North Dakota State Mill & Elevator

One More Step Down the Ladder

The grain merchandiser at your local elevator works hard to sell your wheat at the highest price, perhaps to an exporter or maybe a domestic mill. Steve Sannes, Sales Manager at the North Dakota Mill in Grand Forks, is one more step down the ladder, selling the flour produced from your wheat to end users. The North Dakota Mill sells to several hundred customers each year, mostly domestic, but some flour does get exported to countries such as South Korea, Haiti, Canada, and Brazil. Flour exports have been declining as countries choose to import wheat, and mill their own flour. According to the USDA Economic Research Service, flour exports have Elevator

decreased from over 26 million cwt in 1989 to less than 5 million cwt in 2008, a trend seen by Sannes during his tenure at the North Dakota Mill.

Sannes works with all different sizes of buyers, and different sizes of purchases. “We do the 5’s and 10’s [pound bags] you see in grocery stores and 50’s and 100’s to distributors, and also handle totes for some customers, in addition to trucks and rail cars,” says Sannes. “There are large and small buyers, lots of mom and pop shops, and large private buyers. There are large companies that have a big presence, but the market is not dominated by just one or two buyers.”

Sannes views food safety is something that is becoming a bigger concern, even in the flour, where you typically do not see problems. “Some companies are requesting heat-treated flour, mostly due to the e-coli scare, and people eating raw cookie dough. Companies are taking the extra step to avoid the potential food scares,” says Sannes. “Food safety and quality are issues that take priority right now.”

When it comes to pricing flour, it is very similar to pricing wheat with one exception; millfeed credits. Millfeed is the byproduct of the milling process and it has a separate market that is traded and can move extensively. It is not traded as a future position that you can hedge, but gets sold to animal feed manufacturers and is used as ingredient for cattle and hog feed. “Based on what we can sell the millfeed, it is a deduction off their flour cost. It’ll follow the corn and soybean market quite extensively,” says Sannes. “Cold weather will have an impact because animals need more to eat when it’s colder, so there’s a demand factor. If the mills aren’t running real strong, there’s a supply factor that will have an impact.”

“When we sell flour forward and we have millfeed credits out there, that’s risk for us and we try to hedge off and sell millfeed to cover our feed credits just like we do with wheat. We lock in futures to protect ourselves but basis is more difficult to hedge until you actually buy the wheat,” says Sannes, sounding very similar to a wheat farmer who is trying to take the opposite positions as he sells his wheat. “We have futures out for 2011 flour purchases, but to flat price a contract out in 2011 is pretty risky because of the basis,” concluded Sannes. The flour buyers are very aware of changes in the futures and basis. “If there is a change in grain price, and we don’t reflect that right away, our buyers know that,” said Sannes. The flour buyers follow the grain markets, and know what the markets are, and they know what the prices should be, based on the protein they’re buying.

Listening to Sannes discuss his flour sales sounds nearly identical to a farmer discussing his wheat sales. Buyers are becoming more sophisticated and have increased demands, price risk can be difficult to control, especially with large prices swings, and markets are changing. Whether you are a farmer producing the wheat, or a seller down the line selling wheat products, the challenges of profitability remain the same.

Steve Sannes, Sales Manager

North Dakota Mill in Grand Forks