving to include more animal protein as economies develop and incomes rise. Many large wheat millers, most notably in Nigeria, have moved into the feed sector or are at least exploring opportunities.

African Milling School

Bühler’s Martin Schlauri as moderator of the management forum took the occasion to present Bühler’s own initiative to develop management skills in Africa by inaugurating its African Milling School in Nairobi after three years of planning and the construction of a building for that purpose at its milling service center. The first two courses are fully subscribed.

Schlauri has been named director of the school but will continue to  manage key account relationships. Noting the big increases in mill investment activity in the sub-Saharan region in recent years, Schlauri commented, “Africa is definitely on the move.”

FFI Workshop

The Flour Fortification Initiative (FFI) continued its long-running affiliation with IAOM MEA by holding a separate one-day workshop on Dec. 2 attended by about 60 public health officials, millers and NGO representatives.

FFI Director Scott Montgomery presented an FFI award recognizing the contribution of Abubakar Bakhresa, CEO of Said Salim Bakhresa & Co. Ltd., the largest milling company in Tanazania and East Africa, through its support since 2013 of national level mandatory vitamin and mineral fortification in Tanzania of all industrially produced wheat flour. Magdy Shehata of World Food Programme in Egypt received an FFI award as well in recognition of his six years of tireless work to institutionalize fortification of government-subsidized baladi bread.

IAOM MEA Dubai 2015

At the closing ceremony, Essa Al Ghurair, chairman of Al Ghurair Resources, Dubai, UAE, received the handover of the IAOM MEA District flag from Peter Cook. Organizers hope for a record turnout in late 2015 at the ever popular, thriving and business friendly air transportation hub where the event will be held for the fourth time.

Original PDF article as appeared in the World Grain magazine.

Just like old times?

Could global grain markets be entering a long-term cycle of steady expansion and stability reminiscent of the 30-year period following the inflationary food price spiral of the mid-1970s?

That prospect seemed to be the consensus of a number of leading agricultural trade economists and industry figures speaking at a major feed grain industry conference, Oct. 20-22, in Seattle, Washington, U.S.

The presenters also concurred that ample ocean shipping capacity will keep transportation rates low for the foreseeable future, and that a strong dollar should help keep the lid on cereals prices. The only clouds on the horizon appeared to be inadequacy of inland infrastructure to move crops to port in North America as in other grain surplus regions and the rising specter of non-tariff trade barriers based on GMO concerns.

The bi-annual event, entitled Export Exchange, brought 500 representatives of feed milling companies, grain traders, shipping companies and U.S. suppliers of maize and other coarse grains, corn milling and ethanol by-products like DDGS.

Attendees of the Export Exchange in Seattle in late October heard predictions of steady expansion and stability

Attendees of the Export Exchange in Seattle in late October heard predictions of steady expansion and stability

Two industry groups, the US Grains Council and the Renewable Fuels Association, were the principal sponsors and organizers. Many of the attendees came from countries that are major markets for U.S. feed grains, particularly in Asia, Latin America and North Africa.

Looming over the speakers and audience were the impending record U.S. and global grain harvests this year and larger surpluses.

"Now we are entering a period when commodity reserves are building. Ethanol no longer drives the market,” asserted Terry Barr, senior director of the Knowledge Exchange Division of CoBank, a leading U.S. rural lender. “When you look to agriculture you see much larger supplies coming into the market place.”

Markets are “building inventory that will mitigate volatility in the market place.” This was badly needed he observed, “We’ve seen 50% increases in world wheat trade in the last 10 years.”

Barr contrasted the current U.S. dollar strengthening to the periods of weakening in the mid-1970s and from 2004-2008. “Both run-ups in (grain) prices occurred during a period of devaluation of the U.S. dollar,” he noted.

According to Barr, “If the Fed moves interest rates higher, the dollar will go higher which will impact trade flows. It will put downward pressure on commodity prices, too.”

Terry Barr provided inight into a variety of economic factors that could impact the grain markets.

Terry Barr provided insight into a variety of economic factors that could impact the grain markets.

However, financial market impacts on grain prices will not be sudden. “We are not talking about rapid rises in interest rates,” Barr said.

While increasing agricultural productivity and a stronger dollar should combine to prevent price spikes for years to come, continued economic growth in emerging markets will assure steady increases in demand for feed grains, thereby underpinning markets.

Barr pointed to the twin giants of the developing world. “It is not advanced economies driving the global economy, it is more China and India,” he said.

Gazing into crystal

Marty Ruikka, president of The ProExporter Network, a consultancy specializing in forecasting grain market trends, made a wide range of predictions. Such forecasting is particularly necessary for companies who must plan investment in hard assets like grain terminals and milling.

In particular, he pinpointed one basis for future expansion of global grain trade.

“In the U.S., agribusiness yields are growing much faster than demand,” Ruikka said.

Ruikka highlighted the extraordinary nature of the last 10 years. “The ethanol building boom and Chinese food import boom have been drivers of profitability in agriculture,” he said. “We have never seen this before. There has been nothing like this in history when large groups have made so much in production agriculture.”

Gross return over total costs for soy beans and corn have ranged from 15% to 30% in four of the last eight years, even without government support payments or subsidized crop insurance payouts, according to Ruikka’s data. He said this was unprecedented.

Prior to the price run-up that began in 2004, “there were four decades of flat earnings in agriculture,” Ruikka observed.

He further commented on the global nature of agricultural expansion in surplus regions.

“There are three export hubs: North America, South America and the Black Sea. These export hubs have 13% of world population but are 53% of feed grain and oilseed production.”

Marty Ruikka provided comments on the coarse grains markets.

Marty Ruikka provided comments on the coarse grains markets.

For now the primary customers of Black Sea feed grain are in the Middle East and North Africa, but Ruikka prognosticates that “by 2020, the Black Sea will be a formidable competitor in world markets.”

But Ruikka touched on two factors that are adding to the U.S. surplus. There is a “very positive trend in animal production that means less feed to grow animals.”

Secondly, American consumers, by far the largest per capita meat eaters, have given up 20 to 30 lbs. of meat consumption since the global economic crisis that started in 2008, he said. This means that more U.S. coarse grains are available to meet increasing demand in countries with rising meat consumption.

Curtis Jones, global director of economic analysis at Bunge Global Agribusiness, put a number on the anticipated food trade expansion, forecasting that combined international shipments of corn, wheat and soy beans would increase by almost 40% over the next 10 years from 384 million tonnes to 534 million tonnes, with soy beans growing at the highest rate.

“Population and income are key drivers of agricultural product demand,” he observed.

Barriers and bottlenecks

Though the long-term market outlook appears bright on both the supply and demand side, many of the conference participants were preoccupied with more immediate and medium-term issues concerning distillers grains (DDGS) exports and inland transportation bottlenecks.

In August, China declared a ban on imports of DDGS from the U.S., citing GMO concerns. China accounted for 52% of total U.S. exports of 9.7 million tonnes in 2013-14, a record level and 18% of all DDGS consumption. Suppliers have scurried to divert the supply to other markets, but the rate of increase of U.S. exports is expected to slow. The surge began in 2006 when distillers grains DDGS exporters were only 1 million tonnes at the onset of the U.S. ethanol boom.

DDGS has become a major new component in the rations of many livestock in the U.S. and around the world. Of the 130 million tonnes of corn now being processed for ethanol, up to 30% is converted to the feed by-product. Supply is abundant. Cost of other feed grains and oilseeds determines the share of DDGS in compound feed once corporate livestock nutritionists have been brought up to speed on its uses.

It was news to many overseas attendees that the U.S. transportation infrastructure is currently not up to the task of moving record grain harvest to ports for delivery to burgeoning overseas markets. Grain must compete with unprecedented volumes of petroleum now being moved by rail as a result of the fracking boom in regions without pipelines.

“We think changes in internal transportation in the U.S. are structural,” Ruikka said. “Getting grain to market will cost more. It is a permanent feature of the U.S. having more oil.”

The advent of corn ethanol exports from the U.S puts additional strains on the railroads’ capacity to move grains. About 7% of U.S domestic ethanol production will be exported in 2014. “For most of summer, ethanol has been one of the cheapest motor fuels in the world,” he said.

This was a consequence of the fall in corn prices while petroleum prices were still high before their collapse in October.

“We think there will be a big push in ethanol exports,” Ruikka predicted, but he qualified it by saying they “will happen as elastic economic events.”

One source of increased ethanol demand could be more countries requiring ethanol blending to reduce air pollution. The U.S. mandates a 10% ethanol blending in gasoline, but outside the U.S., average blending is still less than 3%.

Bulk shipping

When it comes to ocean transport of grains, the picture turns rosy again. Peter Borup, president of Lauritzen Bulkers A/S, observed, “If you can get crop to port, there is no problem to transport it. The problem is with U.S. infrastructure.”

He predicted 5% to 20% annual increases in global bulk shipping capacity and assured the audience, “There are lots of new ships on order.”

This was supported by data showing almost 200 dry bulk carriers of all sizes scheduled for delivery from 2014 to 2016 versus an existing fleet of 10,237 of 747 million dwt. “We can expect very decent and low shipping rates for years to come,” he said.

Lauritzen Bulkers, which specializes in the handy size segment (less than 40,000 dwt), handles 25% grains, said Borup, while estimating that 85% of bulk ocean freight is destined for Asia.

Containerized shipment of bulk agricultural commodities has increased greatly and helped to keep down bulk vessel rates.

Mathew Hill, Maersk Lines’ general manager of Trans-Pacific Trade, stated, “In 2013, 10% of water-borne grain out of the U.S. was in containers, mainly due to increased DDGS from 2010 to 2013.”

Farm exports have provided a backhaul for ocean containers across the Pacific. But despite the increased demand from agricultural commodities, a high percentage of containers are still returned to Asia empty, particularly during the lead up to the heavy Christmas shipping season starting in July and peaking in October.

One problem shipping companies face is that most incoming containers are destined for major population centers in the U.S., while outbound shipments of DDGS, corn gluten and corn meal originate in less populated areas centered in Iowa at the heart of the corn and ethanol belt.

“There is a heavy cost to repositioning empty boxes,” Hill said.

With China’s sudden ban on DDGS imports, containerized traffic in 2014 will likely drop back to between 7% and 8% of bulk agricultural exports, according to Hill.

“Lots of investment in bulk has gone to panamax size because handy size is worried about cannibalization from container trade,” Borup said. He noted that DDGS to China had mostly been transported in panamax vessels (65,000 to 100,000 dwt).

About the smaller bulk vessels, Borup said, “The handy size sector is aging. Average age is over 20 years. Investments are coming back. Handy size is used for other purposes: zinc, copper concentrate, logs.”

Borup also said that since the 2008 economic crisis, shippers are managing more efficiently and that has impacted rates.

He asserted that the Panama Canal extension does not make a difference in rates. “There is only a small percentage, 5% to 6%, of panamaxes that actually transit the canal,” he said.

Hill said the impact of containerization of agricultural shipping will be limited to byproducts like DDGS and corn meal. “Quite frankly there is not the number of containers to take dry grain,” he said. “The impact has been on rates more than anything.”

New story is old story

Abundant stocks, increasing crop yields, steady prices and low shipping rates are good news for the world’s rapidly urbanizing emerging economies.

“Asia cannot catch up to the need to import food,” The ProExporter principal declared. “People are more dependent on the world’s future commercial food delivery system.”

But Ruikka concluded, “The new story going forward is an old story. We will have a huge amount available for those who want to eat more.”

Profiling Pakistan’s milling industry

Pakistan is the largest country where wheat is the staple grain of nearly the entire population. With 6 to 7 times more people, China and India consume much more wheat, but in both nations rice surpasses wheat in importance.

Industrial roller mills in Pakistan have risen to the challenge of grinding up to half of the 24 to 25 million tonnes of wheat harvested in the country every year. They provide not only for Pakistan’s 180 million mouths, but also produce up to 700,000 tonnes of flour for export to Afghanistan in some years.

Despite the economic weight of the milling sector domestically, it has had a relatively low profile within the international grain industry. This may have to do with the degree to which it is self-contained. With the exception of some Karachi mills, the 1,200 commercial mills operating in the country process almost exclusively domestic wheat. Aside from Afghanistan, few other countries buy wheat flour from Pakistan. Very little milling equipment is imported as low cost local manufacturers supply complete plants. There is minimal foreign direct investment in Pakistan’s milling sector, the scale of the industry notwithstanding.

The complexity of the business environment for milling goes a long way toward explaining the lack of international investors. Erratic power supply means that mills can only operate without interruption for several hours a day in most places, depending on the season.

Though there is little more than 50% capacity utilization industry wide, new mills continue to be built, keeping profit margins razor thin. The government intervenes in the market by buying several million tonnes of wheat per year and subsidizing its allocation to mills on a quota system for part of the year, thus serving to keep weaker mills in business and distorting the market. At harvest time, inter-provincial and even inter-district bans are frequently placed on wheat movements to enable the provincial food departments to meet their procurement targets.

Finally, security issues related to escalating conflict in a number of regions complicate all types of business dealings.

Wheat and wheat flour trade

The largest concentration of wheat mills is in Punjab Province, which accounts for 56% of the population but three quarters of national cereals production.

David McKee, left, with Muhammad Anees Ashraf, executive director of Ashraf Flour and General Mills (Pvt) Ltd., Peshawar, Pakistan. Ashraf is the current chairman of the Khyber Pakhtunkwa Province Branch of the Pakistan Flour Mills Association.

David McKee, left, with Muhammad Anees Ashraf, executive director of Ashraf Flour and General Mills (Pvt) Ltd., Peshawar, Pakistan. Ashraf is the current chairman of the Khyber Pakhtunkwa Province Branch of the Pakistan Flour Mills Association.

One of the world’s largest canal irrigation systems crisscrosses the Indus River plain that extends most of the length of the country. Wheat has been cultivated there for millennia. Abundant water from the Himalayan snowmelt allows for reliable yields that have been steadily increasing thanks to the introduction of improved varieties.

Larger commercial farms capable of selling directly to millers are the rule in Punjab as compared to other parts of the country. As a result, the province is a large net supplier of both wheat and wheat flour to the rest of the country.

Millers in Sindh, Balochistan and Khyber Pakhtunkwa (KPK) Province (former Northwest Territories) as well as the federal capital Islamabad buy much of their wheat from Punjab and then compete with wheat flour produced by Punjab millers. Sindh Province, which is semi-arid over much of its area, cannot grow enough wheat to feed all its inhabitants including the 20 million in the megalopolis of Karachi.

Pakistan has been an irregular player in international wheat markets. In some years it is open for imports and in others it has exported surplus stocks. There have been years in which both have occurred. When wheat and wheat flour prices rise excessively and exceed international market prices, sometimes due to a high level of demand from Afghanistan, the government allows Karachi mills to import boatloads of wheat. Sea transport costs to the mills, some located directly at the port, can be lower than the cost of 1,000 km to 2,000 km of truck transport from Punjab.

Milling technology

The first roller mills built in Pakistan from the 1950s to 1970s relied on equipment imported from Europe. A number of mills with Miag equipment manufactured in Germany in the 1960s and 1970s are still operating.

Most mills built since the 1980s are based on a cookie-cutter, 5-story plant design using equipment referred to as “Russian mills,” though it is 100% produced in Pakistan. The technology is actually a 1970s Bühler design licensed to a manufacturer in Ukraine. It became the standard machinery for most new mills built in the former Soviet Union and particularly in the former Soviet Republics of Central Asia.

Some of this equipment was installed in Afghan mills before and following the Soviet invasion. Equipment from old dismantled mills in Turkmenistan and Uzbekistan acquired by Afghan traders ended up in Pakistani mills. Domestic manufacturers began making parts and eventually copied the entire equipment line. The only mill components still imported from Russia are the steel rolls, but the term “Russian mill” has stuck.

Leading international milling equipment suppliers have found Pakistan to be a difficult market to penetrate despite the industry’s size and the apparent need for more advanced technology.This has to do with low milling margins that make it difficult to get a payback on imported equipment.

A turnkey 8-roller body mill, the most common size, including plant building and warehouses, can be constructed for just $500,000 excluding land costs. Owners lease out entire mills to former competitors in Peshawar for just $2,500 monthly, such is the stock of excess capacity among the 60 mills clustered around the city.

These obstacles notwithstanding, larger milling companies in some urban areas, particularly in Islamabad and Karachi, have begun to replace the decades-old technology with the latest equipment from abroad.

A number of factors have combined to start to make the choice of imported equipment feasible. In recent years government has more than doubled industrial electricity rates as one solution to generate funds to pay back the investment cost of badly needed new generating capacity and to encourage reduced consumption. After the latest increase, electrical energy now constitutes up $11 per tonne or two-thirds of a mill’s variable grinding costs not including wheat.

Manual and semi-skilled labor rates have also doubled in the last five years. Some mill owners are keen to mechanize more of the handling of wheat and flour to reduce the number of men needed to unload bags of wheat from trucks and stack them before unstacking them again to feed wheat into the plant.

Cost savings aside, the key motivation for buying new equipment is to produce higher quality flour that is demanded by large industrial bakers and other food processors in urban centers.

Milling practices

Milling practices vary across Pakistan depending on type and quality of flour demanded in the local market. In Punjab Province, mills extract between 12% and 18% bran. In urban areas, extraction rates are higher, with 55% to 60% of the wheat kernel converted to atta flour for baking flat bread (nan) in traditional tandoor ovens or for chapatis on griddles. The remainder is divided between fine flour (maida) demanded by industrial bakers and semolina (sooji) for confectionary products. In more rural areas, extraction rates are lower at up to 88% with 70% to 75% processed into atta.

In Peshawar, the capital of the KPK Province, wheat mills cater to the tastes of the dominant Pashtun population whose staple is nan. Extraction rates are 88% converted  entirely to atta. There is some local production of maida and sooji, but much of it is imported from Punjab mills.

Up to half of Peshawar mill output is exported to Afghanistan, where the demand in Kabul and other cities is for higher quality, finer, whiter, 82% extraction flour for baking Afghan-style flat bread. In households and at neighborhood bakeries Pakistan flour may be blended with darker, lower extraction local flour. Or conversely it is mixed with 75% extraction flour coming from modern mills in Kazakhstan to make an even higher quality nan.

Pakistan still has a large informal milling sector made up of chakkis (stone mills), some water powered, mainly operating in villages. However, roller mill flour from industrial mills has replaced chakki atta in the diets of many villagers for much of the year. They may grind their own wheat as long as it lasts in local chakki mills, but choose to buy flour for at least part of the year thanks in part to its subsidized price.

Government's role

The government food departments in all of Pakistan’s provinces provide subsidized wheat to the privately owned mills, a practice dating back decades. There are no state-owned mills in the country. These schemes, which vary considerably from province to province under Pakistan’s highly devolved federal system of government, have two main goals: ensure farmers receive a minimum price that will serve to guarantee that the country remains self-sufficient in wheat production; and to enable government intervention to mitigate price rises in the lean months leading up to the next harvest.

The Punjab Food Department operates the largest scheme. It targets annual purchases during the harvest in April to June of about 4 million tonnes out of total government procurement of 6 million tonnes. This wheat is received and stored at 600 collection centers. The majority of them are open area facilities technically known as Cover and Plinth (CAP).

Distribution of the subsidized wheat takes place in Punjab beginning in mid-November and continuing to the start of the next year’s harvest in mid-April when wheat prices normally fall.

There is little doubt that the scheme helps to stabilize the prices paid by millers for wheat and the prices received by farmers. Government pays farmers, particularly smaller ones who could not afford to store their wheat long after harvest, a higher price than they would get selling to traders immediately.

Large farmers and traders who do speculate by holding on to wheat for several months after harvest are not able to raise their prices as much due to the government wheat allocations to millers beginning in November in Punjab and as early as September in KPK and Baluchistan provinces.

Quotas are assigned based on a mill’s daily capacity calculated per government norms as 20 tonnes per roller body, with no mill allowed quota for more than 8 roller bodies. In practice, because of load shedding (power outages) and the age of their equipment, few mills achieve production rates above 10 tonnes per day per roller body.

The importance of the wheat quotas varies from mill to mill according to the season. Because the number of mills has grown while the government has limited its total wheat procurement for budgetary reasons, the allocation to any mill is rarely enough for more than a few hours of daily production.

Financially weak mills may only operate when subsidized wheat is available. Strong, well-managed mills are able to stockpile sufficient good quality wheat after harvest when prices are lower so that they have little need to buy from the government poor quality wheat with high levels of impurities.

In good crop years the Punjab Food Department wheat price may be higher than that available in the market even four or five months after harvest. The official minimum support price paid to farmers has been fixed at 3,000 rupees ($306) per tonne for a number of years. The Punjab Food Department sells the wheat to mills at the same price, without adding the costs of bagging, storage, transport and storage.

Drawbacks

There are numerous drawbacks to longstanding public grain policy. Because wheat millers could always count on the government to store wheat and release it onto the market in the quantities needed, they have built relatively little warehouse and silo storage capacity.

In contrast to the highly modern feed milling sector that has much steel silo storage, the entire system of government wheat procurement and distribution is based on inefficient and corruptionprone bagged transport and storage.

The size of mills has been constrained by the government quota system that covers only up to 8 roller bodies per mill. Many uncompetitive and financially weak mills have been kept in business simply because they qualify for subsidized wheat part of the year. Indeed, there are many “ghost mills” that have not operated in years but whose owners, including members of parliament, illegally sell their wheat quota to other mills.

Pakistan’s roller milling industry is critical to food security in a country where wheat flour accounts for over 70% of average caloric intake. Whether heavy government involvement helps or hinders its performance of this key role remains subject to debate.