Canada Markets

The first potential merger in the wheat milling industry in more than 10 years was announced on Tuesday in the United States. It's a big, bold move and will undoubtedly have a profound impact on the North American industry.

The announcement involved the merger of Horizon Milling, which consists of the merged operations of Cargill and CHS, and ConAgra Mills, to form Ardent Milling. The combined operations will control one-third of the United States industry, while their combined revenues as indicated on their respective 2012 year-ends totaled $4.3 billion. The end result of the proposed merger will be a corporation which is 44% owned by Cargill, 44% owned by ConAgra, while CHS, a farmer-owned cooperative, will own 12%.

The Canadian connection in this merger involves assets currently owned and operated by Horizon Milling in our country. While the Horizon Milling joint venture between Cargill and CHS was formed in January 2002, the operation made its entrance into Canada with the purchase of the grain-related assets from Smucker Foods of Canada. At the time, the transaction involved the Robin Hood mill in Saskatoon, a mill in Montreal as well as a mixing facility in Burlington, Ont. A third mill in Port Colborne, Ont. was also involved but was closed in 2008.

In December 2011, Horizon announced that a new state-of-the-art mill would also be built at Guelph, Ont., which would increase the company's capacity by 30% and is scheduled to be opened in 2015.

The Canadian milling industry is older than the country itself, with records dating back to 1767 -- 100 years before the country came to be. There are currently 48 commercial scale mills that grind just over 3 million metric tonnes annually. Only one-third of the mills are situated in the West, which also tend to be smaller-sized mills. At the same time, close to 75% of the wheat utilized within the industry is hard red spring sourced from the Prairies. Canada exports milled product to more than 30 countries, with the U.S. being the largest customer.

Horizon is the second largest miller in Canada. The best data I can find suggests that ADM currently has a 39% market share in the country, Horizon 18%, Dover Industries 12% and Parrish and Heimbecker (P & H Milling Group) has 12%. The balance is made up of production from smaller-scale mills. Horizon will look to increase its share when its new plant in Guelph opens within the next few years.

Long gone are the days since I was a kid and we would deliver small volumes of wheat to a Saskatoon mill in exchange for flour. Today, only about 10% of milled product hits the store shelf as flour, while 90% is sold into the food processing industry where it is made into prepared foods such as breakfast cereals, frozen dinners and desserts. The industry has been forced to become nimble, addressing challenges from the low-carb diet movement along with changing trends, such as increased demand for such things as whole wheat products, ancient grains and gluten-free products.

Changes are taking place within the supply chain. The supply cycle may have ranged from weeks to months in the past, but it is now measured in days in many cases. Increased vertical integration is taking place within the chain to drive out costs and create the just-in-time delivery system to meet the customers' needs.

One recent presentation on the subject suggested that bakeries could find themselves forging partnerships all the way back to the grain producer to meet their specific needs in the new environment.

Canadian millers also face challenges with the newly de-regulated marketing environment for wheat in Western Canada. Recent presentations by two speakers I've seen on the topic have suggested that the CWB has historically offered wheat to the Canadian milling industry at equivalent levels, meaning that from an input cost perspective, competing operations were on a level playing field. Deregulation has forced operations to hone new supply relationships within the industry, while developing the risk management strategies needed to remain competitive while protecting margins.

Like all export-driven industries, the milling industry has faced challenges in Canada with respect to the strengthening of the Canadian dollar over time. Millers enjoyed the 65-cent dollar as did producers, although have since been forced to adjust to the current environment where the Canadian dollar is trading closer to parity with the U.S. dollar.

Other challenges in the industry revolve around the aging of our population, along with the lifestyle changes that have accompanied this trend. Increases in the ethnic population in Canada have led to increased demand for new types of products.

Misinformation in the industry, such as the controversy surrounding genetically modified grains and the recent book Wheat Belly, which blames society's increasing obesity epidemic on gene manipulation within the wheat breeding practice, has created confusion among consumers and increased the need for the food industry to ramp-up efforts to educate consumers.

These are early days within the deregulated environment in Canada. As Grainworld speaker Doug Hilderman suggested, "We are in Chapter 1 of a long and exciting book. The sand is shifting so fast after decades of marketing monopolies. Mergers, alliances, new roles, changing supply chain, new players, who survives, how much value gets added and what structural problems arise ... they will be sorted out as markets do."

I'm sure that Mr. Hilderman didn't expect a change as large as the Ardent Milling announcement only a week after making this statement, while the only constant in this industry is change and there will be more to come.

Cliff Jamieson can be reached at cliff.jamieson@telventdtn.com

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