Unprecedented volatility impacting millers

Flour millers are coping with unprecedented volatility, with grain prices moving sharply each day at the same time as markets in other commodities, including energy, which affects production costs as well as the price of farm inputs such as fertilizers and plant protection products.

Despite these challenges, millers cannot waver in their mission to serve their customers, a panel of milling sector experts said at the recent Global Grain Conference in Geneva, Switzerland.

The discussion, entitled “Flour markets in the EU and neighboring countries,” was moderated by Alexander Waugh, director general of the British and Irish milling sector association UK Flour Millers (formerly nabim).

Scott Wellcome, director of risk management at Goodmills Group GmbH, responded to a question from Waugh on the volatility of the market.

“We’re trying not to panic,” Wellcome said. “Not many people in the industry have seen volatility like this — not just in the raw material price, but in the energy, and the logistics, supply chain.”

Stressing the importance of risk management, he suggested that “we have these challenging times for another 12 to 18 months.” Wellcome identified communication, particularly within the organization, as a key component of a successful response.

“That’s been vital to help us make some very fast decisions,” he said. “These markets don’t let you breathe.”

Waugh asked Wellcome if his company was having difficulty getting farmers to sell.

“Surprisingly, we are when you consider the high price,” he answered. “Farmers have invested a lot in the last few years in their own storage. They aren’t the big harvest sellers they used to be.”

Producers are also more educated in the use of derivatives.

“This year we’ve seen real stubbornness by the farmer to sell,” Wellcome said, noting the tax implications, after a period in which many have had a high income because of high prices. “He doesn’t want to increase his tax burden.”

Trying to predict the unpredictable

Gunhan Ulusoy, a Turkish miller, said the market is very different now.

“We have exciting days; no time to get bored,” he said. “We are trying to predict the unpredictable in this market.”

He explained that there have been periods like this before.

“In 2007-08, there was a similar pattern,” he said.

This time there are many more issues. He noted the effect of climate change on agriculture, but not just affecting agriculture, as well as energy and the effect on the freight.

“On top of that, in Turkey we have a currency issue,” he said. “It makes the economic purchasing environment more unclear than other markets.”

The Turkish lira has lost more than 40% of its value, but the country’s millers are managing to work effectively with the changed circumstances.

“We are still the leading flour exporter, thanks to our logistics advantage,” he said.

Waugh, wanting to know who is taking the risk, asked: “Do you buy the wheat first and sell the flour, or sell the flour and buy the wheat?

“There are two different markets,” Ulusoy replied. “For export purposes, most millers do what you’re saying. In the global market, everyone knows what is going on with the wheat. For the domestic market, it’s a different story, with the government putting pressure on prices for fear of food inflation. We need to purchase (wheat) first, build up stocks and then pass it to domestic clients.”

Ulusoy noted that in a month’s time prices can change by as much as 10%.

“For a low-margin industry, price volatility is making the margins negative,” he said. “You need to have as much stock as your finance lets you. The burden is on finance instead of being short of wheat against the flour sales.”

He made a distinction between supply and demand and production and consumption.

“We demand more than we consume just to protect ourselves from price increases,” he said.

Energy cost challenges

Malak Al Akiely, founder and managing director of Golden Wheat, described a different picture for Jordan, with a much more managed market.

“It’s different,” she said. “The government subsidizes wheat to millers. They carry all costs, inland transportation, logistical expenses and they give millers subsidized wheat.”

However, Al Akiely said there are many factors that millers are dealing with, giving energy as an example.

“I visited three millers last week,” she said. “The highest cost of their mills is energy.”

She also noted a problem with finding sufficient technical expertise.

“Jordan has 13 mills for a population of 10.3 million, but five new mills have been approved,” she said.

Al Akiely also pointed to issues wider than milling, such as the need to cut packaging waste, which hampers the sector.

“It’s about them finding their competitive advantage formulation,” she said.

Russia wheat crop rates high in quality

Arina Korchmaryova, vice president of Baltic and Black Seas Business Group of Cotecna Inspections SA, asked about wheat quality in Russia and Ukraine, noted that “when prices change, we as a survey company also see a change in destination, change in origin.”

In some cases, for wheat that meant that “the quality-spec will be more or less the same, but performance will be different,” she said. “Russian wheat quality wise, we see this year excellent quality.”

Most of the wheat now coming on the market is from the southern areas of the country.

“Protein we see maybe even slightly — 0.1%, 0.2% — higher than the previous year,” she said. “We see now Ukraine wheat going to traditionally Russian markets, including Turkey and the Middle East.”

Explaining rising costs to customers

Wellcome said customers are “certainly interested why we’re quoting such high flour prices, and they’re a little bit confused if you look at Europe where production is up by 15 million tonnes. We have to explain that energy costs, fertilizer costs, transportation costs, everything is on the rise at the moment. They are not idiots. They read and see what’s going on.

“If we take countries like Romania and Bulgaria, where you just have to take a daily price, there it becomes very difficult to plan.”

Wellcome said a big part of a miller’s daily job is explaining what’s going on, noting that “one minute you’ve got MATIF up seven euros, then it’s down five euros. Crude prices are up and down like a yo-yo.”

With fertilizer, the problem wasn’t just the price, but the availability of it, he said.

“They want that assurance that we’re also struggling a bit but we’re with them for the long run,” he said.

One way to deal with risk is to store grain, if you have the capacity.

“For many people, storage is just a sunk cost … they don’t want to know,” Wellcome said. “This year, because of quality concerns, we probably had more stock inventory then we would have had in a normal year.”

Ulusoy noted a difference in approach between customers of different sizes.

“There is a negative correlation between size of customers and their perception to have flour as a commodity,” he said. “The small ones see it as retail product (with a price that) should be fixed.”

When they come back after two weeks, they are not expecting a price change, he said.

“As the client gets bigger, especially industrial size, if they are producing packaged goods for retail, we are talking the same language,” he said.

However, industrial packaged bread is a small market in Turkey, with traditional millers taking 80% of sales.

Logistical and environmental issues

Waugh raised the issue of delivery, quoting the UK’s logistic problems, particularly with the availability of freight drivers.

Al Akiely described truck drivers in Jordan as “becoming more selective.”

“They know the power in their hands,” she said, explaining that the government tenders for the inland transportation of grain, which is done at very low margins, something she thought was not sustainable.

Wellcome said GoodMills was dealing with a similar problem with “not enough trains around, not enough drivers around. We made a decision a long time ago to have a short supply chain. We buy 90% of product within the country of the mill.”

Waugh, referring to the COP26 Conference and commitments related to environmental issues, asked the panel if they were seeing, or expecting, any change in demand patterns.

Ulusoy called the European Union’s Green Deal “a popular topic,” suggesting that planned restrictions in the use of pesticides and fertilizers would affect grain supplies.

Al Akiely worried about the effect of extreme weather conditions.

“The priority, of course, is to feed people. But at what cost?” she asked.

“From the customer side, large brands are asking more questions,” Wellcome said. “From the supplier side, it’s not ignored, but it’s not a big issue.”

Wellcome said his company was focused on keeping its footprint to a minimum.

WORLD-GRAIN.com

Tags: grain prices, commodities, markets, production costs, fertilizers, Switzerland, flour millers, plant protection products