Food makers’ profit growth to continue: report

Even as prices rise for ag products and production growth slows, Canada’s food makers are expected to show steady growth in profits over the next four years, according to the Conference Board of Canada.

The Ottawa-based think tank on Thursday released its industrial outlook for the food manufacturing industry, predicting that after two years of “significant” profit increases due to strong price appreciation and “robust” production growth, profit growth in the food sector will “moderate” starting in 2008.

The food manufacturing industry’s overall profits are to surpass $3.1 billion in 2008 and “steadily increase” over the next four years, the board forecast.

“Although profit growth is not expected to be as stellar over the forecast horizon, it should keep growing healthily, to reach $3.8 billion in 2012,” the board wrote in its outlook.

“Higher prices for wheat, corn and rice are increasing material costs for food manufacturers,” said Michael Burt, the board’s associate director for industrial outlook, in a release Thursday. “But manufacturers have been able to pass some of their costs on to consumers, which is maintaining the industry’s profit growth.”

Food industry profits in 2007 passed their previous record set in 1999, the board said. Canada’s biggest food companies in 2007 by revenue were led by McCain Foods ($6.02 billion), Maple Leaf ($5.21 billion), Saputo ($4 billion), Agropur ($2.45 billion) and Nestle Canada ($2.29 billion).

Retailers’ power

However, the board noted, “cost pressures will remain a challenge for this industry because retailers’ power to dictate their buying prices from manufacturers is increasing.”

That means that while food makers can pass some cost increases onto consumers, their pricing power is being limited by large and influential food retailers. Wal-Mart’s expansion into food retailing, for example, “has prompted Canadian retailers to place additional pressure on manufacturers to contain costs.”

Rises in material prices have generally lagged behind the Consumer Price Index for years, the board said, but that has changed in 2008, as sugar, wheat, rice and corn prices rise on increased energy prices, erratic weather affecting production, and rising demand due to population and income growth. “Only massive investments and improved productivity in the agriculture sector will release some of the pressure,” the board said.

Meanwhile, higher feed costs and measures to cut back herd sizes are also expected to translate to higher prices for cattle and pigs in the medium term, the board forecast.

“As a result, total (food) industry cost growth is expected to average a solid 4.3 per cent per year over the forecast horizon,” down from 5.4 per cent growth in food industry costs in 2007.

Cost growth in 2007 was also due to Canada’s tight labour market, which pushed up wages by 7.3 per cent and led to a 6.6 per cent hike in labour cost appreciation. Capital costs have “slid slightly” on reduced debt charges, leading to a shift in cost structure more toward labour and material.

Lower-end products

The slowing Canadian economy is expected to limit growth in consumer demand over the short term, as some consumers are forced to shift to lower-priced food products, the board said.

Changes in consumers’ diets, however, are also shaping the industry in the longer term and helping certain segments such as fruit and vegetable processors and seafood processors, as some consumers remain willing to pay premiums for healthier and better-tasting foods.

The seafood sector “has the added advantage of consumption rising with age and income,” the board said, while opportunities in fruit and vegetable processing are to come more from exports rather than domestic markets.

Canadians, the board noted, consume twice as much fresh fruit and vegetables as they do processed fruit and vegetables. The U.S. takes 79 per cent of Canada’s processed fruits and vegetable exports.

The recent listeria outbreak is not expected to affect the forecast, the board said. Consumers might alter their spending habits but any changes are expected to result in a shift in market shares within the food manufacturing industry.

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