Vietnam mills are hungry for WA wheat

There is no mass-produced sliced bread and no distribution network for it - local bread would become stale stuck in traffic before it reached retail outlets.

Rapidly escalating bread sales in Vietnam, as a 90 million population transitions from a traditional fish and rice-based diet to a more western diet, depend on thousands of small bakeries serving a local clientele, often with specific preferences for flour they use.

It is a similar story across the rest of South-East Asia with a total population of 680 million becoming more accustomed to having their daily bread.

An 80,000 tonne Panamax-sized ship load of WA APW wheat delivered to CBH Group's joint-venture business Interflour via its own deep-water port facility 27 kilometres upstream from the mouth of the Thi Vai River, 80 kilometres south of Ho Chi Minh City, is gristed, milled and blended into more than 65,000 tonnes of flour.

It goes to bakers in 20 kilogram bags.

The Vietnam supply chain is laborious and complex, and competition from other millers is strong.

Again, it is a similar story across South-East Asia.

But despite distribution difficulties and a myriad of local preferences, Interflour's annual sales have grown from 352,000 tonnes in 2009 to 3.422 million tonnes last year, with a 64 per cent increase between 2014 and 2015, farmers on the CBH grower study tour were told last week.

When CBH bought a half-share of Interflour in 2004 from Indonesia's largest conglomerate, the Salim Group, some growers recalled it was a "basket case" and very much second fiddle to Salim's massive Indofood enterprise.

It is now one of four major flour millers in South-East Asia and aiming to become the sixth biggest in the world.

With the purchase last year of a competitor's mill at Da Nang on Vietnam's central coast to complement its Cai Mep mill and port in the south, and construction of a US$30 million greenfields mill at Subic Bay in the Philippines, Interflour has eight flour mills across South-East Asia, including in Indonesia and Malaysia, and one in Turkey.

According to Interflour managing director, chief executive officer and former CBH employee Greg Harvey, it buys four-five million tonnes of grain a year, two thirds of it from Australia and 90pc of that from WA.

Mr Harvey told the WA growers it was also prepared to pay a premium of up to $10 a tonne for WA wheat because mills could extract more from it than lower quality, but cheaper, wheat from the Ukraine and Argentina.

"Australian wheat is the core ingredient for flour in this part of the world," he said.

"The Australian Wheat Board did a great job for decades in developing varieties and a position in the market place as producers of clean and green product, and deregulation hasn't diminished that at all.

"Our (WA) wheat is clean, low in moisture, it's white, that means we can extract a bit more of it at the flour mill.

"Nature and geography mean that no one can compete with the freight rates and turnaround times - nine days from Kwinana - freight advantage to WA, and it's always going to be like that."

But growth in South East Asia will see WA's share of the market gradually diminish, he said.

Australian growers will be unable to keep up with per-capita flour consumption in developing markets like Vietnam, Indonesia and Thailand, and emerging markets like Myanmah, with consolidated annual growth expected between 5 and 6pc for at least the next 10 years.

"Australian productivity increases in agriculture range from 1-1.5pc per annum in the grains industry versus the 5-6pc growth rates that we have here.

"The maths just doesn't add up.

"All I can say to CBH shareholders is that at least with this investment (Interflour), when you can only supply so much wheat because of constraints, you can also buy into that total grain market to supplement profitability - it's a good problem to have," Mr Harvey said.

He predicted a consolidation of the grains industry across South East Asia and a need for Interflour to continue to grow to capitalise on the market.

"Flour milling, like farming, is asset heavy and it sucks up revenue.

"We've got to pay for wheat on loading, we might not get paid for flour until six months later.

"We're in growing markets where we have to keep investing to keep profits coming through.

"If you go into Interflour, or any other agribusiness worldwide looking for a high-yield dividend, that is not the investment you should be making.

"Your return comes from capital growth, capital appreciation on exit," he said.

Answering questions from growers Mr Harvey said Interflour paid out about 95pc of retained profits as dividends to its two shareholders, CBH and Salim Group.

CBH annual reports 2012-15 showed Interflour had paid CBH annual dividends of $7m, $8m, $12.1m and $8.4m.

Director Simon Stead said he would discuss some growers' wanting greater transparency of how the dividends were used, with the CBH board.

Tammin grower and WAFarmers president Tony York pointed out that much of the information relating to the profitability of Interflour was of a "commercial in confidence nature" that could benefit competitors of Interflour and Salim Group in the region if it were more widely publicised.