Flour Mills: Quality and Competition

One of the blow-by-blow reports on the wheat harvest posted on the cngrain.com web site last month reports on quality issues and competition in the flour-milling industry in Bozhou, a city in western Anhui Province.

Mr. Liu, the manager of a flour mill in Bozhou, says the supply of wheat is tight. The cost of buying wheat is high--1.05 yuan/jin--leaving little room for profit. He says they are buying wheat now, but being careful to make sure the wheat is good quality. Liu says the company is concerned about the quality of their flour and the quality of wheat is the key.

In recent years his company set up a 2000 mu quality wheat seed base to supply farmers with seed. When the wheat is harvested they buy the wheat at a high price. This way maintain wheat quality, and guarantee a raw material supply. According to him, other large mills in the area all use this method.

The company buys its wheat from traders who buy directly from the farmers. The traders supply them with good quality wheat, but the price is high. Says Liu, "Most of the time traders give us samples of the wheat. If it meets our quality standard we buy it.”

With large numbers of flour mills competing to buy wheat, there have been instances where companies engaged in panic-buying at high prices and lost control of quality. According to Liu, last year some companies bought wheat that cost them 1.08 yuan per jin after adding interest and storage costs. They lost money at these prices. The current price is 1.05 yuan. Even worse, they didn't control the quality, did not store it well and "had some problems."

According to Liu, the local flour industry has excess capacity and low profitability. The government set designated sales for some large companies and placed a limit on the flour price. Recently, the price of bran (the by-product used in animal feed) went down, eroding profitability. This put pressure on small mills to cut back production or shut down. Large companies receive government support. Liu says his company receives support from the Agricultural Development Bank of China to buy a certain amount of wheat, "as long as we don't panic-buy."

According to the article, the industry re-shuffling process is speeding up with guidance from the government.