A 'modern miracle'
July 01, 1994
by Teresa Acklin
Amazing growth in U.S. flour use transforms the country's milling industry.
After nearly 50 years of stagnation, U.S. flour consumption from 1970 through 1993 grew by 59%, a rate of increase that more than doubled population growth in the same period. The trend shows no sign of abating in the coming years.
The reasons for this growth and the U.S. milling industry's reaction to it were analyzed by Morton I. Sosland, editor-in-chief of World Grain, in a May speech to the International Milling Association in Florence, Italy. Following is a partial text of Mr. Sosland's comments.
Flour production and consumption in the United States in the period from just after World War I through the 1950s and 1960s were amazingly static. Annual consumption hung quite near to 9 million tonnes, in terms of flour, for almost five decades. Production was also flat, at about 10 million tonnes in terms of flour, except for the period at the end of World War II when huge quantities of flour moved to Europe as relief. The spike that occurred in the 1945-47 period and the subsequent drop produced elation and trauma of a sort that few milling industries elsewhere in the world have ever experienced.
The swing from the low to the high point and back down again represented about 4 million tonnes, in terms of flour. Production rose to a high of 13.8 million tonnes in terms of flour in 1947 and fell to a low of 10 million seven years later in 1954. I need not tell you how this decimated American milling.
Not only did exports collapse, but per capita consumption fell at a rate that offset population expansion under way at the same time. At the low point of domestic flour use and exports in the 1950s, I assure you it was difficult to find anyone who would say anything positive about the outlook.
The industry quite literally found itself excluded from the post-war boom as consumers turned to an ever-broadening array of foods that nutritionists and consumers, too, viewed as preferable to bread and other flour-based products. I define this period as a time when mothers were ashamed to admit that they fed their children sandwiches made of bread.
When it came to export markets, not only was the milling industry in Europe rebuilt, thus foreclosing that outlet, but new mills were being built with investment priority in developing countries that once had been large-scale outlets for U.S. flour. The export market collapsed from about 4 million tonnes in terms of flour in 1947, the peak of the post-war clearances, to a low of less than 771,000 in 1954. That's real trauma.
Efforts to do something anything about the domestic flour market during that period were not very effective. The Millers' National Federation, the U.S. millers' association, provided support for the Wheat Flour Institute. Its efforts were focused on two fronts a program to persuade nutritionists they were neglecting the health of the citizenry by not promoting consumption of flour-based foods, and the conducting each year of a National Day of Bread and a National Sandwich Idea Contest, which encouraged food service (mainly restaurant) people to submit ideas for sandwiches in the hope of spurring families to eat more meals in sandwich form.
Day of Bread only served to make the industry feel more positive about itself, which is all well and good, even though it doesn't add a gram to consumption. I have little hesitancy in saying that these efforts, finally abandoned for budgetary reasons, did precious little to reverse the declining trend in per capita consumption.
One of my memories of this period is the howls of protest I would hear from the head of the Federation's export promotion activities whenever we wrote anything positive about spurring the domestic market. He seriously believed that American milling's future depended on growth in exports. He wanted milling to do everything possible to promote this export effort by persuading Washington of the virtues of fostering business overseas.
He delighted in citing examples of how governments in Europe heeded the pleas of their domestic millers for export assistance. He even sought to convince wheat farmers that they were wrong to push for export wheat sales when they would be far better served by promoting export flour sales.
Even though these export and domestic market promotion initiatives did not work, even failed, one must agree the transformation that has occurred in U.S. flour milling from the industry's nadir in the 1950s and 1960s is a wonder to behold. First, let me cite a few numbers that will affirm this modern miracle.
You will remember my noting how U.S. flour production in the first 50 years or so of this century was stuck near the 10-million-tonne mark in terms of flour. The latest numbers show that 1993 was the fourth year in a row of a record in output and don't forget these totals are influenced by a fairly erratic export pattern. At 17 million tonnes in terms of flour, 1993 flour production was up 71% from the 1954 low of 10 million.
The figures are even more amazing when you look at consumption of flour in the United States. Here was a number that held fast around 9.3 million tonnes in terms of flour for 30 or 40 years. It began to turn upward in the 1960s and enjoyed accelerated growth in each succeeding decade.
The annual average increase in the 1960s was 63,500 tonnes in terms of flour; in the 1970s, it was 177,000 tonnes; in the 1980s, consumption grew at an annual average rate of 331,000 tonnes; and, for the first three years of the 1990s, has expanded at a rate even faster than that.
Domestic flour consumption in the United States has been establishing a record year after year now for the past several decades. Yes, there have been a few years when reductions occurred, but the upward trend is now so solid and so repetitious, that I sometimes worry about millers being bored by a development that we consider startling. In 1993, the consumption record was 16.4 million tonnes in terms of flour. That is up 76% from the flat-use line of 9.3 million tonnes noted earlier.
Based on developments I'll discuss shortly, we like to say that the modern milling era began in 1970. From that year through 1993, domestic consumption of flour in the United States rose 59%, from 10.3 million tonnes in terms of flour to 16.4 million. With the possible exception of poultry, few other sectors of the U.S. food industry grew in the past quarter of a century by more than 59%.
Considering that the daily milling capacity of the industry in the United States is currently right at 59,000 tonnes in terms of flour, the current pace of consumption increase means the addition of about five and one-half days of flour mill grind each year.
Consumption of flour is driven by changes in the number of consumers as well as by changes in the amount each person consumes. The U.S. market continues to grow in number of consumers, even though that rate has slowed, from 2% annually in the immediate post-World War II years to the current rate of about 1%. This means American milling has 2 million to 3 million new customers each year.
In the period between 1970, the start of milling's modern era, and the middle of 1993, the U.S. population grew from 205.1 million to 258.2 million, an increase of 26%. You will remember I noted earlier that domestic flour use gained 59% in that same period. Thus, you come to the astounding conclusion that consumption of flour in the United States in the last quarter of a century has risen at more than twice the growth in population.
Here, of course, the driving force is expanding per capita consumption something that, so far as I can tell, is happening in no other developed country in the world.
In 1993, U.S. per capita consumption of flour reached 63 kg, up 0.5 kg from the year before, up about 2 kg from the start of the decade and up 13 kg, or 26%, from the average of 50 kg in 1970. Not so incidentally, the latter just barely misses being the historical low, which was 49 kg in both 1971 and 1972.
Americans currently are consuming more flour per person than they have in 46 years, or since 1947, when the per capita rate was 65 kg. Actually, the peak during World War II, spurred by shortages of other foods, was 75 kg in 1943. From that level through 1972, the fall was 25 kg, or 34%. The rebound from that low offsets a little more than half of the earlier sinking spell.
As someone who has told American millers on more than a few occasions that they can take little, if any, credit for this turnabout in the fortunes of American flour milling, I'll tell you that I've been rethinking that assertion. Increasingly, I believe that the millers' response has contributed positively to the recovery of flour consumption. At the very least, U.S. millers performed admirably in seeking to accommodate a totally unexpected trend.
I hardly need to tell you how delicate the balance is between flour production and flour capacity. Milling in the United States, like that in many other nations of Europe and elsewhere in the developed world, suffered for years from excess capacity.
Too much capacity obviously leads to a deterioration of milling margins. Ridding an industry of excess capacity can be an exceedingly costly undertaking, particularly in a nation like the United States, where antitrust regulation is exceedingly keen, and where efforts to collaborate are fraught with penalties to the point that no one even thought of that, even at the industry's lowest points in the 1950s and 1960s.
What happened to American milling is the wonder of wonders. Demand simply overtook capacity. Going back to the benchmark year of 1970, we estimated at that time that milling had 16% to 17% more capacity than was needed to supply demand on the basis of 307 days of operation a year, which is what we determine to be the annual equivalent of six days of grind each week.
By the beginning of the 1980s, excess capacity was down to 13%; it has been at around 8% since the late 1980s, and a few years have even seen the surplus dip to 6%. It's our view that 8% is a good number for both flour millers and their domestic customers, while also providing a margin to allow response to surges in export demand.
Let's look at these numbers another way. Between 1970 and 1993, U.S. flour production increased 5.7 million tonnes in terms of flour; in that same period, U.S. milling capacity, computed on an annual basis, increased 5 million in terms of flour. This difference in production and capacity increases accounts for the contraction in excess capacity.
In adding that much capacity, to bring the annual total to 18.8 million tonnes in terms of flour, compared with production in 1993 of 17.2 million in terms of flour, millers not only responded to the needs of a growing marketplace but also to the working of the marketplace. Thus, we calculate that mills in 1993 ran at 91.7% of capacity again computed on the basis of six days of grind a week.
The average operating rate has exceeded 90% every year since 1986. Grind at that level allows mills to enjoy a positive environment, stiffening margins near the point where investments in new capacity may be desirable. From the time hardly 25 years ago when investments in flour milling could not be justified by even the greatest of optimists to the current situation where new mills are being talked about and old plants are being modernized and expanded is to witness a revolution.
All of this has prompted a massive restructuring of milling. Consolidation during this period of market growth has been greater than anyone could have dreamed about a few years before. The largest company currently operates 23% of total wheat milling capacity, contrasted with 10% for the largest a different company no longer in milling when the modern era began in 1970. The four largest milling companies now account for 67% of capacity, against 34% in 1970; the 10 largest for 84%, compared with 62% 25 years ago.
The five largest companies include two that were not even in the industry in 1970. In the obverse, six of the companies that were counted in the leading 10 in 1970 are no longer in milling, mainly absorbed by those remaining. That is searing change.
If you ask the chief executives of the groups that operate the five largest flour milling companies and let me remind you that these companies have 73% of the industry's capacity only one would respond “flour milling “ to the question of what's your principal business. Again, this is monumental change of a sort few other food industries have experienced.
The changes in flour milling have been matched, if not surpassed, by what has occurred in the makeup of the principal customers for flour. For instance, only one of the major baking companies has the same ownership structure currently as it did in 1970; the others have gone through restructurings, acquisitions/divestitures and realignments that make them all totally different.
As in milling, many of these new owners don't regard baking as their major business; they apply a measure of professionalism to their purchasing and their relationships with their suppliers that make them comfortable in dealing with the largest enterprises, which in turn creates pressure on millers wishing to maintain their independence and unwilling to look upon size as a desirable goal in itself.
Two reasons stand behind our selection of 1970 as the start of the modern milling era. One of these relates to demand growth. The other is something uniquely American. Here I refer to the dramatic escalation in wheat and flour prices that occurred in the early 1970s as a result of the surprisingly massive purchases of wheat and other grains by the former Soviet Union.
Within a very short period of time, flour users had to deal first with a doubling in prices and then a further climb that proved a searing experience for anyone who used flour as a major ingredient. One result was strengthened relations between flour millers and their customers. Flour buyers became aware that haggling about cents in flour prices could be totally unproductive in markets that could soar with scant warning. A new measure of mutual respect found its way into these relationships.
This is an important point to address since reform of the Common Agricultural Policy and changes in wheat programs prompted by the Uruguay Round might make wheat pricing in Europe subject to the same sort of market forces as rule in America. After a long period during which Europe's wheat costs have been determined largely by government fiat, European millers and their customers may soon have to be aware of what is happening in global wheat markets, including events in places that up to now have been outside their concerns. Let me assure you that if this happens, and European wheat price movements become as volatile as America's continue to be, it will make for an industry much different from what you've known up to now.
Let us now look at the forces that have made demand for flour in the United States over the past 25 years grow at a rate more than double the increase in population. A number of trends are at work, which I divide into three kinds those that largely happened external to the industry, but which have had a dramatic impact on flour consumption; those that relate to health, nutrition and dietary concerns, which I would credit to external as well as intra-industry considerations; and those that are the direct result of actions taken by or within the industry.
As to the first group, which might be categorized as reflecting a lifestyle revolution among the American people, I would list:
rising number of women in the workforce (not so incidentally, some observers see this trend as halting and even possibly reversing);
great change in what constitutes a household and a family;
sharp contraction in home preparation of food, as well as sharply rising demand for convenience and time-saving;
growth of the food service industry and its recognition of flour-based foods as providing a base on which a profitable business could be built.
Let me just amplify on one of these the last. America experienced what many observers called the “hamburger revolution” in the 1960s. In my judgment, it should have been called the “bun revolution,” since so many of the most popular menu items were and are flour-based.
Marching along with the hamburger on a bun in spurring rapid growth in flour consumption was the soaring of pizza business to the point where pizzas, which use a lot of flour, consistently rank as the most popular lunch and dinner choices of Americans, whether eating out or at home. The fast food industry is driven by innovation, and one suspects that pasta might be the next class of flour-based food to enjoy accelerated demand as a result of the need of fast food restaurants to build their dinner-time business.
I can only shake my head with wonder when it comes to the second category of influences that encompasses how flour use was boosted by nutrition and health considerations. Having earlier noted the time when mothers were ashamed of feeding their children bread, I find the present-day environment, where complex carbohydrates the wonderful code name for bread among nutritionists are at the top of practically everyone's “good food list,” to be absolutely amazing.
Of course, the Food Guide Pyramid developed by the U.S. government (see diagram on page 10) symbolizes better than anything else the absolutely superb position to which grain-based foods has been assigned, not just by nutritionists and physicians, but also by government experts. Grain-based foods are the Pyramid's base, the most important component of the diet.
The number of servings recommended, six to 11 per day, represents an increase of 50% over current consumption levels, even after the increase of the past quarter of a century. In contrast to previous eating recommendations, where the U.S. government refused to favor one food over another, the Pyramid makes no bones about the importance of increasing consumption of bread and other grain-based foods for Americans of every age and shape.
Not too surprisingly, marching under the banner of the Food Guide Pyramid is fairly easy for all in grain-based foods. The industry has eagerly supported dissemination of posters and other literature presenting the Pyramid's message. The U.S. Wheat Foods Council, the main promotion arm of wheat growers, millers and bakers, has taken the lead, along with federal authorities, to assure that every school child know of and learn about the Pyramid and that adults are also made aware. Polls taken to measure consumer attitudes indicate that progress is being made and that more and more people are aware of the Pyramid.
In my judgment, spreading the word about the Pyramid must be at the top of any list of things the industry ought to do to keep the flour consumption trendline on its steep upward course. My list of industry actions that have affected or will affect flour use includes:
promote the Food Guide Pyramid and be sure people know how they can easily and economically eat the quantity of grain foods recommended.
keep innovating the format and product, which means that in-store baking needs refinement; and new products must constantly be presented in the long and successful line of variety bread, rolls, croissants, muffins, bagels, etc.
maintain awareness of ethnic diversity, looking for products that will solidify consumer appreciation for flour-based foods.
American milling owes a great deal to Europe, from which many of the hottest, or fastest-growing, products have come. We've given you the hamburger and hot dog sandwich, but you've given us any number of our best-selling products.
Two of the most successful flour-based food categories, pasta and pizza, have their origins in the cuisine of Italy. Even though the American versions probably would not have much success here in Florence or anywhere else in this country, that's not the point so much as is the success of the American food industry in adapting these products to U.S. tastes.
The same goes for the flour tortilla, which is hardly known in Mexico, but which is an absolute stunner when it comes to stimulating demand in America. Bagels, which had their origin in eastern Europe's ghettos, are now available in practically every grocery store in America.
These products, as well as some of their amazing American adaptations, reflect the willingness of U.S. millers and the food manufacturers they supply to search diligently and vigorously for new products that will capture the interest of millions of consumers. There's no sign ingenuity has been exhausted in the American food market.