U.S. Wheat Grades & Milling Industry Overview

1. U.S. Wheat Grades
Tab. 15 summarizes the grade requirements for wheat.
There are 5 wheat grades for good quality wheat. All other wheat, i.e. wheat that
– does not meet the requirements for grades U.S. Numbers 1, 2, 3, 4 or 5; or
– has a musty, sour, or commercially objectionable foreign odour (except smut or garlic odour); or
– is heating or otherwise of distinctly low quality, is classified U.S. sample grade.

Tab. 15: Grades and grade requirements for wheat

2. Milling Industry Overview
The U.S. Milling Industry has undergone dramatic change from any perspective, both from a historical and a current business view. North American milling is without question a competition- based market. It has been shaped and moulded by the economic forces created by the combined decisions of the consumers and producers of flour. In order to put these changes into a context to which we can all relate, a set of terms common to the U.S. market will be used to bring some clarity to this subject matter.
• Annual Wheat Flour Production:
Total flour produced by all U.S. milling companies combined in one calendar year. Expressed in Cwt 8.
• Daily Capacity:
The amount of flour capable of being produced by all U.S. mills in one 24-hour period. Expressed in Cwt (shown here in metric tonnes).
• Operating Rate:
A percentage calculated by dividing the "Annual Wheat Flour Production" by the theoretical "Annual" 6-day capacity of the industry. Expressed as a percentage
• Per Capita Consumption:
The amount in pounds of wheat flour consumed per person in the U.S. This includes all forms of wheat-based food products and is calculated on a disappearance basis. Expressed in lb per year.

Note :
8 1. A unit of weight in the U.S. Customary System equal to 100 pounds (45.36 kg). Also called cental, or short hundertweight.
2. A unit of weight in the British Imperial System equal to 112 pounds (50.80 kg). Also called quintal.

Flour milling is clearly one of the world's oldest industries, for the extraction of endosperm from wheat as a source of food was one of mankind's first halting steps towards civilization. In America flour milling is among the oldest industries; in fact the first flour mill was established in Virginia in 1621, or just 14 years after the settlement of Jamestown. In the 18th and 19th centuries, as the U.S. grew and moved west, new flour mills were built as virgin lands were cultivated and began producing large crops of wheat. As the people moved west, so did the production of wheat and the milling of flour. Towards the end of the nineteenth century, as wheat growing became established in the Great Plains, the mills in that area tended to become larger, and those plants remained in operation well after the westward migration of people spilled over the Rocky Mountains onto the West Coast. Even as the westward migration to California, Oregon and Washington of the nineteenth century turned into the flood of the twentieth, two of the three largest wheat flour milling states were in the heart of the traditional wheat growing region – Kansas, which ranks number one and Minnesota, which is number three (California has recently replaced New York as number two; Anon., 1998).

Not only is flour milling one of the oldest industries in the United States; it has also been one of the largest industries. In fact in 1900 flour milling was the largest industrial classification in the United States, with some thousands of small, mostly privately owned mills. This is no longer the case. Today the number of mills has dropped to less than 200, most of these being large mills. The number of companies owning mills has compressed even more dramatically. If we look at the current status of the U.S. milling industry we see there are at least four trends of some significance. The first trend is the reduction of companies currently milling wheat into flour in the U.S. (Tab. 16).
Tab. 15: Grades and grade requirements for wheat
 The milling industry (as well as world enterprise in general) is confronted by relentless adjustment. Each day the industry commits itself to a course of action based on the best knowledge and judgment available, then waits for history to determine who was right and who was not. Economic forces are inexorable. What has been experienced will continue to be experienced in terms of consolidation. This scenario has been played out in industry after industry as they become mature and economics of scale become relatively more important than innovation and product differentiation in the economic return equation.

One of the clear effects of competition-based change is that there are winners and losers. In U.S. milling, maybe "winner" doesn't describe the existing milling companies as well as the term "survivor". As is true in all business, we must look at a longer view to understand if a current "survivor" is a true winner or simply the next market-place victim. History is shouting that the number of milling companies in the United States is in decline. Current economics seem to support a continuation of that decline. As of this writing there are approximately 194 wheat flourmills operated by about 85 milling companies (Anon., 2000).

The second trend, which is tied to the first, is the reduction in the number of operating mills in the United States (Tab. 16).

The message of Tab. 16 is that the U.S. demand for flour compared to the available supply is limiting the financial return for milling companies. This earnings pressure is causing milling companies interested in remaining in the business to look for growth through acquisition. The goal of the acquisition is to increase sales volume without increasing the corporate infrastructure required to operate the company, thus allowing the remaining company to take advantage of the increased scale through increased earnings. Tab. 16 also shows the long-term change in the number of mills and in the average size of the remaining mills since 1974. It is interesting to note that average mill size has more than doubled while the number of milling locations has dropped to slightly more than half. Again, it appears that in order to produce an acceptable return for the company owners, a mill has had to increase the output of a location in a greater proportion to its fixed cost structure. Much like a company has had to add locations to increase its output in relation to its overall corporate size, the individual mill has had to increase its output in relation to the fixed operating costs of an individual location.
Fig. 18: U.S. Mills by daily flour capacity and market share (Anon., 2005)
Fig. 19: Number of mills by daily flour capacity (Anon., 2005)
This third trend of increased mill size is understood better by comparing Fig. 18 and Fig. 19. These charts further break down the number of mills in operation and group them by overall size. While the average U.S. mill produces just over 380 t of flour per day, the reality is that the largest number of mills in the U.S. produces more than 450 t of flour per day. This further highlights the fact that mills have had to get bigger to maintain or improve their financial position. Finally, if we look at the amount of wheat ground by all mills within a size distribution we can see that as expected the largest mills also dominate the overall capacity of the country. In fact two thirds of all wheat is ground by one third of the mills.

Mills and milling companies positioned well geographically and strategically have survived to acquire those that have good geography but a poor strategy. Those with neither good geography nor good strategies are typically the mills abandoned.

The final trend is somewhat surprising. The U.S. industry has continued to grow in overall daily capacity. While consolidation has taken out numerous mills and milling companies, the opposite has happened with respect to the ability of the industry to produce flour (Fig. 20). This chart shows that there has been an upward trend in the capacity to produce flour in the U.S. for the last 6 years of the last decade. While this has been an exciting time of resurgence for the industry, the current condition is not one of widespread optimism. Part of the issue has to do with the amount of capacity added in the late 1990s. As many have said, the Western U.S. needed one new flour mill in 1999, but 4 milling companies built it.

Some focus should be given to the U.S. wheat flour demand. Several factors go together to create the overall demand for wheat flour in the United States.
• Population
• Per Capita Consumption
• Dietary Perceptions
• Flour Use
Fig. 20: U.S. milling output versus U.S. milling capacity 3
The demand for flour in the U.S comes from two major factors. The first is the U.S. population and the second is per capita consumption of wheat flour based products. Flour and wheat based imports, while important, have been largely flat over time and have been ignored in this analysis. Exports of U.S. flour have played an important role in the strength of the U.S.

generally overshadowed by governmental policies and therefore are not a good indication of the U.S milling industry's world competitiveness. Exports, too, have been ignored as a part of the demand for U.S. flour and flour based products.
Fig. 21: Change in population for U.S. states 1990 to 1999 (source: U.S. Census Bureau)
 The U.S. population has grown at a fairly steady pace over the last 3 decades. The percentage, 13.2%, for the decade ending in 2000 has been both steady and predictable. The difficulty for millers is that while the population has grown nicely in total, it has not grown consistently for all regions. For instance, the U.S. population growth rates are highest in the West and South and the lowest in the Northeast and Midwest (Fig. 21).

The shift of population centres from North to South and East to West has had the impact of shifting flour demand away from some of the North Eastern and Midwestern mills towards mills able to send flour to the growing Western markets.
Fig. 22: U.S. flour consumption per capita by year 3
Per capita consumption is equally critical to a growing U.S. industry. Remember, in the U.S. we measure the amount of flour consumed in one year, not the wheat. In so doing we exclude the amount of wheat eaten by animals. The growth in per capita consumption of flour has been one of the real success stories in the U.S. food industry. U.S. flour consumption has grown by nearly 25% since 1964, and has fuelled the need for much of the milling capacity expansion. This growth in demand has come about due to a couple of factors. The primary reasons were that a favourable perception that "grain is healthy" was combined with an American population that began to eat on the go. Meaning that the meal is consumed away from home, often in an automobile, making time and convenience extremely important. This has dramatically increased the use of wheat flour products used as "meal carriers". Buns for hamburgers and hot dogs; tortilla wraps for hand-held meals and sheeted bread products like pizza dominated the consumption growth of the last three decades. The "grain is healthy" viewpoint was further enhanced by the government's adoption of the food guide pyramid (page 28) that describes a healthy diet as being based upon foods made from grain.

One area of concern is the apparent levelling of this growth trend that appears to have taken place over the last couple of years (Fig. 22). Much of the concern lies in the unknown. No one is sure, but the speculation is that we may have reached a plateau of consumption in the U.S. Others more optimistic see this not as a plateau but as a slowing of the growth rate. In either case, the growth rate of domestic flour demand has slowed to near stagnation, equal to just that growth that has come from the increased population and government aid donations. This will continue to challenge the U.S. milling industry to make many tough decisions about capacity. The likely scenario is one of continued consolidation in the number of companies, and the abandonment of misplaced less strategic capacity. The U.S. milling industry is believed to be healthy economically when the industry operating rate exceeds 90%. Any reduction in demand or increase in supply in the near term could push the industry into another round of consolidation.

However, an end to the consolidation will come. Over time the remaining milling companies and mills will be less likely to overbuild capacity and repeat the cycle of oversupply and consolidation. This belief is based upon the assumption that with fewer companies making "capacitybalancing decisions", better decisions will result. These surviving companies, hurt economically in this recent period of capacity expansion, will be less likely to trigger another state of over capacity.


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