Ottawa think tank predicts recovery for Canada's food manufacturing and service industries

Thursday, April 10, 2014

by JIM ALGIE

Canada’s food service and manufacturing industries are expected to recover in 2014 from recent years of high costs and weak consumer confidence, a Conference Board of Canada report says.

Set against the background of moderating food commodity prices over the past six months and a stronger Canadian economy, restaurant operators and food processors should return to growth and profitability, the report released Friday says.

Part of the non-profit, Ottawa-based think tank’s Industrial Outlook for the winter of 2014, the report predicts recovery from recent challenging years in both food manufacturing and service industries. Both sectors should benefit from recent moderation in commodity costs and new optimism, particularly in the United States, about prospects for the general economy.

As well, Canadian food manufacturers should benefit from recent strength in U.S. currency and the consequent decline in relative value of the Canadian dollar. New border regulations for trade to begin in 2014 should simplify export procedures, the report says.

Pre-tax profits for food service are expected to rise from $951 million in 2013 to $1.393 billion in 2014, an increase of 46.4 per cent, Conference Board research forecasts. That’s a dramatic turnaround from 32.6 per cent profit shrinkage in 2013.

Food manufacturers are expected to generate pre-tax profits of $3.894 billion, up 9.5 per cent from 2013 and a recovery from two years of declining profits. Both forecasts rely on analysis which shows moderating food commodity costs.

“The good news is that increases in food prices have moderated which will lower pressure on overall material prices in 2014,” the food service forecast says. For food manufacturing, the report includes a “caveat” warning that “sharp fluctuations” in raw material prices can hit processors harder than other parts of the industry. However, the report also maintains “upward pressure on raw material prices should be minimal this year.”

Both reports rely heavily on U.N. Food and Agriculture Organization analysis published in November that predicted continuing declines in prices for major food crops because of the abundant, 2013 harvest. However, the FAO report pre-dates severe weather conditions this winter in some growing regions and recent political unrest in the Ukraine, both of which seem to have boosted market prices in early 2014 beyond what was expected late last year.

Publication of the Conference Board reports coincides with a Financial Times report showing sharply higher prices since January for coffee, cocoa, wheat and other grains because of droughts in Brazil, parts of the United States, Ukraine and Australia.

In a report posted in early April to the Grain Farmers of Ontario website, market trends commentator Phillip Shaw predicted continued “nervousness” in world grain markets. Shaw cited “geopolitical intrigue” that will “continue the nervousness of world grain markets.”

Conference Board researchers have identified continuing trends away from full service restaurants toward quick-serve establishments. Between 2008 and 2010, the market share of quick-serve restaurants rose from 44.1 per cent to 45.8 percent. As well, the Conference Board identified a well-established trend toward healthier and gluten-free menu options in restaurants.
McDonalds Restaurants of Canada and Tim Hortons dominated the food service category with 2012 revenues of $5.022 billion and $3.121 billion, respectively.

The top two food manufacturers in Canada, based on 2012 revenue data, are: Montreal-based Saputo at $6.930 billion and McCain Foods at $6.333 billion. Maple Leaf Foods with 2012 revenues of $4.865 billion was third in Conference Board ranking followed by: Agropur, $3.655 billion; Pepsico (Canada), $3.290 billion; Nestle Canada, $2.288 billion; Parmalat Canada, $2.209 billion.

The lower cost Canadian dollar should help food manufacturers with exports, the Conference Board says, although the sector is “predominantly oriented toward domestic markets.” Exports have accounted for an average of 28 per cent of sales over the past decade while import penetration has risen slowly from 19.9 per cent to 25.4 per cent, the report says.

A seven per cent decline in the value of the Loonie against the U.S. dollar in 2013 and continued decline this year means Canadian food products will be “less expensive abroad,” the report says. Processors of seafood and millers of grains and oilseeds are the most active exporters and should benefit most from currency issues, the Conference Board says. BF