NEW YORK — Having weathered the low-carbohydrate diet phase and the consolidation of leading wholesale baking companies, the flour milling industry has “demonstrated its resilience” and is attracting outside investors, according to “AgFocus,” a paper issued this month by Rabobank.

The report, which suggests considerable opportunity remains for milling companies large and small, even after the recent wave of milling consolidation, was written by Stephen Nicholson, vice-president, Food & Agriculture Research & Advisory, Grains and Oilseeds; and Sterling Liddell, senior vice-president, Food and Agribusiness Research.

While the creation of Ardent Mills earlier this year represents the “largest structural change in the history of the U.S. milling industry,” Rabobank said this change and other consolidation “do not spell doom for the remaining players.”

“Rather, they create opportunities for these companies to compete by identifying niche products, geographic advantages and strategic customers and partners,” Mr. Nicholson said.

Specific Rabobank suggestions for competing in the new milling world include identifying “post-merger orphan customers, expand milling capacity, acquire a competitor, develop a strategic partnership, vertically integrate your mill and /or identify new niche products such as ancient or multi-grain flours.”

Even as new opportunities are surfacing, challenges have grown, too.

“The cost of entering the sector has increased, with more assets in stronger hands and the remaining sector players seeing the value of their mill(s) increased, and wanting to be compensated accordingly,” Rabobank said.

In the period ahead, the largest and smaller companies will contend with the industry changes in distinct ways, Rabobank said.

“While smaller milling companies will experience challenges competing with new and larger entities, the larger consolidated mills will face the task of managing a larger enterprise and combining corporate cultures,” the report said. “These internal challenges are likely to create opportunities for smaller players. Larger milling companies first face the hurdle of proving themselves in the marketplace for both wheat producers and flour buyers by being price competitive, bringing corporate cultures together and by standardizing sales and customer service. The clear advantage of larger milling companies is their national footprint, which will give them a competitive advantage in sourcing wheat, being able to reach more customers, spreading costs over a large number of mills and bringing a larger number of products to the table.”

Elaborating on overall industry trends, Rabobank credited the milling industry for having weathered changing diets, consolidation and capacity rationalization because of sluggish demand. At the same time, the report calls growth prospects for milling “modest” at best. Population growth will be the principal driver of whatever growth is generated.

The authors noted that while total flour production has grown slightly over the last 30 years, the number of mills producing flour has fallen by a third since the mid-1980s.

These mill closings and industry consolidation reflect pressure to maximize industry efficiency, Rabobank said.

“Millers are under constant pressure to drive costs out of their operations,” Mr. Nicholson said. “While these improve profitability of their mills, the key factor is pressure from customers to keep prices competitive and at continually lower levels.”

Mr. Nicholson identified still another way mills have become more efficient in recent years — gradually raising extraction rates (the percentage of the wheat kernel milled into flour, rather than feed).

“The national average conversion factor and/or extraction rate is better than the generally accepted industry conversion rate of 2.3 (bushels of wheat per hundredweight of flour — the lower the more efficient),” he said. “For this reason, the trend toward whole wheat flour could be very profitable for the industry, as the extraction rate is 100%.”

A number of regional differences are evident in capacity ownership by company, Rabobank said. The report said Ardent Mills will be the leading company in the spring wheat growing area. Capacity comparisons were made using the Grain & Milling Annual, published by Sosland Publishing Co.

“Ardent Mills will have the majority of the milling capacity in California (35.9%), Illinois (52.4%), Minnesota (44.1%) Pennsylvania (50.1%) and Texas (56.1%),” the report noted. “In the major hard red winter wheat growing states, Ardent Millis is the significant player with 44.6% of the milling capacity, versus ADM, which controls just 21.9%.”

The latter company is a leader in a number of states, though, including Indiana (79.7%), Missouri (49%), New York (47%) and Tennessee (55.4%).

Grain Craft is the leading milling company in Alabama (48.4%), Georgia (73.9%), Idaho (100%), Oregon (100%), Montana (47.7%) and Utah (54%).

“And with the purchase of Cereal Food Processors, Grain Craft has the largest milling capacity share in Kansas, at 32.4%,” Rabobank said.

Soft wheat milling areas tend not to have the same degree of market leadership, Rabobank said.

“The soft red winter wheat growing areas east of the Mississippi river are splintered between the large and many smaller millers,” Mr. Nicholson said. “In Rabobank’s view, this region is where potential expansion and outside investment is possible due to the fragmentation. This area produces several varieties of wheat and is located close to many bakers and food processors (e.g., the Chicago area).

“Similarly, the Pacific Northwest offers opportunities for further expansion and investment due to the several varieties of wheat grown there, export opportunities form P.N.W. ports and wheat imports from nearby Canada.”