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IRAQ’S wheat milling conundrum

Iraq is a conundrum when it comes to wheat and flour. Despite around 300 privately owned mills, it is among the world’s largest wheat flour importers at over 2 million tonnes per year. The wheat supply is not enough but new mills continue to be built. The government pays farmers close to $500 per tonne for their wheat, and yet production had declined and quality falls far short of bakers’ and consumers’ requirements. The milling industry is almost entirely in private hands but depends on the government for all wheat deliveries and flour offtake. Mill revenues are from tolling fees and bran sales. Mills do not sell flour.

Earlier this year, World Grain went to Sulaymaniyah, the commercial and industrial center of the semi-autonomous Kurdistan region in northern Iraq, to meet with Saad Kola, chairman of Iraq’s largest wheat milling company, Kulok Group. He talked about his company and candidly shed some light on the challenges it faces in such a uniquely difficult business environment.

“It was the father of my father that founded the first mill,” he said. “It was 100 tonnes per day and built in 1973. The mill was one of only two mills in Sulaymaniyah during that time.”

The two mills had “more than enough capacity,” for the city and for the Kurdistan region, he explained, adding, “They even exported product to Baghdad and the south of Iraq. At that time there was not much population here.”

Now the company’s Sachnar Mill on the original site has 600 tonnes per day of total capacity. “It is the largest milling plant in all Iraq,” the chairman noted.


Kulok Group’s Sachnar flour mill is the largest mill in Iraq with daily wheat grinding capacity of 600 tonnes. Photos by David McKee

It consists of three processing lines of 200 tons each, supplied by mill manufacturer Aybakar in Ankara.

“We have been acquiring mills,” he said. “We have four in Sulaymaniyah for a capacity of 1,500 tonnes per day. In Kirkuk we have another two mills. One is Zad and the other is Rast. We have six milling plants in total. All are separate companies. Total employment at our mills is 150. With management and drivers, it is 175.”

WHEAT SUPPLY CHALLENGES

The main challenge has to do with getting enough wheat. “Unfortunately, the government gives us the wheat,” Kola said. “There is no private importation. We are trying to get permission from the government to import wheat. Since 1991, the Iraqi government has not allowed private importation.”

Kola referred to the system that the Saddam Hussein regime was forced to adopt after the first Gulf War as part of the UN Food for Oil program.

Regarding the wheat allocations from the government, the chairman observed, “Year by year they have reduced the quantities. We used to get enough wheat to run 24 days or 30 days per month. After the start of the ISIS war more than five years ago, they gave us wheat in eight portions over the year, not 12 monthly allocations. Our six separate milling companies get separate wheat allocations. Ten years ago, the government gave Sachnar 9,000 tonnes every 30 days. Now it gets 5,600 tonnes every 44 days.

“But now a lot of people are interested in this business. People with other businesses are entering flour milling, though they don’t know anything about it. Just because people have enough money, they do it. They build a mill and get an allocation. This milling business doesn’t require any marketing. Mills receive wheat from the government and deliver flour back to it.”


Saad Kola, chairman of the family-owned Kulok Group, represents the third generation to manage the mill.

Kola maintains that there is enough milling capacity to feed Iraq three times: 50,000 tonnes per day times 300 days is 15 million tonnes. Iraq needs 4 million tonnes of flour.

Based on the government system, Kola said, “Now there is only one type of flour: 80% flour and 20% bran; no gluten or protein specification; moisture 14.5% and ash is maximum 1%.”

Since virtually all private mills must operate within the government system, they are excluded from buying wheat to produce flour of the type needed by private bakeries.

“Private companies import flour from Turkey. All bakeries use flour from Turkey,” is how Kola explains the phenomenal 2 million tonnes of wheat flour that Iraq has been importing annually in recent years.

Kola dwelled upon Iraq’s Public Distribution System (PDS) that is intended to provide monthly rations of flour, rice, sugar and cooking oil to every family based on household size.

“The Iraqi government gives flour to the people mostly free of charge,” he said. “Because it is free without quality control, it is very bad quality. In the countryside, the people eat it. They make bread at home, but in the cities, especially big cities, the people don’t even take it. The flour dealers sell it as animal feed. Rich people don’t take the flour.

“Each person or family member gets 9 kilograms per month, but in reality they get 9 kilograms for each five weeks. Now it is even every 44 days.

“Distributors work with the government. They are private shops — retailers. They are called agents for Ministry of Trade and Grain Processing.”

He commented further on the fraud inherent in the PDS scheme.

“A lot of people left their homes due to instability after ISIS,” he said. “Many people are missing. So bad people take flour from the trucks and sell it immediately without looking for people (the rightful beneficiaries). Even World Bank and IFC are asking the Iraqi government to change the system.”

People with other businesses are entering flour milling, though they
don’t know anything about it.


Saad Kola, chairman, Kulok Group

INCONSISTENT WHEAT QUALITY

The 320,000 tonnes of wheat per year ground by the Kulok Group milling plants is almost entirely imported. Kola reports very inconsistent quality.

“Sometimes there is good wheat from the U.S. or Australia or bad wheat from Ukraine,” he said.

The government imports wheat through the port of Basra and transports it in 35- to 40-tonne bulk trucks to government silos around the country. There are 40,000-tonne and 80,000-tonne grain storage facilities near Sulaymaniyah.

The mills must send their own trucks to pick up their grain allocations. Because of the government storage facilities, the private millers need to store relatively small volumes. The Sachnar mill, despite being Iraq’s largest, has only 4,000 tonnes of silo capacity.

The government buys up nearly all the domestic wheat crop. The USDA estimates it at 3 million tonnes in 2018, a 25% decline from the 4-million-tonne harvest of the previous year. The peak production year was 2015 with 4.4 million tonnes, but thanks to the most rain in two decades, the USDA forecasts 2019 production to be a record 4.8 million tonnes.

Wheat growers need financing well before the government can pay. Kulok Group helps to fill this need, Kola said.

“Most farmers can supply two or three truckloads of 22 to 25 tonnes,” he said. “Landholdings are small. I finance the farmers. I give them money before they plant. But the money is stuck for two years. We collect the wheat and supply to government under their name. The government pays the farmers and they pay us.

“We work with farmers around three big cities. My employees are there. They need financing for irrigation. A few other millers do the same, but it takes a lot of capital. And it takes patience. In southern Iraq it is different. Traders are financing farmers because they will get a high price from the government.”

Kola said the quality of local wheat is very bad.

“Low gluten, not even C class,” he said. “The government buys it from farmers at a high price to encourage them to farm. Minimum purchase price is $500 per tonne for Class C. I could import it for $200 per tonne.”

The subsidies, he said, “do not go into the right pocket. Mostly traders do this business. They are cheating. They buy it from the farmers at a cheap price and mix it with imported wheat to sell to the government.”

The government pays millers only a $10 per tonne tolling fee, but they are allowed to sell 20% of the bran. The price of bran can go as high as $270 or $280 per tonne, though in the spring of this year, thanks to good grazing from abundant rain, it had fallen to below $200.

“An advantage of importing more wheat would be more bran for sheep and cows,” Kola said.


Kulok Group employs 150 workers at its mills in Iraq.

Though Sulaymaniyah is the principal city of Kurdistan, most of the employees are Arabs from the south of Iraq. Arabic is the language of the milling plant. The unmarried men have housing within the mill compound. Married ones live in apartments in the city. Because of the wheat shortages, the mill operates a maximum of four or five hours per day, five days per week and rarely more than that.

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.