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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.

Lifting the screen on Indian milling

Industry expanding despite government controls and challenging business environment

The owners of roller flour mills in India like to describe their country’s wheat industry in sweeping terms:
• an annual harvest that has reached a record level of 88 million tonnes;
• about one-third of the crop each used by farmers, bought by traders or by the government;
• more than 1,200 roller milling companies grinding from 15 to 18 million tonnes of wheat per year into refined flour
called “maida” and other products;
• several million tonnes of branded packaged stone ground whole wheat flour or “atta”; and
• most importantly, 40 to 45 million tonnes of atta still ground on a job-work basis in villages, towns and even in large cities by small electric or diesel driven stone mills, known as chakkis.

The 100-tonne-per-day flour mill of Gillco Agro Pvt. Ltd. stands among irrigated wheat fields near Ludhiana, Punjab. Photos courtesy of David McKee.

Such broad brush strokes, however, conceal the enormous complexity of India’s grain value chain. Wheat production and consumption vary tremendously from region to region. Differing tax regimes on wheat purchasing and wheat product sales give artificial advantages to millers in some states and put those in others at a huge disadvantage. Government procurement of wheat for the “central pool” in surplus states and movement to deficit states for heavily subsidized distribution to the poor under an array of state level welfare schemes results in massive distortion of markets and creates incentives for illegal behavior at all levels of the supply chain, as does a highly regulated agricultural marketing system for wheat that protects unneeded intermediaries, reduces the efficiency of supply, raises costs through extra fees and taxes and prevents millers from procuring directly from nearby farmers.

The central government periodically reduces excess stocks through release for export or forcing poor quality wheat on to the domestic market while preventing importation of high quality wheat by millers. When the monsoons fail, the government may import wheat itself.

Expansion

Despite the heavy-handed role of the government and challenging business environment, the roller milling industry, which is entirely privately owned, has been steadily expanding during the last two decades of economic liberalization and rapid GDP growth in India. Millers estimate that refined flour consumption has been increasing at the rate of 7% to 8% per year against an average population increase of 2%. Leading equipment suppliers estimate there are 20 to 30 new roller mill plants being built every year.

The total number of roller mill stands installed may be as many as 15,000 to 20,000, estimates Manesh Lokin, a milling industry consultant, meaning average mill capacity of 100 to 150 tonnes per day. Many of the new milling plants being built or on order are as large as 300 tonnes per day, placing them among the biggest in the country.

This expansion notwithstanding, the roller milling industry remains fragmented with national milling groups having failed to emerge. Only a handful of companies have multiple milling plants and usually they are clustered in one region of a state.

On the other hand, by some estimates up to three quarters of India’s roller milling companies’ owners may have close or distant family ties. They are mostly members of the same Mawaris community of wealthy merchants, one branch of whom made their profession the construction and operation of industrial flour mills throughout the country. Brothers, cousins, nephews and uncles often cooperate to found mills in the same state or even district, or move onto new states where they perceive market opportunities. But their companies remain separate entities.

Indian roller millers traditionally produce a different product range than their counterparts in other countries. Only 55% of refined flour may be extracted for bread and biscuits. Millers also separate out fractions of fine semolina called “sooji” and used for pasta, and coarse semolina called “rawa” for traditional sweet foods like halwa, in addition to 10% atta, and finally 20% bran.

Chakki atta

For the last 10 years, roller mill owners have been increasingly targeting the market for packaged branded atta. Traditionally, Indian families store wheat at home and take 10 to 15 kilograms (kg) at a time to chakkis for custom milling. In large cities, this practice has been slowly dying out as busy lifestyles and dual income families cause many to opt for packaged atta from shops and supermarkets. In the largest cities, only 10% to 30% of families still take wheat to chakkis. Often they are the more well-off ones, with domestic help available to perform this task.

Depending on the state, a quarter to three quarters of roller milling companies have also installed lines of mostly Indian-style horizontal stone mills in order to produce their own brands of atta in all package sizes. The mills make use of the cleaning sections and bagging lines of their roller mills.

Indian consumers prefer chakki atta over roller mill atta for its taste and texture. It is commonly thought that stone grinding breaks the starch sufficiently to release extra sweetness while burning it slightly to give added flavor to chapatis (flat bread cooked on a griddle) and nan (flat oven bread).

Some of the most successful roller milling companies are contracted copackers of chakki atta for the handful of national brands. By far, the leader in this segment is the domestic consumer goods giant ITC, whose Aashirvaad brand sells 100,000 tonnes per month.

Multinationals General Mills and Hindustan Unilever have also targeted this segment for over a decade with their Pillsbury and Annapurna brands, respectively. Besieged by local lowprice competitors unburdened by either the high overhead costs or heavy advertising budgets, both companies have retrenched. None of these market leaders own their own chakki mills, relying instead on the larger flour milling companies who invest in lines of large diameter horizontal stone mills to supply them. According to C.S. Saboo, managing director of Sunstone Engineering Industries, a major manufacturer of stone mills, there are over 50 roller milling companies that also dispose of production lines of 15 to 25 stone mills.

The historic Century Flour Mills Ltd., established in 1955 in Chennai in the southern Indian state of Tamil Nadu, still operates at a capacity of nearly 150 tonnes per day roller milling and another 100 tonnes per day stone milling.

Overall growth in the commercial whole wheat atta segment has been driven by the entry of hundreds of new players. As most urban and many rural consumers switch to ready-made atta, new local commercial stone milling enterprises have sprung up, particularly in the areas of heavy wheat production and consumption, resulting in fierce price competition.

Barriers to entry are minimal. Just a handful of stone mills are sufficient to start up a commercial atta mill, preferably with a cleaning section and bagging and packaging lines. Wheat can be purchased by the truckload from traders at mandis or at a discount if it is illegally diverted from government distribution channels. A brand with colorful 5-kg, 10-kg or 25-kg packaging can be created easily. These small local companies produce a fresh product tailored to local preferences. Their packaged atta can be marketed directly to wholesalers and brokers who supply retail shops.

Just in the 200-km corridor between Mumbai and Pune, Saboo estimates there have been 50 new commercial chakki millers started up in recent years to supply the two largest cities in Maharashtra state.

Fortified atta

A phenomenon that has also stimulated commercial atta production has been policy changes in several states to distribute subsidized vitamin- and mineral-fortified atta to ration card holders under their Public Distribution Systems, instead of bagged wheat which beneficiaries would normally take to local chakkis for custom milling but which is often illegally “leaked out” of distribution channels.

Both roller milling companies with or without chakki production and the new chakki atta companies have been able to qualify for production quotas under these fortified atta schemes, whereby they receive wheat for fee-based milling into fortified atta.

For example, in Rajasthan, where daily per capita wheat consumption of close to  300 grams is the highest of any state, the largest program for fortified atta now operates. Some 120 mills, including 70 roller milling companies, are officially grinding about 95,000 tonnes of atta monthly for distribution in 10-kg packages to most of 14.4 million ration card-holding families in all categories through a network of 25,000 Fair Price Shops. Production for government welfare schemes is the only business being done by up to onethird of the enterprises involved.

Wheat purchasing

Further complicating the life of roller mill owners is the heavy involvement of both the central and state governments in wheat purchasing. Thanks to a highly developed irrigation infrastructure fed reliably by the Himalaya snowpack, the wealthy and highly mechanized farmers of Punjab and Haryana states in the north produce a combined annual wheat surplus of about 18 million tonnes, nearly all of which Food Corporation of India purchases at the central government Minimum Support Price (MSP) through a comprehensive network of agricultural trading centers (mandis). A farmer rarely has more than 10-km distance to go to sell his crop.

From its location in the heart of the city, Century Flour Mills still delivers much of its refined flour in jute bags according to the preferences of Chennai’s baking industry.

However, millers in the two states, who must pay MSP for wheat, face low price competition from neighboring Uttar Pradesh, where traders and small farmers sell wheat at well below the MSP, since the government wheat purchasing system is underdeveloped, with mandis often 50-km apart and farmers lacking means of transporting their grain.

The result is that millers in the Punjab and Haryana may run at a fraction of their capacity even as wheat flour arrives from Uttar Pradesh and huge amounts of wheat are poorly stored for up to four years by FCI all around them.

Haryana millers have also lost the New Delhi market due to state taxes on their wheat purchases and wheat flour production not faced by Uttar Pradesh millers.

Uttar Pradesh, which occupies most of the Ganges Plain, has the largest number of roller mills of any Indian state at around 200 enterprises, according the Roller Flour Mills Federation of India. New mills are being built every year. Wheat production is increasing as the state has experienced a delayed Green Revolution.

Despite the state’s population of 200 million, millers are able to export more and more surplus flour to other states, thanks in part to lower wheat prices due to the inability of the government to enforce the MSP.

Neighboring Bihar, India’s poorest state, is also experiencing a boom in its wheat industry, with yields rising and new mill construction doubling the number over the last five years, stimulated by a state government subsidy of 30% of the investment cost. Conversely, to the south, the state of Jharkand has seen a halving in the number of mills since it separated from Bihar in 2000. This is mainly due to a tax on wheat and wheat products, which is not collected in Bihar.

Millers in the states of southern India, where wheat is not grown, have traditionally relied on FCI for much of their wheat supply, since that agency’s mandate is to move wheat from surplus to deficit states. In Tamil Nadu, however, supply from FCI in recent years has become less reliable.

Consequently, many of the mills have shut down because they lacked the financial resources to buy whole trainloads of wheat from the north or import wheat from Australia and elsewhere when it is allowed.

The number of operating millers has fallen from 54 to 33 in just four years, according to the Tamil Nadu Roller Flour Mills Association.

As India’s wheat production increases and wheat processing enterprises grow in number and size, one wonders how much more rapidly the industry might evolve in efficiency and scale if the invisible hand of the market had freer play in both the supply chain and distribution channels.

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