National Flour Mills holds flour prices stable despite higher wheat prices

National Flour Mills’ unaudited financial statements for the quarter ending June 30 2021, released earlier this week, was a testament to what businesses are experiencing all over the world. As a result of shocks along its value chain – from the acquisition of raw materials to getting packaging, to the costs associated with selling and distributing the end product – NFM, the state supplier of flour, realised $2 million in profits.

While in his chairman’s report, Nigel Romano attributed the decline in profits to many things, one of the main reasons was that US providers of the raw material – wheat – are experiencing the worst crop in 33 years. And wheat prices are rising.

Spring wheat, planted around April and reaped in late summer,
is experiencing a dramatic shortfall, according to the US Department of Agriculture (USDA) with 38,102,000 acres harvested from 46,743,000 acres planted. In addition to a combination of disruptions, the average price of wheat rose from US$5.49 per bushel in 2020 to US$7.27 in 2021, according to Macro Trends.

NFM: costs leave profits unleavened

Despite a $210 million turnover, slightly higher than the $206 million it made in the same period last year, NFM incurred a 12 per cent increase in the cost of sales – the cost incurred to acquire materials and labour to produce the final product – going up from $150 million in 2020 to $168 million this year.

Sales and distribution which includes promotion, packaging, warehousing, storage and delivery also went up from $17 million to $19 million.

In his report, Romano said the main culprit behind the hike in cost of sales was the cost of getting raw materials at its source, along with packaging, freight and transport.

The result was an 84 per cent reduction in profit, from $13,686,000 in 2021 to $2,145,000.

But while NFM’s profits were declining, the retail price of flour remained the same. According to the Ministry of Trade’s reports on supermarket prices, there was even a slight reduction.

In April, a 10kg bag of flour ranged between $73.30 and $77.50. In July, the prices ranged between $57 and $59.99. A 2kg bag of pre-packaged flour went for between $12.95 and $14.25 in April but dropped to between $11.95 and $13.99 in July.

NFM CEO Ian Mitchell told Business Day the company was doing everything it can to keep the price points at a level reasonable to the consumer, at whatever cost.

“When you look at what proportion of our costs are directly related to the raw material input, it is really the lion’s share,” Mitchell said. “But we are mindful of the fact that we are in a trying time. There are a lot of families that are disadvantaged, there are a lot of people that are out of work. So we take these things into consideration whenever we make these decisions, because our product is put into many different industries and processes. So we understand the impact of us making adjustments to prices.”

“So there is nothing you can do other than absorb the cost and monitor the situation. If it moves back in the opposite direction then we will get some relief, but if it doesn’t then it means that we will have to absorb the cost."

But like many other businesses facing shocks and increases in production costs, NFM cannot continue absorbing these costs forever.

NFM's flour brands include Ibis, Lotus, Hibiscus and Good and Natural.

Supermarkets Association president Rajiv Diptee said should these conditions continue, sooner or later the price of flour will rise.

“In addition to covid19 being a global phenomenon, the cost of shipping, which has elevated to alarming levels, the demand and supply situation with several countries back stocking for their own food security, and the cost of shipping to our ports, it is going to create a cocktail where we are going to be concerned about production of flour and what it means for meeting demand and staying within a price point to meet the expectations of the nation,” Diptee said. “Other companies go through the same channels to acquire flour so it is likely that if this is affecting the state provider for flour, it may be affecting the others.”

Diptee reiterated that supermarkets do not set prices and buy flour at the price points set by suppliers.

Greater Tunapuna Chamber of Commerce president Melissa Senhouse compared wheat to oil in that shocks in the value chain would lead to an inevitable rise in price.

“Ultimately increases in cost of sales and other expenses will result in an upward adjustment of selling price. Therefore bakeries, pizzerias, pet supplies manufacturers, and restaurants to name a few, will eventually have to adjust their prices.”

The bad batch

Although flour can be sourced from a variety of plants including soy beans, barley, buckwheat, oats, lima beans and corn, wheat is preferred because of its protein and gluten content, which traps gasses formed by yeast and baking powder, causing it to rise and making light, soft bread.

Wheat, mostly grown in temperate areas in the Northern Hemisphere, is harvested somewhere in the world every month of the year.

Some spring wheat is grown in mild winters in North Africa, Pakistan, India, Mexico, South America and Australia. In the winter, wheat is planted in the fall in most of the US, Europe and China but most spring wheat is grown in these territories. The bulk of wheat for local flour is bought from the US, the third largest exporter of wheat in the world.

Mitchell explained that a good crop is defined by its quality and quantity. Yield, the quantity reaped from what is sown, has a great influence over how the market is supplied. If, for example a particular acreage is spoilt due to flooding it would affect the quantity.

“Farmers try to plant what they think the market would demand. If for some reason that is lost it would affect its price.”

The quality of the grain is dependent on the protein. In general, wheat is either hard (containing 11-18 per cent protein) or soft (containing eight-11 per cent protein). Wheat with a percentage of less than eight per cent protein is considered poor.

A USDA crop progress report said as of August 8, the six states which planted the spring wheat crop (Idaho, Minnesota, Montana, North Dakota, South Dakota, Washington) harvested about 38 per cent of their crops. But crop quality is an issue with only one per cent of the crops graded as “excellent” and 10 per cent graded as “good”.

In 2020, 57 per cent of the wheat was considered good, while an additional 12 per cent was graded as excellent.

This was mainly because of drought which is affecting close to 98 per cent of the areas where wheat is grown.

According to the National Integrated Drought System in the US around 39.99 per cent of the states is in drought with California, Nevada, Idaho, Montana, Washington, Utah, Arizona and New Mexico experiencing exceptional and extreme drought. A total of 210 million acres of farm crops are enduring these conditions.

The outlook for Europe also has its fair share of bad news, with torrential rain causing flooding in Germany, one of the four top producers of cereals in Europe.

Mitchell said when the crops are bad, how one blends the grains to make the proper grade of flour would have to change.

“There are ways that the millers will try to adjust the mix to arrive at whatever the end user requires and they will typically fix that by blending. But it would cost you more money,”

Grain strain

But the wheat industry does not operate in silos. Most grain industries operate in tandem with each other so shocks and disruptions in one part of the industry affects another.

With regard to wheat, which is also a key component in the production of animal feed, issues affecting supply and demand for corn, another key component in animal feed added to the strain for the wheat industry.

In late 2020, Mitchell explained, issues affecting the supply and demand for corn had an effect on the prices of all grain. In March, NFM raised its feed prices between three to 14 per cent owing to an increase in global grain prices. In July, NFM raised feed prices again between 2.8 to 5.9 per cent.

“You have China buying huge amounts of feed grain for their swine industry,” Mitchell said.

“They had some issues with swine in 2019 and 2020 and they were trying to rebuild, so they started buying a huge amount and that in turn raised prices again.”

A Bloomberg report in May, citing information from the USDA, indicated that China has already cornered 9.5 million metric tonnes of US corn from next year's expected crops, about 37 per cent of America’s 2022 corn futures, to feed its growing hog herd.

Mitchell added with wheat production being divided into wheat for animal feed and wheat for flour and flour-based products, a lessened supply of corn would mean that feed manufacturers would have to depend on wheat even more as a main ingredient which, like many other factors, will affect its price.

He also said while local manufacturers have the option of seeking a supply from other areas, the shocks affecting wheat in the US would have a ripple effect all over the world, as the availability of grain would be compromised.

Asked how long NFM could keeping flour prices stable
for consumers, Mitchell said that was a question he could not answer. He said the company's only option at this time is to hold on until the prices for grains become less volatile.

“It is really pushing us to a point where we are hoping to see that things are back in a favourable direction but we have to look very closely at it,” he said.