With the number of flour mills in Turkey falling nearly 60% in 15 years, S&P Global Commodity Insights has spoken to Eren Gunhan Ulusoy, Chairman of market-leading Ulusoy Flour Mills, who said the country's environment, in terms of managing price volatility, has changed due to the COVID pandemic and then the Russia-Ukraine war.
"Tiny margins and the environment are not easy," Eren Gunhan Ulusoy said in an interview.
Turkey's competitive market conditions, together with interest rate and currency issues -- there are about 28 lira per dollar, up from 3-4 in 2017 -- make it a difficult environment for mills.
Following is a Q&A lightly edited for clarity.
S&P Global: What has happened to the Turkish milling industry in the past few years?
Eren Gunhan Ulusoy: The industry saw a booming decade in the 1980s and 1990s. The country's milling capacity increased very quickly in these two decades. At the beginning of the 2000s, there were about 1,200 mills. This created extremely competitive market conditions and shrinking margins. The number of mills started to decrease, and it was down to 500 by 2017. In 15 years, the number of mills halved.
We have always had excess capacity. Capacity utilization is now up to 58% from historically around 50%. Low margins are hard for millers.
Raw materials are not that big a problem because Turkey does not just rely on imports. It has a local supply of say 20 million mt and imports of roughly 10 million mt – two thirds of the supply are local supply, and we have not had disruptions on the supply chain.
S&P Global: How much of Ulusoy's flour production is for the domestic market?
Eren Gunhan Ulusoy: The combined share of Ulusoy and Soke [a popular flour brand in Turkey, owned by Ulusoy] is in total around 5% in domestic and close to 9% in exports of Turkey. Turkish flour exports in the last calendar year were 3,040 million mt, the season year from July to June 22/23 is 3.245 million mt, the next season will be close to 3.7 million mt. Almost half when we consolidate all our mills, but it depends on the location of the mill. The ones near the port produce goods for export and the inland ones for the domestic market.
S&P Global: When the number of mills fell between 2002 and 2017, what happened? Was there consolidation?
Eren Gunhan Ulusoy: No. They were closed or were destroyed. They were uninstalled and sent to Bangladesh and Myanmar as machinery. I would say 80%-85% of the shrinkage was mills that left the market. Only around 15% were mergers and acquisitions. There are fewer than 10 companies with more than two mills. There is one company with three mills and there is only one company [Ulusoy has six mills, with the largest production capacity of milling in the country] with more than three. There are not more than 10 companies which own six, three and two mills. When compared to Europe and the US, we are at the beginning of the era for consolidation.
S&P Global: Why have none of the multinationals entered the Turkish milling market?
Eren Gunhan Ulusoy: Tiny margins and the environment are not easy. You need to know about the dynamics of local production, the inflation environment, the regulation, and intervention by the government. These are some uncertainties which make it harder. There was only one attempt by Interflour Group which operates in SE Asia. They were operational in Ankara for six or seven years, but they closed. Interflour only operates in Indonesia, Malaysia, Philippines, and Vietnam as of 2023).
S&P Global: How do you manage price volatility?
Eren Gunhan Ulusoy: Physical short-term contracts – one month, 45-day delivery, there is no way to make forward delivery contracts because there is no trust. But war in the Black Sea can limit delivery. We are used to getting spot shipments and keeping them in our warehouse. We prefer to carry more stock in our warehouses compared to carrying long-term delivery contracts. Our attitude has changed in the last three years, from the pandemic and then war. A forward position used to mean 2-3 months in this region, but now it is one month.
S&P Global: Some people have said the milling industry is going to die, what is your response?
Eren Gunhan Ulusoy: I started 20 years ago in a family company, which was started by my father 54 years ago. One year after I started at the company, I went to my father and said this business model is not sustainable. He said why? I said we are exporting to countries which are starting to build mills that they own, so they will not import flour, but import wheat. I was correct for the countries 20 years ago: Azerbaijan, Georgia, Iran. But the countries reduced imports and new countries opened in the market. Now it is Iraq, Syria, Yemen, Venezuela, Sudan and Angola are reducing imports because they are building more mills, but Venezuela imports are rising.
Unfortunately, I am not happy to mention it, but if there is some civil unrest then that country needs some imported supply because the production chain can become interrupted too.
S&P Global: What will be the biggest change in the next 20 years for the Turkish milling industry?
Eren Gunhan Ulusoy: The consumption habit is changing to more ready-to-eat products, personalized products, industrial flour products channel will grow faster and faster. i.e., a croissant will grow compared to a simple bread product. The client demands the products and the industry changes to more specific production.
