All over the world and throughout history, flour has been considered a product of high nutritious value, used as a primary component in bread-baking, confectionery, pasta production and other industries. It can rightly be called a staple food and efficient means of satisfying hunger.

Lately, a number of factors have contributed to a rise in demand for flour including population growth, particularly in India and China, and lower income levels making customers choose in favour of more economic products.

Supplies falling behind the market needs created global shortage of grain processing products. In future the food security problem may be aggravated even further as the world population is still expected to increase.

The global picture of trade in flour products is mainly represented by four largest exporters – Kazakhstan, Turkey, China and Russia; and major importers - Central Asian countries, Libya, Iraq.

In 2007/08 international flour trade hit a record high due to a number of countries imposing limitations on export of wheat grain which brought more overseas deals with processing products. Afterwards, as World Grain Council data says, this volume has gone down since the grain quotas were lifted and major importers reduced the amount of flour purchased from abroad.

Russian flour market is highly competitive, however there are companies which, due to outstanding product quality and cost controls, have secured a stable share. As a rule, they have a favourable geographic location – next to the major agricultural production areas.

The largest flour producing regions in Russia are the Altay Territory (Western Siberia), the Chelyabinsk region and several Volga regions; the highest consumption is recorded in the Altay Territory, Moscow and the Moscow region, the Krasnodar Territory and the Chelyabinsk region.

Domestic production provides sufficient output - in 2008 it amounted to slightly more than 10 mln. tonnes - and imports are insignificant. It is expected that in 2009 output will increase, being accompanied by growing exports.

Geographically, household consumption in Russia has undergone some changes. In the European part of the country, which provided highest demand for consumer-size flour until the recent time, living standards have been rising, and baking at home has become less widespread. At the same time, the economically growing Eastern regions are buying more smaller-packaged flour instead of building up home stocks of 50-kg sacks.

The industrial demand is characterized by reduction in the bakery sector, compensated by a definite increase from manufacturers of confectionery and pasta.

Speaking about the product range, manufacturers driven by tight competition seek more diversity. Introductions to the assortment tend towards wholesome nutrition products, blends consisting of several flour grades.

Grain prices and profitability. Vertical integration of businesses

Margins in the flour milling sector are directly correlated with prices for grain, and fluctuations of the latter can seriously impact profitability of the business. Thus, in early 2009 when prices for grain soared and flour prices were characterized by a more moderate growth, millers faced the negative impact on the overall performance.
As an instrument against price volatility, recently food processors started turning towards a vertically integrated structure which could hedge them against rising cost of raw materials and bring additional margins coming from control over the full production chain.

Over the past years, Russian flour exports have demonstrated stable growth, and amounted to over 390,000 tonnes in 2007/08 marketing year. According to IKAR, forecast of grain harvest in 2009/10 fluctuates between 90-100 mln. tonnes, and analysts say export of flour in 2009 may be increased 1.5 times.

Amid the growing concerns about world food security, Russia has all the resources to establish itself as a major grain and food supplier. Agricultural land abounds and its use is not limited by any sustainability programme, the favourable climate allows to grow prime-quality crops and there’s sufficient processing capacity for manufacturing world-class products.

Up to now, the major export flows of flour from Russia were to CIS countries, which import a large share of grain processing products - Uzbekistan, Tajikistan and Azerbaijan, as well as Mongolia and Afghanistan. The breakthrough on the Afghan market was performed by one of industry leaders – OJSC PAVA, situated in Western Siberia. In 2008, the company shipments accounted for just under 50% of all Russian flour exports to this country.

The geography of Russian overseas flour sales is positioned to extend in the near future, as the large players begin to penetrate new markets. There seems to be an unabating interest in Russian grain processing products, particularly in Asia. Their quality/price ratio can excellently compete on the world market. Several regions, like Siberia which produces the second biggest amount of third-grade wheat in the country, offer flour of exclusive quality in terms of gluten and whiteness.

Compared to other major exporters, Russia has a sufficiently developed infrastructure, and access to ports in the South and the East allows to maintain effective logistics.

At the same time, export of flour products still requires more federal support, and subsidies for the industry could greatly enhance the overseas trade.

Operations and product range

One of the companies that holds leading positions on the Russian flour market is OJSC PAVA, that recently started a large-scale transition to vertically integrated agroindustrial structure. Currently, its main operations are production of flour and animal feed, grain storage and grain trading. Headquarters of PAVA are located in Barnaul (the Altay Territory, Western Siberia).

The company, which employs over 2,000 people, has three production units – 2 milling plants in the Altay Territory and one plant in Achinsk, the Krasnoyarsk Territory. Besides, it owns vast storage facilities for over 570,000 MT of simultaneous storing, with developed infrastructure and access to railroad. The mills of PAVA can process up to 400,000 MT of wheat grain per year.

The company products are sold under two brands with wide recognition at home and abroad: ‘PAVA’, for upper end of the market, and ‘Altay-Batyushka’. In end-2008 PAVA developed an exclusive processing technology and introduced a new flour grade ‘Zhitnitsa’, which is characterized by unique health value that has no analogues in the world.

Market standing

PAVA ranks among the top five grain processors in Russia, and is the largest one to the East of Urals. Production units of the Group account for 20% of all flour manufactured in the Altay Territory. The sales span 68 regions which constitutes almost the entire country, and the export activities are strong.

Remarkably, PAVA became the 7th in the list of Russian companies and the 1st among agricultural and food companies to go public in 2005. 10% of its shares is in free float, quoted on MICEX.

New strategy

New strategy seeks control over the full field-to-table chain, and PAVA has re-organized its structure registering two daughter enterprises. The first, OJSC ‘Russian Agricultural Division’ (RAD) has joined the company existing farms and built up a solid land bank, putting under control over 160,000 ha. With RAD, PAVA has secured production against fluctuating price of raw materials, and works to improve grain yields by advanced approach to farming.

In search of new market opportunities in the highly competitive environment, PAVA decided to diversify into production of high value-added wheat ingredients such as VWG, starch, syrups, alcohols and others. The plant for deep wheat processing will start operations in 2011, but preliminary contracts have already been signed for the total output, as the global and domestic demand for these products is rising dramatically. The project is registered under the name ‘Grainvest’.

Competitive advantages

Operating for almost 10 years, PAVA has become one of the respected leaders on Russian grain processing market with solid experience and in-depth industry knowledge.

The Altay Territory, where the company is located, is a traditional supplier of prime quality, high-gluten wheat, and flour produced here has the highest baking qualities, which is part of the reason that PAVA export co-operation has been thriving.

The enterprises are located in close proximity to major buyers in Central Asia, which enables the company to make railroad shipments at an easy cost. Convenient access to railway allows successful product delivery to sea-port destinations.

Large scale of activities and improved cost control are important for the ability to set competitive level of prices.

Innovative approach enhances economy of the production, e.g. recently developed flour grade “Zhitnitsa” increases overall output while being a unique source of nutrients and excellent baking material.
 
Export co-operation: achievements and future goals

In 2005 the company became strongly oriented on development of export business, and carried out its first overseas shipment to Georgia. Later, sales expanded to other neighbouring states – Mongolia, Uzbekistan, Tadzhikistan, Kyrgyzstan and others.
In 2008, export sales geography significantly widened, including other Asian and African countries – Thailand, Bangladesh, South Korea, Kenya, Somalia, Ethiopia.

Subsequent to the results of 2007, PAVA was granted the status of the leading flour exporting company on the Russian grain processing market. The company’s export deliveries totaled 17% in overall volume of flour exports. Furthermore, in 2008 PAVA experienced a dramatic 84% upturn in overseas sales, and was declared the most rapidly developing exporter of the industry.
PAVA develops its export activities as both commercial shipments and food aid within UN World Food Programme.

The company set up a separate subsidiary, responsible for export coordination, and its strategic course puts a great emphasis on exploring new opportunities abroad. Increase of customer base and penetration into new markets are the main tasks – PAVA envisages to increase its distribution network in such core regions as South Korea and China.

PAVA technologists have deep understanding of the market needs in partner countries and specific features of national bread baking. The equipment allows to make adjustments to flour quality parameters, and fulfill individual requirements, which is confirmed by multiple positive feedback.

The company new business model will be unique for Russia, and PAVA is committed to maintain deliveries of best-in-class products to its customers and ensure profitability of growth.

FoodBizIntel®

About Agroindustrial Company OJSC PAVA

Agroindustrial Company OJSC PAVA is one of is one of the three leading grain processors in Russia. Company’s main business – processing wheat grain into flour of different grades and animal feed, as well as purchasing, storing and distribution of cereals. PAVA operates two grain processing plants in the Altay territory (Rebrikha mill, Mikhailovsky mill) and one in the Krasnoyarsk territory (Achinsk mill). The plants have well developed infrastructure including their own grain elevators, railway junctions and close proximity to the cultivation area. PAVA sells its products to 68 regions of Russia.

Moreover PAVA constantly cooperates and supplies foodstuffs to overseas markets within the framework of UN World Food Program. The Company supplies high-quality fortified flour to Tajikistan, Afghanistan, Kenya, Somalia, Ethiopia, South Korea, Bangladesh, Azerbaijan and other countries. Subsequent to the results of 2007, PAVA was granted the status of the leading flour exporting Company on the Russian grain processing market. The Company’s export deliveries totaled at 17% in overall volume of flour exports.

In 2005 “PAVA” was the first agro-industrial company in Russia to hold IPO and enter the capital market. Moreover, in the year 2006 OJSC "PAVA" has been assigned national corporate governance rating of B+ by the Russian Institute of Directors. In the following 3 years OJSC “PAVA” plans to gradually shift from the status of Russia’s major grain processing company and become a LEADING AGRO-INDUSTRIAL HOLDING COMPANY. Under this concept new lines of business will be launched. They are: THE DEEP GRAIN PROCESSING PROJECT “GRAINVEST” and AGRICULTURAL BUSINESS OPERATIONS “RUSSIAN AGRICULTURAL DIVISION” (“RAD”) (acquisition, lease, development and farming of agricultural land assets), consolidated under “GLOBAL AGRO”.