Milling & Baking News - April 13, 2004 - 9

E D I T O R I A L

Unique performance of millfeed examined

hile many markets important to grain-based
foods have performed unusually, even
spectacularly, in recent weeks and months,
millfeed could be singled out as especially fascinating.
This byproduct of milling has reached price levels this
spring that are mostly unprecedented for the time of
year. Spring is a period when millfeed usually faces
downward pressure, but this year it has displayed amazing strength. Bulk middlings in Kansas City recently
have been at the same levels as the peaks of last winter,
and trades have been made within sight of $100 a ton,
a level beyond the recall of most market participants.
Hardly anything underscores the unusual character of
the market more starkly than the recent premium of $35
a ton over a year ago. As a commodity that frequently
trades in nearly identical price ranges from year to year,
the spread in 2004 over 2003 writes new price history.
This strength reflects the confluence of market-moving events that is itself unique. Of great interest to bakers
and other flour users is how the action of this market has
countered, as a byproduct credited against the cost of
wheat in producing flour, the considerable strength of
wheat this year. It is the millfeed credit that bakers need
to keep in mind in understanding how wheat prices more
than $1 per bushel above a year ago have translated into
bakery flour prices only about $1 per hundredweight
higher. Normally, such a wheat price advance would
mean flour prices nearly $2.30 per hundredweight higher.
And while competitive forces as well as a whole range
of other factors enter into flour quotations, the role of
millfeed looms large in the current equation.
Explaining what is driving the millfeed market into
new territory covers a broad range of supply-demand
influences. On the supply side, disappointing mill grind,
reflecting flour production levels, obviously has played
an important role. Many mills are running a half-day to
a full day less than customary operating rates, and this
has been the case most of the spring. Of course, export
demand for flour is stagnant, but that's not new. It is
likely that domestic disappearance is still feeling the
negative impact of diet choices that curtail consumption

of flour-based foods. Millfeed buyers in instances have
had to scramble for spot supplies, reflecting a remarkable supply condition for this season.
Compounding the slow mill grind is the lack of
forward flour bookings, with an increasing share of
business being done on a current basis. This, in turn,
stems from the unwillingness of bakers to book flour
ahead of new crop harvest at current wheat prices. As
a result, most mills are adhering to conservative stances
that avoid forward sales of millfeed, not wanting to risk
being short this volatile commodity into a future where
flour has not been sold. As a result, demand for deferred
shipment millfeed, such as October-December 2004, has
been mainly filled by merchandiser risk-taking, mostly
with contracts that include sizable premiums over spot.
As bullish as these supply forces may be, the demand
side for millfeed also has been spurred by this year's
sharp advances in grain prices, notably corn and soybeans, but also wheat. In feed manufacturing formulas,
millfeed competes with a range of ingredients, but it's primarily the prices of grains, like corn and grain sorghum,
as well as soybean meal that are looked to. As the millfeed
market has entered new territory, it still has lagged competitive ingredients, being at a discount of as much as $20
per ton below corn even at recent peaks. Strength in these
ingredients markets has been stimulated by shortfalls in
2003 production of corn and soybeans along with active
export demand. As if this was not enough, record or near
record prices for cattle, the livestock that are the primary
consumers of millfeed, as well as recent upturns in hogs,
also an important and expanding outlet, have intensified
demand. The upward slope of feed demand reflects rising
numbers of animals attracted by high meat prices.
The end result of these multiple forces has been this
spring's unusual millfeed market, particularly the positive
it has been in flour prices for bakers. In many previous
years, several of these very same factors accounted for
sharply lower millfeed credits at this season. In being grateful for this spring's action, beneficiaries of such a unique
millfeed market ought to remain aware of how swiftly
these same forces often do move in contrary fashion.

Watch on an industry leader facing problems

hen the largest company in any industry is having problems, these cannot help but reverberate
beyond the internal impact on its own owners
and employes. Wholesale baking is facing that situation
as Interstate Bakeries Corp. copes with disappointing
results. I.B.C. experienced an unexpected loss in its latest
quarter, attributed primarily to a projected sales decline,
it has suspended dividend payments in order to conserve
cash, and one of the rating agencies downgraded its senior
debt, with a negative outlook. As the largest wholesale
baker, as measured by annual sales of $3.5 billion, such
tribulations are daunting for the company's management
and its board of directors, and they are worrying for its
competitors and everyone else in grain-based foods.
Without attempting to assess the causes of Interstate's
problems or to compare its results with its peers, there
can be little cause for celebration of these results, even
by its fiercest competitors. After all, when the industry
leader is "wounded," as might be said of Interstate,
the certain efforts at recovery may take many different
tracks. Some of these could cause great harm to competi-

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tors and others could provide leadership for the entire
industry. The management of Interstate is held in esteem
on many counts. Yet, missteps also have been made, and
actions are under way to correct or reverse these.
Interstate's lineup of brands, primarily in white bread
and snack cakes, includes the grandest in all of baking.
Its efforts in super premium bread and in responding to
changing emphasis in the American diet toward weight
reduction and low-carbohydrate foods have yet to be
tested fully in the marketplace.
In watching how such a company can suffer setbacks at
a time when the economy is improving and when some of
its competitors have seized upon food preference changes
as a great opportunity is to learn how swiftly fortunes
may change in an industry as stable as baking has been.
It makes sense to wish Interstate's management success
in the endeavors under way to reverse these unfavorable
trends. That is particularly the case if one agrees that the
company's problems are not on account of loss of business to its competitors, but how it has done business in
the face of a harsh and shifting marketplace. MBN
Milling & Baking News, April 13, 2004 / 9

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Milling & Baking News - April 13, 2004

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