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The Canadian Cereal Grain Flour Industry

This sub-sector includes firms involved in the milling of wheat, oats, barley, corn, and rye. Products are flour, semolina, bran, groats, and millfeed.

Introduction

In the early post-war years the Canadian flour milling sub-sector was the largest exporter of wheat flour in the world. However, as countries rebuilt their economies and invested in flour milling capacity, world market demand increased for wheat and decreased for flour. Starting in the 1970s, the European Union (EU) and the United States (U.S.) began to engage in export subsidy wars, which led to an increase in their world market share at the expense of Canada. By the end of the 1980s, the Canadian flour milling sub-sector had lost most of its commercial offshore markets. This left the sub-sector primarily dependent on the domestic market and suffering from overcapacity, leading to some plant closures. The Canada-U.S. Free Trade Agreement (FTA) brought about the elimination in 1991 of Canadian import permits for flour originating in the U.S., as well as the phased elimination of tariffs over a ten-year period. This was followed by industry reorganization, increased exports to the U.S. and higher capacity utilization, and increased output in remaining plants.

Significance

The value of shipments in the flour milling sub-sector has been increasing marginally over the years, amounting to $1,064 million in 1996, up from $891 million in 1988. Employment in 1996 was 1,984. This has declined by a third since 1988 with the closure of old mills, reorganization of the sub-sector through takeovers, and increasing automation. In 1997, Canada had a trade surplus of $64 million in flour. (Please see the appended table providing statistics on the Canadian Cereal Grain Flour Industry).

Structure

Sector contribution to the GDP in 1996 was $442 million. Value added has increased 34% since 1988, reaching $234 million in 1996, the most recent year for which statistics are available. The cost of wheat accounts for about three quarters of the value of flour shipments. Overall, the sub-sector has presented a fairly static economic picture in the last ten years.

This sub-sector is dominated by two large flour milling companies, both now American-owned. They control about 75% of Canadian capacity, which is approximately 9,000 tonnes per day. The Canadian flour milling sub-sector is regionally concentrated. Some 70% of establishments are located in Ontario and Quebec, 22% are in the Prairie provinces, with the remaining 8% in British Columbia and Nova Scotia.

A number of small mills serve local markets. Some of these mills produce stone-ground specialty flour, for sale on the premises.

The milling sub-sector is a major domestic customer for Canadian wheat, using about 2.5 million tonnes per year.

Performance

Performance in the flour milling sub-sector is influenced by raw material pricing, production technology and final-product demand.

Basic technology in the flour milling sub-sector has not changed substantially in the last hundred years, since the introduction of the roller mill that replaced stone mills. Although the roller mill is still the heart of the process, increasing automation allows millers to optimize production and reduce labour. A recent development, preprocessing, offers reductions in roll surface required, simplified milling operations, and by-product opportunities. Research and development activities are concentrated mainly in the areas of quality control and product formulation.

Flour milling is not a heavily regulated sub-sector. Products are subject to normal health and safety regulations, and elevator storage facilities are inspected and licenced by the Canadian Grain Commission. Millers must purchase all their domestic wheat and barley (if grown in the Prairies) from the Canadian Wheat Board, or from the Ontario Wheat Producers Marketing Board (for wheat grown in Ontario). Millers are also able to purchase imported wheat and barley (duty-free from the U.S. and Mexico).

There is also some producer investment in the milling sub-sector in the Prairies. CSP Foods is jointly owned by the Saskatchewan Wheat Pool and Manitoba Pool Elevators. Prairie Sun Grains is owned by the Alberta Wheat Pool. Recently both the Manitoba Pool Elevators and Saskatchewan Wheat Pool have taken an equity position in Can-Oat Milling in Manitoba and Saskatchewan.

As indicated previously, sub-sector output has increased modestly in the last ten years. Between 1988 and 1996, the value of industry shipments increased by 19% and the volume of production by 7.8% (as opposed to a volume increase of 15% in the U.S.). However, between 1991 and 1996 the value of shipments has increased by 43% and production volume by 11%, reflecting increased wheat prices and value added. During the 1988 to 1996 period, employment declined by 33%.

Investment

We do not have a subject on "Investment", our apologies.

Between 1991 and 1996, the Canadian market for flour increased by 68% (in value) and domestic shipments by 42%. Over the same period, domestic disappearance of flour increased by 14% in the U.S.

Figure 1: Total Shipments and Employment, 1988-96

Source: Statistics Canada (CANSIM) and/or Annual Survey of Manufacturers

From the signing of the FTA in 1989, until 1996, exports to the U.S. increased in response to growing flour consumption and U.S. takeovers of Canadian milling companies. This integrated 50% of Canadian milling capacity with the networks of U.S. milling companies, through cross-border trade and rationalization, and provided marketing channels for Canadian flour in the U.S. The quality and consistency of Canadian flour has also been a factor in increased exports.

Canada has been largely uncompetitive in offshore markets due to U.S. and EU export subsidies, although the U.S. has not used export subsidies for flour since 1995, and EU export subsidies declined with high international wheat prices between 1995 and 1997, but have recently increased again. Between 1988 and 1997, exports increased by 45% to a total of $103.2 million or 10% of shipments. The increase in exports raised capacity utilization to 90%, equivalent to U.S. levels. Imports increased by 670% to $38.8 million, but from a very small base.

In 1997 imports accounted for 3.9% of the domestic market and Canada enjoyed a trade surplus of $64.4 million in flour. In the U.S., exports changed very little between 1988 and 1995, at more than one million tonnes (6% of shipments), and have declined significantly in 1996 and 1997 to about 500,000 tonnes.

Figure 2: Imports, Exports and Domestic Shipments, 1997

Source: Statistics Canada (CANSIM) and/or Annual Survey of Manufacturers

Productivity measured on the basis of labour employed has increased within the milling sub-sector as employment has decreased. Factors affecting employment have been: increased automation, closure of old mills, and industry rationalization in Canada and the U.S. Automation has also had an effect on the productivity of the basic process, optimizing raw material utilization. Pre-processing has the potential to significantly improve productivity through reducing capital requirements.

Between 1988 and 1996, investment in building and construction decreased by 52% while investment in machinery and equipment increased by 38%. This period saw a number of mill closures in Canada. During the same period the remaining mills were modernized through additions such as automated process control. Canadian wheat, including durum, milling capacity has increased from 8,544 tonnes per day in 1994 to 9,460 tonnes in 1997. By contrast corresponding U.S. capacity increased from 65,078 tonnes per day to 72,901 tonnes in the same period.

As indicated previously, research and development spending is very modest in the flour milling sub-sector, both in the value of the resources applied and the sophistication of the activities. The two large flour millers do continue to operate facilities for product and process development. For smaller mills, technical facilities do not generally extend beyond a quality control lab.

Issues, Challenges and Opportunities - Toward the Next Century

Flour milling has traditionally been a low-margin operation. In order to profit from added value, milling companies have integrated upstream with bakeries and bakery supply companies, or starch and gluten manufacturers, to produce bakery mixes or ingredients to customer specifications. In-store bakeries and the rise of specialty muffin, bagel and donut shops have provided a value added market for the milling sub-sector. These operations use complete bakery mixes that require the addition only of shortening or, in the case of frozen dough, product can be put directly into ovens. This has given the milling sub-sector an opportunity to develop mixes based on customer specifications, increasing the amount of value added over the more traditional commodity-oriented business of supplying bakery flour.

Continued growth in fast food outlets and the ethnic and specialty bakery markets have also contributed to increased flour consumption.

Nutrition is an increasingly important consideration in consumer food purchasing decisions. Both the U.S. food pyramid and the Canadian guide to healthy eating recommend cereal-based products as one of the major constituents of a daily diet. In the U.S. market, companies promote the nutritional advantages of breadstuffs through use of the nutritional pyramid of healthy eating developed by the U.S. government. In Canada, grain and flour product producers have been discussing similar activities using Health Canada's "Rainbow" guide to healthy eating.

Trade Perforamance

We do not have a subject on "Trade Performance", our apologies.

Opportunities

The U.S. flour milling sub-sector has benefited from a steadily increasing rate of per capita consumption in cereal-based foods, and has exploited this potential through generic promotion of the nutritional advantages of wheat-based foods. In Canada, per capita consumption has been stable but the public has similar nutritional concerns. An opportunity may exist for the cereal-based industry in Canada, including producers, millers and bakers, to join forces and promote breadstuffs as a healthy eating alternative.

Another area of opportunity for the flour milling sub-sector is the market for food ingredients. Flour is a basic food ingredient that is priced largely as a commodity. Further fractionation of flour yields products such as starch and gluten that have a higher value added. Preprocessing yields bran fractions with characteristics such as high fibre, which may have high value applications as dietary fibre. Minor constituents liberated from the bran through preprocessing also have antioxidant properties. The starch component can be further processed into ethanol. There may also be further opportunities to produce higher-value products such as sweeteners and biochemicals based on the starch fraction, as is done in the corn wet milling industry. The food ingredient and nutraceutical markets offer the potential of greatly increased returns based on technological developments and specialized products.

At present, cereal fractionation in Canada consists of separating flour into starch and gluten. One company has recently been established in Western Canada to undertake further cereal fractionation. This involves separation of flour into starch, gluten and fibre. The starch fraction is converted into ethanol, and the fibre fraction is sold in the dietary fibre market. Changes to the Western Grain Transportation Act, resulting in producers paying the full cost of shipping grain to export position, may provide an incentive for cereal fractionation in the Prairies.

Employment

We do not have a subject for "Employment", our apologies.

Challenges

A considerable amount of milling capacity has been added to the U.S. industry recently. The U.S. will continue to be the major export market for Canadian millers, although exports to the U.S. have decreased since 1996 as consumption is increasingly supplied by new U.S. capacity. EU export subsidies for flour continue to provide a barrier to increased Canadian flour exports to non-U.S. destinations. EU export subsidies were reduced significantly between 1995 and 1997 when wheat prices were high, but subsidies have since increased again as prices have dropped.

The further development of a wheat fractionation industry in Canada would involve some basic development work. Corn is an excellent raw material for fractionation, yielding a host of products and derivatives. However, the U.S. corn wet milling industry would be a powerful competitor. Work would have to be done with wheat to establish what sort of derivatives are feasible and practical. In the corn fractionation industry the raw material, corn, is bred for specific end uses such as starch production. Wheat breeding in Canada tends to be based on general factors such as baking characteristics, yield, disease resistance, and visual distinguishability, aimed at producers and export customers. The challenge is to develop new varieties that respond to particular demands while meeting the general characteristics noted above. Registration of new varieties can take several years. If particular varieties are developed for specific end uses, industry would need to deal directly with producers to assure appropriate supplies.

Association

The Canadian Cereal Grain Flour Industry

Agriculture and Agri-Food Canada Contact

Date Modified: 2004-06-02		Important Notices
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