Asia asks: can Australia grow enough wheat?

Australia is the dominant supplier for Indonesia’s modest per capita wheat consumption but the gap between demand and Australian production capacity is widening fast

Image of grain storage area in a port

A ship unloading at the Eastern Pearl Flour Mills at Makassar, Sulawesi.

PHOTOS: Catherine Norwood

For the flour-milling industry, the South-East Asian story is unequivocally the story of developing economies with an emerging middle class. In countries such as Indonesia, flour milling only dates back to the 1970s, but rapid growth in the past 20 years has seen wheat-based products rise to become dietary staples. Instant noodles, for example, are now ubiquitous, and demand for bread is increasing steadily.

While Australia currently has a market share of up to 70 per cent of wheat imports into South-East Asia, millers and food processors in the region question whether Australia will be able to maintain this, given the scope of potential demand.

In other words, while per capita consumption is still low in many South-East Asian countries by Australian standards, consumption is trending rapidly upwards and, given the size of the population, could eventually require more than Australia’s current total wheat production.

Greg Harvey, managing director of Interflour, one of the largest millers in the region, says Malaysia currently has higher levels of consumption per person because it is more advanced economically, but Indonesia is rapidly catching up. Interflour has four mills in Malaysia and one in Indonesia, as well as mills in Turkey and Vietnam.

In Malaysia per capita wheat consumption is about 40 kilograms a year and about half this in Indonesia; Australia’s per capita consumption is about 120kg a year. Given Indonesia’s larger population – 250 million compared with Malaysia’s 35 million – it already imports four times more than its neighbour. Indonesia’s imports in 2013 totalled 7.2 million tonnes, while Malaysia imported 1.5 million tonnes.

To put this into a clearer market perspective, Mr Harvey points out that if consumption of wheat-based products in Indonesia only reaches Malaysia’s current consumption, it would require 16 million tonnes of wheat a year.

“So when we do the figures there are some big issues with the ability of Australia to supply South-East Asia,” Mr Harvey says. “Can Western Australia and South Australia [the main exporting states] meet the anticipated growth just in these two markets – before we add in Vietnam, Taiwan, the Philippines and Thailand, plus existing markets in Japan and Korea?”

Regardless of where the wheat will come from, South-East Asia’s milling industry is expanding rapidly to meet this rising consumption, with Indonesia at the forefront of this expansion.

Deregulation in Indonesia

The flour-milling industry in Indonesia was deregulated at the end of the Suharto Government era in 1998. At that time there were five flour mills with a total capacity of five million tonnes a year, including the Eastern Pearl Flour Mills at Makassar, South Sulawesi, operated by Interflour.

Image of a person in a food processing factory

An operator at the Eastern Pearl Flour Mills, Indonesia.

Since then competition has become fierce, with new players entering the market. By the end of 2014 there will be 29 mills in Indonesia, with a total capacity of 8.2 million tonnes. Many of the new mills are based in Java, positioned to supply both Indonesia and Malaysia.

Eastern Pearl Flour Mills has the second largest share of the Indonesian market, behind Bogasari Flour Mills, a subsidiary of the international food corporation Indofoods.

The Interflour mill is the fourth largest mill at a single site in the world, capable of processing 2800t of wheat a day – up to 700,000t a year. It has five milling lines, with a newly installed sixth mill to be operational before the end of the year, adding another 250t a day to production capacity.

Establishing effective wholesale and distribution networks in Java and strong branding, providing technical support, holding baking and cooking demonstrations, and developing specific flours for end users are all part the company’s strategy to maintain market share. It has 24 different flour brands of high, mid and low-protein flour available.

While price is the dominating factor for customers, Eastern Pearl Flour Mills also focuses on quality – in particular a high-protein branded product that is largely made from North American wheat, and mid and low-protein products largely made from Australian wheat.

In 2013 its wheat purchases were: 76 per cent Australian, 13 per cent US, seven per cent Russian and four per cent Indian. The breakdown of Australian purchases was 70 per cent Australian Premium White, 28 per cent Australian Hard and two per cent Australian General Purpose.

Average wheat receivals of 25,000 to 37,000t arrive twice a month and are unloaded directly into the mill’s 85 silos.

Cleaning, as with all mills, includes sieving to remove foreign bodies, optical scanning and removal of discoloured grain, and the use of magnets to remove metal. Water is added to the wheat, which is tempered for eight to 12 hours before milling, sifting and fortification with folic acid – part of a global initiative to increase nutrition and improve health and development, particularly for children.

Quality testing is continuous – wheat samples are collected during cleaning and tested for moisture, protein and colour; the samples are milled and baked independently of the larger milling process to test end-use performance.

As wheat is blended for milling it is sampled to check the blend is correct, and flour samples are collected and tested every hour during milling. Quality is checked again before the flour is bagged.

Image of a man in a food processing factory

At Cherry Bakery in Makassar dough is prepared into industrial mixers before being loaded in automated forming machines.

Cherry Bakery

In Makassar, Indonesia, perceptions of value drive consumer choices. For the city’s largest baker, Cherry Bakery, this means bigger, higher-rising loaves for the same price. “It all comes down to how much you get for the price,” says the company’s owner Cherry Liem.

Makassar is the capital of the Indonesian state of South Sulawesi and, with a population of 1.3 million, it is Indonesia’s sixth largest city. Cherry Bakery opened its doors only 10 years ago and has grown from 20 to 100 staff. Flour use has increased from 300 tonnes to 1500t a year.

Initially the bakery only supplied businesses within the city of Makassar, but a fleet of delivery trucks has allowed it to extend its network, servicing many smaller towns and cities throughout South and Central Sulawesi.

The bakery began with just six basic items, which has increased to 10. The best sellers are small cream-filled buns that sell for 1000 rupiah – about 10 Australian cents. These make up 60 per cent of sales, with pineapple, coconut, chocolate and peanut butter the most popular flavours. Burger buns are another popular product.

“As customers want bigger bread, but at the same price, we need to use higher-rising flours, and good-quality flour with good water absorption and gluten levels,” Mr Liem says. “So we prefer spring wheat from the US and Canada. We blend high and low-protein flours to get a good dough composition.”

Production processes are semi-automated, including two mixing machines and dough-forming equipment.

“We would like to expand our products, but we will have to see. The buying power of the people is quite difficult at the moment. In a depressed economy, even 10 cents can seem like too much,” Mr Liem says.

Earlier this year, Ground Cover writer Catherine Norwood undertook a GRDC study tour to learn firsthand from traders and processors what shapes the South-East Asian market. This is the second in a series of reports based on wide-ranging meetings with major buyers and processors.

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Region National, Overseas, South, West