3 July 1998

Changes in store as co-ops


Co-operatives dominate the French grain trade.

Despite bringing stability to a potentially volatile market,

some growers suspect there may be a better way to

do business. Philip Clarke reports

DRIVING through the grain growing regions of central France, one thing in particular stands out as a reminder that you are abroad – silos.

Every village seems to have one, be it large, small, modern or dilapidated. There are other differences, of course. The crops are more advanced, irrigation is commonplace and every other car is a Renault.

But it is the appearance of centralised storage that sticks in the mind and is symptomatic of one of the major differences between the French grain trade and that in the UK. Most of these silos belong to co-ops.

Co-ops control about 75% of the so-called "grain collect", with the rest picked up by private merchants or local compounders and millers.

One of the co-ops involved is Agralys, formed two years ago as a union of the Dunois and Ligea cereal groups at Chateaudun on the south-west edge of the Paris basin. Collecting over 2m tonnes of grain from 7000 members, Agralys is the third largest co-op in France, with an annual turnover (for all activities) of 3.5bn francs (£350m).

The group has 12 central silos and over 150 other smaller stores, with a total capacity for 1.7m tonnes. About 40% of the grain is pooled, with the remainder bought on a weekly "spot" price.

But, while co-operatives dominate the grain trade, consolidation has been "a la mode" in recent years, says commercial director, Philippe Milochau. "In our area of Eure-et-Loir and Loir-et-Cher the number of co-ops has dropped from 17 to just six in the last 10 years," he says.

The rate of consolidation was greatest just after the MacSharry reforms of 1992, when trading margins came under pressure and set-aside reduced the volume of grain with which to trade.

Since then, the number of co-ops has been cut almost in half in France. According to the Paris-based Federation of French Agricultural Co-ops (FFCAT), there are now just 226 co-ops operating throughout the country, compared with 410 in 1990.

But pressure on margins has also meant that private companies have not been attracted into the industry, so market share has been maintained.

The dominance of co-ops is one of the reasons the French grain market is much more stable than in the UK.

For a start, most of them only sell their members grain and do not take additional positions in the market. As such, the actual volume of grain traded more closely matches the amount produced.

This contrasts with the UK where each tonne changes hands maybe two or three times before it reaches the end consumer. According to Mark Treadway, who heads the EU wheat desk of shipper/merchant Soufflet at Nogent-sur-Seine, this partly explains why UK prices are so much more volatile.

French traders also benefit from the fact that about two thirds of the countrys grain is delivered straight to co-ops and merchants silos at or shortly after harvest. Soufflet, for example, collects and stores around 2m tonnes in France, and owns another 350,000t of port silos at Rouen, La Rochelle, Southampton and Rotterdam.

"In the UK, at the start of each season, we have little idea of how much we will have to sell, or where we will be able to sell it," says Mr Treadway. "In France, the trade can make a much better forecast, both with regards to intra-EU trade and exports to third countries."

France also has more "bread and butter" business, with some overseas buyers almost guaranteed to buy French grain each season. The availability of government-backed export credits and more stable exchange rates help in this respect.

But, if things do get sticky when trying to shift the countrys average 15m-tonne wheat surplus, there is always intervention. "Unlike the UK, in France intervention provides a real support to the market," says Mr Treadway.

And then there is grain quality, which is much more dependable. Though last year was an exception, with about 45% of the crop downgraded to groups 3 and 4, generally French wheat is of milling quality, setting the standard for the rest of Europe.

But the French grain trade is not without certain weaknesses. The availability of a huge storage capacity – much of it held by co-ops – makes farmers less aware of the cost of holding grain, says Alain Benloulou, a wheat trader with Paris-based shipper, Cargill.

This makes them vulnerable when it comes to selling. "Over the past five years we have seen a trend for farmers to take a more speculative attitude to marketing their grain, breaking away from traditional co-operative pool pricing," says Mr Benloulou. "This appeared to be successful until this season, when those who held on to their grain too long met with disappointing prices.

"French growers are not yet used to trading tools such as futures and options," he adds. "But their attitudes are changing and we will soon see the effects, leading to new relations with their co-ops."

One company looking to latch on to this evolution is Toulouse-based Compagnie Continentale, (better known as Continental Grain in the UK).

"A new generation of farmers is coming through who are taking a more dynamic approach to marketing their grain," says the companys Jean Francois Martin. "Many are fed up with the co-operative system and do not want to pay the costs of financing it."

As such, two years ago Continentale launched its own on-farm collection service, to supplement its established shipping operation, buying direct from farmers in the Paris basin and hauling the grain to the ports.

The company now employs five full-time field staff and has built its direct buying business up to 300,000t out of a total grain trading activity of 3m tonnes in France. The task has been made easier by the rationalisation of co-ops and the fact that few of them demand 100% of their members grain. "We have no internal storage to worry about, so can offer a better price," says Mr Martin. "And, since farmers store in smaller bins and by variety, we can be more specific in getting the grain we want."

Whether other shippers follow suit remains to be seen. Some who have tried in the past have found the going tough, with strong links between the co-ops, the banks and the administration. Co-ops enjoy considerable benefits in terms of tax breaks and preferential interest rates.

Cargill itself bought into farm procurement about 15 years ago, but got out in 1988 and has no plans to retun to the sector due to what it sees as a poor return on investment.

Certainly the co-ops do not seem unduly perturbed by the Continentale initiative. "It makes life a little bit harder for us, but is not a real threat," says Mr Milochau of Agralys. Thats the public position, anyway.

But things are changing. Increasingly French farmers are looking for other ways to trade their grain, says Pierre Coutris of marketing company, Valeur Agricole. "French farmers are fundamentally independent and do not like being part of mega organisations," he says. Consolidation of the co-op sector means they have less choice of whom to sell to.

The response has been an increase in the number of farmers investing in their own on-farm storage to give themselves more flexibility. This is not a revolution, but a gradual process, says Mr Coutris.

Communal silos are not about to disappear from the French skyline, it would seem. But in future, farmers may be making rather less use of them.

Co-operative storage, like this facility at Ouzouer, south-west of Paris, gives traders a solid base from which to operate, according to Philippe Milochau of Agralys (inset).

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