The Heinz/Kellogg's plant closures A body blow to Ontario food processing
Monday, February 3, 2014
The announcements that Heinz and Kellogg's will be shutting their Ontario plants sent shock waves through the agricultural community. Premier Kathleen Wynne has set ambitious targets for the province and points to promising recent start-ups, but farmers wonder what will be left
by JIM ALGIE
Dave Epp's family has grown Heinz tomatoes for 50 years. Until recently, he had counted on doing it again in 2014 and he wasn't alone. A former chair of the Ontario Processing Vegetable Growers and a Heinz supplier, Epp knows farm families in the Leamington area who have grown vegetables for the company almost since it arrived in town 105 years ago. He and 45 other Leamington-area growers received notice by email and by a registered letter – it arrived following a public announcement, Nov. 14 – that Heinz would close Leamington operations this spring.
At the time the company also announced plant closings in Florence, South Carolina, and Pocatello, Idaho, citing the need for greater efficiency in a "challenging environment" for its business.
Despite years of adjustment and consolidation in Ontario food processing, the Heinz decision to dump Leamington and 700 good jobs has sounded an alarm among farmers and food policy makers about the industry's future in Canada. Alliance of Ontario Food Processors executive director Steve Peters, a former Ontario agriculture minister, described it as "a wake-up call" for the province's $34-billion-a-year food industry.
Back in the 1930s, Ontario Federation of Agriculture president Mark Wales' dad used to draw tomatoes by horse and wagon to the Heinz plant in Leamington. These days, Wales juggles federation responsibilities with an Aylmer-area cash crop and vegetable farming operation about 180 kilometres east of Leamington. Most farmers of his generation have seen conventional processing warp and shrink, and Wales, for one, hates to let any of it go without a fuss.
"We grow 200 different crops in this province," Wales said in an interview. "If it's grown in Canada, somebody grows it in Ontario and that diversity is what allows us to have a lot of employment at the farm level. It's what should allow us to have a lot of processing of all sizes," Wales said after an autumn of major closure announcements. "We keep having less every week, it seems. And that's the concern. At what point is there nothing left?"
The Heinz announcement and another in early December by Michigan-based Kellogg Company to kill its historic cereal plant in London, along with 500 jobs, has raised a political challenge for Ontario Premier Kathleen Wynne. Wynne also serves as the province's agriculture minister and has staked her government's reputation to some extent on improved links with rural Ontario and agricultural development. By about mid-December, that stake looked wobbly.
Epp is particularly frustrated about Heinz. In 2009, the company marked its Canadian centenary, a 100-year period that began when the Leamington Businessmen's Association wooed the famed ketchup processor with promises of factory space, good growing conditions for vegetables and a cohort of likely growers whose grandchildren continue farming the region's sandy soils.
When Heinz announced in mid-November that it would close its Leamington operations by June of this year, you could almost hear the sound of traditions crumbling. Leamington was among the company's largest vegetable processing plants in the world.
That world began in 1869 with Henry Heinz's horseradish bottling plant in a two-storey farmhouse in the Sharpsburg suburb of Pittsburgh, Pa., about 300 kilometres southeast of Leamington. Still operating from a Pittsburgh head office, the company Henry Heinz started now manages preparation and distribution of food products for retail customers in 200 countries on six of the world's seven continents.
In 2012, Heinz reported sales worth more than US$11.6 billion, including 650 million bottles of ketchup. Heinz Canada operates from a head office in North York with regional offices in Montreal and Calgary and two remaining processing plants in the Ontario communities of St. Marys and Etobicoke.
The company's 2012 annual report for the most recent fiscal year, ended April 29, included a note from then-CEO William Johnson about his expectations for a "difficult consumer and economic environment" as North American grocery shoppers focused on frugality.
"These trends, combined with aging populations, smaller households and increasing ethnic diversity, are affecting purchasing behaviour, package sizes, price points and innovation," Johnson told shareholders. He announced a "disciplined and measured" response. That response, Johnson said, included the closing of 11 factories around the world and a plan to "regionalize our global supply chain."
Johnson is no longer Heinz CEO. He retired following a change of ownership in June of 2013 through the acquisition of widely held shares by a partnership between Warren Buffett's Berkshire Hathaway investment group and 3G Capital, a company organized in 2004 by a quartet of Brazilian bankers that also owns the fast food chain, Burger King. When former Burger King CEO Bernardo Hees moved to Heinz, Johnson retired after 31 years, 15 of them in the top job. He is among only seven CEOs in the company's 144-year history.
Despite Johnson's departure last spring, it's hard to imagine he wouldn't have known what lay ahead for Leamington. In upper management shifts that followed the Berkshire Hathaway deal, former Heinz Canada president Kristen Clark moved to head office as a senior vice president for human resources.
Contract violated
One aspect of the shutdown really irks Dave Epp. He figures the company's move violates a long-standing agreement with growers, who had become wary before last season's contract talks because of production adjustments in plants in Ohio, Iowa and California. Even so, negotiations for tomato supplies last spring included a traditional, three-year contract security clause giving producers a pro-rated share of the plant's two succeeding years of production. Talks are continuing with the company, but Epp worries the plant shutdown makes his contract security worthless.
"Personally I made some investment decisions, knowing we had a couple of seasons yet to recoup my money," says Epp. "This past August, after wheat harvest, we went out and we formed our 2014 beds, l put the fertilizer down, applied lime to the farms, put wind strips in. I'm not alone here; all producers readied themselves because there was no reason not to.
"The shock came when they flipped the switch and closed it all," says Epp, who grew 120 acres of tomatoes for Heinz in 2013. That crop required only 20 per cent of his Essex County land base but yielded about 50 per cent of gross revenue. He'll be hard-pressed to find something that pays as well.
"Kellogg's, Bicks, Smuckers, Strubbs, I'm familiar with the list," Epp says of recent food processing shutdowns in Ontario. "The border is open in corn, soybeans and tomatoes, peas and beans. Raw product can flow both ways. So now we're not looking for subsidies at the grower level. Give us a competitive processing market that entices processors to locate here and the industry will be just fine."
But, he adds, "if processing is leaving Ontario and if it's not raw product cost, ask yourself 'why are they leaving?' A good chunk of it is the legacy of the high dollar; but does energy play into this? Does tax policy play into this? Those are questions I'm not qualified to answer, but I'm sure qualified to ask them."
Ironically, last year's farewell announcements from Heinz and Kellogg's followed a high-profile challenge to Ontario's agriculture and food processing sector from Premier Wynne. At her October Summit on Agri-Food Innovation, she challenged the industry to double growth and create 120,000 new jobs by 2020.
In the Heinz/Kellogg aftermath, opposition political parties have been quick to jump on utility and fuel costs, taxes and other aspects of government policy. Ontario Progressive Conservative agriculture critic and Oxford riding MPP Ernie Hardeman, whose constituents include both Kellogg suppliers and workers, describes recent announcements as an important signal to the province.
"One of the biggest challenges in the agriculture and food industry is that we need to build our processing sector," Hardeman said in an interview.
"It's a real concern when they decide that Ontario is not the right location," Hardeman said of Kellogg's. "It's not because we're not producing the grain, so it must be because of the environment for operating as a business in Ontario."
In a statement prepared for this story, Wynne expressed personal disappointment with the decisions by Heinz and Kellogg's but insisted that agricultural prosperity is an important part of her government's plan for renewed economic growth.
Wynne cited recent start-ups in London by both the Spanish confectioner, Natra, and German-based Dr. Oetker, which has begun construction of a new plant for frozen pizza. As well, the Ferrero Group has expanded employment in its Brantford plant processing its chocolates and Nutella spread. There's a new Royal Canin pet food plant in Puslinch, south of Guelph, and California-based Misionero Vegetables announced in early December that it would begin production in Brantford by year end.
No local processors
Even so, some Ontario fruit and vegetable producers have virtually no access to domestic processing. Brenda and Ray Lammens grow asparagus on 50 acres of their 300-acre Spearit Farms between Aylmer and Delhi in Norfolk County. When they started 30 years ago, the Ontario asparagus marketing board supplied six Ontario and Quebec processors, who canned the early-season vegetable and took as much as 80 per cent of the crop. The business has "completely changed" to concentrate on fresh produce, Brenda says.
A past chair of the Ontario Fruit and Vegetable Growers Association, she has pioneered an effective, direct wholesaling technique for most of her fresh crop with suppliers who serve Toronto restaurants. She figures processing accounts for as little as six per cent of fresh farm product these days and all of that goes to individual quick-freeze processors in Michigan. But it's still a useful and profitable outlet for growers, particularly for asparagus spears Lammens describes as "number two" quality.
"The good thing is we've been able to ship to Michigan and have product frozen by the experts there and bring it back and it's still a product of Ontario. It's certainly an added cost, but a lot of the product shipped over just stays there, too," Lammens says.
"The only way you can add value is through processing, whether it's freezing or canning or making it into a powder," she notes. "Processing is critical because it's going to move us also into another market of export. Export is a market that in many ways in horticulture is untapped."
There are other emerging markets for the raw products of Ontario's primary producers in what many people describe as the bio-economy. Talk to Guelph-area cash cropper and former Ontario Corn Producers Association executive director Terry Daynard about the Kellogg's closing and he points quickly to an innovative, $110-million succinic acid plant now under construction in Sarnia by a four-year-old company, BioAmber Inc.
An off-shoot of New Jersey-based DNP Green Technologies Inc., BioAmber manufactures sustainable chemicals for use in plastics by replacing petroleum derivatives with renewable alternatives from crops. It's an example of new industrial uses for agricultural crops now expanding beyond the manufacture of ethanol.
The Sarnia plant construction is expected to wrap up by year-end, provide 60 processing jobs and is said to be the only commercial-scale plant of its kind in the world, according to a joint company and Government of Canada statement last summer announcing a $12 million federal loan to the project.
"When the Kellogg's plant shuts in London, for corn growers I don't think it makes any difference," Daynard said from his home near Guelph. "The big change at Kellogg's occurred sometime during 1990 when they stopped milling corn." He was referring to a Kellogg's decision to buy processed grits from an Illinois supplier. At the time, it represented a market of about three million bushels of corn for Ontario growers.
"I'm not implying there's nothing new going on at the moment," Daynard said. "It's a concern. We've got a lot of challenges . . . but we have some good stories, too," he said. BF
SIDEBAR: Canada's growing trade deficit in processed foods
Recent and continuing research by the 10-year-old Canadian Agri-Food Policy Institute (CAPI) warns of a growing, competitive decline in food processing, now the country's largest manufacturing sector with 300,000 workers.
But the Ottawa-based think tank – funded mainly by Farm Credit Canada, the federal, Alberta, Ontario and Quebec governments – has lots of company these days on the agri-food policy front. It's among three agencies which have published major reports on the subject in the past two years.
The Conference Board of Canada is poised to complete more than three years of research into Canadian food policy and has published much of it on its website. In 2010, the Ottawa-based Conference Board launched its Centre for Food in Canada, with major financial support from Loblaws, Maple Leaf Foods and Saputo. The project's stated objective: to heighten public awareness of, and make recommendations for, a national food strategy. Its third annual conference planned for Toronto in mid-March will concentrate on five themes, including ways to increase the output and profitability of Canada's food industry.
In 2012, the Alliance of Ontario Food Producers (AOFP), based in Cambridge, Ont., published a study of Ontario's $39-billion food and beverage sector, using 2010 data which identified it as the province's second-largest manufacturing sector for value of shipments and jobs. Ontario processors account for about 65 per cent of food-related farm production in the province, the AOFP report says.
As if to underline the significance of recent announcements and trends, the Guelph-based, agricultural think tank, George Morris Centre, issued a late-year commentary by executive director Bob Seguin keyed to recent announced plant closings in Ontario by Heinz and Kellogg's.
Seguin's report used 2011 data to emphasize the contribution of Ontario and Quebec processors to the national food and beverage shipments worth about $92 billion. It spoke to the "relative stability" of the industry but emphasized the need for new investment.
A former assistant deputy minister of agriculture in Ontario, Seguin recommends a five-point "market and policy response" to address "long-term capital, human resources infrastructure and regulatory reforms" to ensure future growth and prosperity. His commentary focussed primarily on new investment in both "scale and technology."
Both the food processors' report and Conference Board studies highlight important opportunities for Canada and Ontario in food processing. But CAPI research has also identified complex balance-of-trade issues that Institute CEO David McInnes says are crucial to understand.
Research by former Agriculture Canada policy director Doug Hedley, commissioned by the Institute and published on its website, identifies the rising gap in value between imports and Canadian exports of processed food. Hedley cites a 600 per cent increase in Canada's net trade deficit for value-added, processed food over seven years ending in 2011 – from about $1 billion to $6.3 billion.
Further refinement of the data shows the deficit at $6.5 billion, McInnes said in a recent interview in which he emphasized the importance of careful, co-operative analysis and discussion by all food supply chain participants. The agency has commissioned further sectoral research, including case studies of food processing success stories.
The deficit reflects the higher value of the Canadian dollar and increased imports from the United States and Mexico, Hedley's report says. As well, an increasingly integrated North American economy is being served predominantly by U.S.-based processing during a period of declining investment among Canadian food processors, the report says.
Steve Peters, executive director of AOFP and a former Ontario agriculture minister, agrees the trend is disturbing and is "just one of many issues that the industry is facing." However, Peters remains enthusiastic about new opportunities for Ontario growers and processors, both domestically and in export markets.
Referring to recent closure announcements by major plants in Leamington and London, Peters emphasized the importance of encouraging smaller, more diversified processors.
"Yes, we've lost, but is there opportunity? I'm a firm believer that there is and some of the opportunities I see are in how we utilize Ontario farmers to add value to what they're doing, whether it's on the organic front or in new crops. I'm excited about the work that's being done on world crops and all the agricultural commodities we can grow," Peters said.
There are dramatic variations in the data that make it difficult to generalize about Canada's trade deficit in processed food, McInnes warns. Canada seems to have no problem with processing frozen French fries, for example, where we have a $770 million trade surplus, or, curiously, chocolate. Even a dramatic trade imbalance in wine and beer masks notable successes in domestic production that just can't match demand.
"I think the question is: How can the agriculture sector, processors, researchers, retailers and others create the wins because they rely on each other?" McInnes says. "That's a mindset shift we've seen taking hold when supply chains are acting differently, together. We need to do more of that." BF